Economy on track to grow by 6pc
Some downside risks must be averted, says MCCI Q2 review

FE Report

The Metropolitan Chamber of Commerce & Industry (MCCI) has said the Bangladesh economy is on track to grow by 6.0 per cent in fiscal year (FY), 2009-10 as it is moving toward a more broad-based path.

But it has reminded all concerned of downsides, cautioning inflation, after falling, has started climbing again, while foreign investments are shrinking.

"The real sector production increased, and performance in the areas of public finance, credit delivery, remittance inflow and exports was better," the MCCI said in its quarterly economic review.

"The driving forces behind good economic performance were a favourable climate, strong domestic demand spurred by remittance inflows, the pick up in the government's Annual Development Programme (ADP) implementation rate, and, not the least, the central bank's proactive monetary policy pursued since April 2009," it said.

The review noted that agriculture sector performance during October- December period--or the second quarter of FY10-was better than in the immediate past quarter, with output expanding in rice, vegetables, livestock and fishery.

With Aman rice production exceeding the target and boro showing bright prospects, the review said the overall food production target is expected to be achieved, barring unforeseen crop failures.

Like the farm sector, the chamber review said, all industrial sub-sectors that suffered declines in FY09 began to recover with the advent of the second quarter of FY10.

The manufacturing sector picked up following strong growth of domestic demand and the turnaround of exports.

The construction sub-sector grew strongly as is evident form the spread of activities in residential and commercial building construction by developers.

The review provided optimism that services sector in the quarter two (Q2) depicted good growth, supported by increasing activity in agriculture and manufacturing sectors, and export trade.

"Better performance was visible in such sub-sectors as education and health, transport, wholesale and retail trade, real estate business, and financial and capital markets," according to the review.

Referring to the revenue collection efforts by the National Board of Revenue (NBR), the chamber said it improved greatly in October-December, 2009 when government revenue increased by 25.2 per cent to which a rise in both VAT receipts and income taxes contributed.

In the area of public spending, both current and capital expenditures increased significantly in the quarter under review. The increase in public spending was the result, partly of an expeditious disbursement of funds for ADP projects and partly the implementation of the new pay scale in the period.

On the external front, exports came out of the negative growth phase of the past two quarters and recorded a 2.62 per cent expansion in October-November FY10.

With the recovery of major economies from recession, the chamber predicted that it would not be "unrealistic to expect a double digit growth of exports in the coming months."

Imports also picked up in October-December, although import growth in Q 1 bottomed out with a decline by 19.9 per cent, the negative growth rate came down to a nominal 1.5 per cent in Q2.

With restoration of business confidence and pick up of investment, the chamber is hopeful about an uptick in import growth in the coming months.

"Already, imports of machinery and equipment, industrial raw materials, and consumer goods have edged up and are likely to increase further," the review said.

The flow of remittances in Q2 stood at over US$2.8 billion, compared to US$2.1 billion in the corresponding quarter of FY09--a 30.6 per cent year-to-year (y-o-y) increase.

Remittances in the immediate past quarter, i.e., Q1 FY09, stood at US$2.7 billion and the MCCI analysis said the growth of remittance from Q1 to Q2 of the present fiscal was thus only 4.5 per cent.

The current account balance shifted from a surplus in the previous quarter to a deficit in the quarter under review. The FDI inflows continued to decline, maintaining the trend that began in the July-September quarter.

According to the chamber, the price pressure increased in Q2, primarily as a consequence of increased domestic demand and higher commodity prices in the international markets.

Average inflation rate fell slightly to 5.11 per cent in October 2009 from 5.15 per cent in September 2009, but on point-to-point basis, the rate of inflation increased to 6.71 per cent in October 2009 from 4.60 percent in the previous quarter, the MCCI said.

It said food inflation increased to 7.78 per cent in October 2009 from 4.98 per cent in September, while non-food inflation recorded a smaller increase to 5.07 per cent, from 4.28 per cent in September 2009.

"The price pressure emerged from higher domestic demand and rising commodity prices in the international markets combined with the tapering off of the government's cost-of-living reduction measures since July 2009," the chamber said in its analysis.

Nevertheless, it added, the average inflation in October 2009 declined for the higher base effect from the corresponding period of the previous year.

In the quarter under review, the inflation rate in the rural areas was lower than that in the urban areas.

Despite the drop in manpower exports, remittance growth has remained steady, and the foreign exchange reserves have continued to increase.

" … Some downside risks, which must be averted if the country is to achieve the targeted GDP growth of 6.0 per cent or more in the current fiscal," the MCCI said in its sum up.

"It's worrisome that the inflation rate, after falling, has started rising again," it said, adding FDI inflows in the first half of the fiscal are about a half of the flows that took place in the corresponding period of the previous fiscal.

The country's leading chamber body said the condition of physical infrastructure remains weak, which together with the crisis in power and gas sectors, acts as "disincentives to industrial investors."

It, however, noted with disconcert that there has been no progress toward implementation of the much-talked-about public-private-partnership (PPP) projects for infrastructure development.

"Corruption, weak governance, and poor law and order conditions continue to be serious problems that discourage investment and business activity," the MCCI review said. "All out efforts need to be taken to tackle these problems."

The chamber urged the government to improve the investment environment by adopting consistent fiscal-monetary and commercial-exchange rate policies and energise the export sector.

Other areas that needed special attention, the chamber said, include fair price to farmers for their produce, further improvement of the collection of NBR and non-NBR revenues, creation of employment opportunities at home and abroad and specific measures to tackle the adverse impact of climate change.

It also called upon the policymakers to instill impetus into the public administration and further improve the development projects and protect public expenditure on social sectors.

The MCCI said the government's stimulus package should be continued until the affected sectors are able to stand on a sound base.

The government has already announced nearly Tk 45 billion stimulus in two phases to help export sectors ride out the storm of the global recession, worst in generations. (More on Page 9)