Whither economy in first half of FY 2017?

Dhaka,  Wed,  23 August 2017
Published : 13 May 2017, 19:43:23

Whither economy in first half of FY 2017?

Abdul Bayes
The Center for Policy Dialogue (CPD), a premier think-tank of the country, assesses the country's economic status every year. It closely follows the preparation of the national budget presumably to provide an analytical review of the whole economy to help frame policies, forecasting its future too. The purpose is also to foster a dialogue on the events pertaining to the economy. Although a number of issues are generally covered, this writer will dwell on three 'I's - inflation, interest rate and investment.

A research finding by the CPD reveals that 'headline inflation' continued to decline despite some rise in food inflation. Annual average inflation in FY2017 was well within the Bangladesh Bank's Monetary Policy Statement (MPS) target of 5.3-5.6 per cent. However, the falling trend has primarily been driven by declining non-food inflation although the rate was higher compared to food inflation. Inflation of rent, fuel and lighting is showing upward trend in recent months. In view of this, the report fears, the government's decision to further increase gas and electricity prices may exacerbate the inflationary situation over the coming months. At the same time, the decision to keep retail prices of kerosene and diesel unchanged in the domestic market has deprived consumers and producers of some relief on account of lower oil price in the global market. The review by the CPD reveals that price of kerosene, primary source of energy for the poor, is currently about 1.8 times higher than that of Kolkata, India.

The rising food inflation since January 2017 is likely to have its adverse effect on the poorer households with coarse rice price about 24 per cent higher than a year ago. This is due to falling stock and low procurement. More importantly, average rice price in Bangladesh is estimated to be about 27.9 per cent higher than that of India. 

The declining trends in interest rates experienced in FY2016 - for both lending and deposits - continued throughout FY2017. Both the rates have been decreasing with the spread at around 5 per cent. It needs to be closely monitored to what extent the weak state of the banking sector parameters including non-performing loans (NPL) and CAMELS indicators, is contributing to a situation where the spread is not coming down. Indeed, without significant improvement in corporate governance and operational efficiency in the banking sector, further reduction of the spread will be difficult. As is the case, the Bangladesh Bank's directives to the commercial banks to raise efficiency have not produced any visible success.

In contrast to the recent past situation of a grim outlook for private investment, proxy indicators, as used by the CPD, show promising signs. FY2016 ended with an upturn in private investment-GDP ratio. During July-February period of FY2017, capital machinery import, which has important investment implications, registered an impressive growth of nearly 24.0 per cent. However, this investment was concentrated in one particular area - the power sector. This uptake is reflected in the private sector credit which increased by 15.9 per cent by the end of February 2017 compared to the corresponding period of FY2016. During July-February period of FY2017, net foreign direct investment (FDI) inflow also increased by 17.4 per cent. 

Agriculture credit disbursement registered 21.8 per cent growth during July-February period of FY17, which was 14 per cent during corresponding period of FY16. It is to be noted that this is the highest attained growth since FY2014. Non-farm rural credit disbursement also rose by 28.6 per cent during the aforesaid period. Additionally, loan disbursement to small and medium enterprises rose by 21.7 per cent during July-December period of FY2017. 

On the flipside, industrial term loan disbursement recorded only about 7 per cent growth during the first half of FY2017, down by 3.0 per cent over the matched period of FY2016. It could also be observed that during the January-June period of both FY2015 and FY2016, growth rate of industrial term loan disbursement was significantly high. Nevertheless, it is important to deliver infrastructure and policy support in a timely fashion. Of particular importance in this connection is ensuring the availability of gas and electricity and raising efficiency of port facilities on a priority basis.

The overall balance of payments was reportedly positive (US$ 2.5 billion). The current account balance, however, turned negative following falling remittance inflow. During July-February period of FY2017, Taka appreciated against Euro, Chinese Yuan and GBP and depreciated against USD and Indian Rupee. At the end of March 2017, foreign exchange reserves stood at US$ 32.2 billion- nearly a US$ 2.2 billion increase from July 2016 - pointing to the capacity of meeting roughly 7-9 months of import expenditure. The government is considering utilisation of the growing forex reserve for infrastructure development through a sovereign wealth fund. 

The CPD continues to argue that independent institutional mechanism, moderate interest rate, and appropriate monitoring and governance should be the key concerns in the aforementioned context. It is also to be noted that the reserves do provide a cushion in terms of import payments that it can sustain. But growing debt servicing and other obligations in terms of foreign exchange payments merit serious attention of the government.

The writer is a former Professor of Economics at Jahangirnagar University. Abdul.bayes@bra.net/


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