Failure to boost power generation can hold back industrial expansion, and political instability can affect economic development in Bangladesh this year, said the Asian Development Bank (ADB), in its latest Asian Development Outlook (ADO) report.

The government should maintain close coordination between monetary and fiscal policies to ensure macroeconomic stability to facilitate rapid growth in 2012, controlling expansion of credit to contain inflation and balance-of-payment pressures, while ensuring a steady flow of credit to the private sector.

The government would also need to closely watch budgetary finance from the banking system, the report stated. The fiscal policy will stay expansionary with total expenditure likely to grow by 25.8 per cent. Supported by a strong revenue effort, the budget deficit is projected at 5 per cent of the GDP, a little higher than the 4.4 per cent in 2011.

The deficit is being planned to be financed by domestic borrowing (3 per cent of the GDP) and external sources (2 per cent of the GDP). The 2012 budget assumes 24.4 per cent growth in revenue (a 0.9 percentage rise in the revenue-to-GDP ratio). Higher tax effort, an outcome of the tax authority’s systematic effort to expand coverage and strengthen tax administration, including further automation of tax collection, is a crucial element in achieving the GDP growth target, the ADB report noted.

This update maintains the ADO 2011 average inflation projection of 8.5 per cent for 2012, which is lower than 8.8 per cent inflation in 2011, but higher than the Monetary Policy Statement projection of 7.5 per cent. To keep inflation within the rate projected in this update, the central bank will have to bring down the annual money and credit growth to at least 18.5 per cent and 20 per cent, respectively, as specified in the statement.

The projected likely decline in global food and commodity prices in the baseline assumptions is expected to dampen the price pressures.

The expected adjustments in domestic power and energy prices would, however, exert upward pressure. The import bill is expected to rise by 20 per cent in 2012, reflecting the effects of the tighter monetary policy and the expected stability in prices of raw materials, including those related to export industries.

The growth of export receipts is projected at 15 per cent, close to the historical average.
A rise in remittance is expected, with more people leaving for work abroad. Several million Bangladeshis, working outside the country, are a reliable source of remittance.

The government’s engagement with recruiting countries appears to be yielding results. Remittance is expected to grow by 12 per cent in 2012. But like recent years, they will be unable to offset the expected deficits in trade, services, and income accounts.

The current account is expected to move to a modest deficit of 0.3 per cent of the GDP in 2012, from a 0.9 per cent surplus the previous year.

The monetary policy stance may be compromised to meet the high growth target, or the attempted tightening may not control inflation or contain import demand.

The expected revenue and external financing may not be mobilised as planned, the ADB report noted.

The Independent/Bangladesh/ 22th Feb 2012