Current setting. After passing through a prolonged period of political uncertainty Bangladesh is now at the threshold of getting an elected political government. Now that all eyes and minds are focused on the upcoming elections, unlike last year this time, economic news seem to have mostly disappeared from Bangladesh radar. This situation is in sharp contrast to the economic shocks of external and domestic origins, which distressed the nation and dominated the media last year this time. As stated in the old proverb that "no news is good news", this absence of economic distress signals in the radar is a welcome development. This situation on the economic front, however, is in stark contrast to the ongoing economic crisis creating havoc throughout the globe. Against this unique background, this article attempts to assess the state of Bangladesh economy at this juncture by looking at the recent past and figuring out the near-term outlook. We start with the economic developments and management during 2007/08, describe the current state of the economy on the eve of a newly elected government taking over economic management, and conclude with the key challenges and opportunities for the future government in moving Bangladesh firmly toward a middle income country.
What the economy has passed through recently. The year 2008 certainly had a stormy beginning on the economic front and economic management was extremely challenging. The combined effect of two rounds of flood, cyclone Sidr, and the global energy and commodity price shocks, all happening or starting in the second half of 2007, produced an economic crisis that was uncommon even by the disaster-prone Bangladesh standard and pushed many families to poverty.
As the tensions caused by numerous shocks slowly eased off, economic activity started to regain momentum. The first signs were visible in the export sector as buyers started to place new orders in much larger volumes following the restoration of law and order after 1/11. The opportunities created by relative peace on the political front and rising cost pressures in major garment exporting countries (like China and Vietnam), focused the attention of global buying houses on to Bangladesh. The outcome was a strong surge in exports beginning in December 2007. Exports of garment products increased by 29% during the 10-month period through October 2008. This export surge also laid the foundation for the recovery in manufacturing sector expansion in 2008.
The rebound of the agriculture sector has been phenomenal in the post-Sidr period. Government's concerted efforts to ensure a bumper agricultural output to overcome food shortages, combined with farmers' response to the high product prices, contributed to a strong agriculture sector recovery. Following a bumper wheat crop, potato output reached a level that the farmers and traders were incapable of handling. Government's all out efforts to ensure supply of electricity, diesel and fertilizer and the record high rice price induced the farmers to produce a record boro output (18 million tonnes or 19 percent higher than the previous boro crop). The supply surge was entirely attributable to the introduction of hybrid boro on a large scale and compensated for the loss of aman crop due to the floods and Sidr. The high level of procurement price also enabled the government to build up the depleted stock of rice rapidly through a record volume of procurement of boro crop, laying the foundation for greater market stability and food security. Compared with the 3.0 million tonnes of domestic consumption demand for 2007/08, domestic production of food grain was to be about 29.8 million tonnes. If objectively looked at, government's handling of the food situation was remarkable despite its initial stumbling, and in many respect defied the doomsday predictions of many analysts.
In the event, most headline indicators performed remarkably well, although inflationary pressures resulting from higher commodity prices caused a lot of hardship for fixed- and low-income households. Real GDP grew by a respectable 6.2 percent in 2007/08, despite a very weak first half. Notwithstanding the surge in import payments (26% in dollar terms), the external current account was in surplus due to growth of remittance and export receipts. Bangladesh was the only country in South Asia with a current account surplus in this difficult year (Fig. 01). The growth rate of remittance inflows was the highest among the regional countries, which helped increase per capita income in dollar terms by the highest amount ($76 or14.6 percent) in any year in the history of Bangladesh, reaching $599 as of June 2008. A record number of workers left Bangladesh for work abroad, primarily from the low-income and rural families, helping alleviate the unemployment problem and also strengthening the capacity of these families to cope with adverse shocks.
The cumulative impact of the shocks in 2007 was largely manifested in higher prices. The price discovery function of the market sent a shockwave with rice prices almost doubling within a few weeks in the aftermath of Sidr and the imposition of rice export ban by India. Other basic commodities like edible oil, wheat and pulses, which are mostly imported from abroad, also jumped globally sending a tsunami-type shock wave for the Bangladeshi consumers. Already low and rapidly depleting stock levels of food grains, coupled with unscrupulous behavior of certain segments of the business community to maximize personal gains from the higher prices, made the situation alarming. With food prices accounting for a very large segment of the household budget, inflation as measured by the consumer price index (CPI) reached almost 12 percent by July 2008. The market signal was ruthless, but helped identify the vulnerabilities in food security arising from crop losses, low stock level, limited access to imports and the surging global commodity prices. Although the government was caught unprepared initially, these developments and the associated political repercussions forced it to mobilize supplies from abroad and ensure effective distribution of inputs to farmers realizing a bumper agricultural output. This surge in inflation was unacceptably high, but still lower than most regional countries (Fig: 02 & 03).
Where does the economy stand at the end of 2008? All signs on the domestic front are very favorable in the first quarter of fiscal year 2009. Real economic activity appears to have gained further momentum, while inflation is firmly on a downward trend. The phenomenal growth in exports (42 percent) and import of industrial raw materials as reflected through LCs settled, point to a further acceleration of the manufacturing sector expansion. Absence of flood and cyclone, coupled with high rice prices in the domestic markets, contributed to a bumper aman crop this year. Domestic demand has remained strong with government budgetary current outlays increasing at a record pace and as manifested through strong private sector credit expansion (26% during the first quarter of 2008/09 over the corresponding period). Under these circumstances, currently the economy appears to have been expanding at no less than 7.0 percent in real terms in the first half fiscal 2009.
While government expenditures are likely to grow fast in line with the budgetary plan, the overall fiscal deficit should be significantly lower than the preceding year because of the large savings expected to be realized on account of subsidies on petroleum products. Thus domestic fiscal borrowing should be significantly lower, releasing more resources for the private sector.