Contents

FY11 growth hinges on the easing of energy constraints and pursuit of structural reforms. 

Global recovery is off to a stronger start than many observers anticipated. In 2010, global growth is expected to rise by 2.7 - 4 percent. In advanced economies, the recovery is expected to remain sluggish by past standards, whereas in many emerging and developing economies, activity is expected to be relatively vigorous because of buoyant internal demand. Exports of developing countries as a group rose 38 percent in December. Despite robust growth, levels of trade and production in December 2009 were below pre-crisis levels in 2007 by 27 and 18 percent respectively, highlighting the toll taken on world economic activity by the financial crisis. World trade volume is expected to grow by 4.3 percent in 2010. Among Bangladesh’s main export markets, the US economy is expected to grow by 2.5 percent, the Euro zone by 1 percent, and the Middle East by 3.7 percent in 2010.

Energy shortages pose perhaps the biggest threat to Bangladesh’s growth recovery. The present demand for electricity varies between 4,200 MW and 5,500 MW and it is expected to rise to 6,850 MW within the next two years. Maximum generation available is between 3,800 MW and 4200 MW. The estimated demand supply gap currently is 2,000 MW in peak hours. Gas shortages account for at least half of this gap. Power and gas shortages have undermined external competitiveness. According to garment industry leaders, garment orders cannot be fulfilled because of energy constraints. Frequent power cuts and low gas pressure add to shipment time, forcing exporters to airfreight the merchandise at their own cost. Power cuts and gas shortages have reportedly rendered a significant part of the country’s garment capacity idle.

Progress in expanding power generation remains slow. To combat the acute power shortages, the government plans to increase power generation to around 7,000 MW by 2013. However, power plants continue to suffer from gas shortages, despite some recent ad-hoc measures to increase gas supplies for power production. Short-term solutions being floated include diesel- and furnace oil-based rental power plants which can start generation within a short period of time, but these are higher cost routes and will reduce competitiveness of firms. In 2009 and 2010 so far, 586 MW of power were added to the national grid. Many approvals for new power plants have been given by the Cabinet committee on purchases, and prequalification bids for eight large independent power producing plants have been floated which, if contracted, could be on stream by 2013. Despite this, it is difficult to see as to how the power demand supply gap will be bridged in 2011.

There have been positive developments on energy cooperation between India and Bangladesh in the last six months, culminating in a Memorandum of Understanding on Power Cooperation, signed January 2010. Specific areas of cooperation include: (i) India’s agreement to supply–on a fast track basis– at least 250 MW of power to Bangladesh; (ii) joint development of thermal power generation facilities in Bangladesh (including for institutional capacity building within Bangladesh), and (iii) technical assistance from India’s National Thermal Power Corporation, Power Grid Corporation of India Ltd., and Indian training centers. Proceeding on a fast-track is an electricity transmission interconnection project to link the electricity grids of India and Bangladesh, with an initial agreement for India to sell 250 MW to Bangladesh as soon as possible (with construction expected to start in the coming summer season).

The FY11 growth outlook is mixed, depending on the government’s ability to address energy shortages.

There are some positive signals on private investment. LC opening of capital machinery and import of capital machinery has picked up sharply since May and July 2009 respectively. LC opening of steel has picked up since November and import of steel has also rebounded in December 2009, indicating a pick-up in construction. Capacity utilization is also increasing as evidenced by strong growth in LC opening of industrial raw materials since June and intermediate goods since August 2009. The real commercial bank lending rate declined to 4.3 percent in December 2009 after peaking at 11.2 percent in June 2009. Private sector credit growth picked up in the second quarter of FY10, reaching 19.3 percent through January. According to a recent IFC-BICF survey, business confidence and investment improved since the second quarter of FY10. The overall performance of the surveyed firms has been better in Q2 of FY10 compared to Q1, with the services sector performing better than the manufacturing sector and expected to improve further in Q3.

However, the possible optimism on private investment indicated by these signals could easily be negated by the energy situation. Unless there is significant easing of the energy bottleneck, firms will be disposed to maximize production based on their existing capital stock rather than go in for fresh investment.

Public investment is likely to rise. The government’s medium-term macroeconomic framework targets a 15.7 percent increase in the size of the ADP in FY11 relative to the original FY10 ADP size. 

Consumption growth outlook is worsening due to a possible slowdown in remittance growth. Migration continued its downward trend with 43.5 percent fewer workers finding employment abroad in FY10 (July-Dec) compared to FY09. Moreover, a reported 72,000 migrant workers have returned home in calendar year 2009, which is one third more than in 2008. This does not bode well for sustaining private consumption growth. However, growth in public consumption is likely to remain robust because of fuller implementation of the public sector pay increase package, possible rise in energy and fertilizer subsidies, and further expansion of safety net programs. Table 1 shows two scenarios for GDP growth in FY11. The 6 percent growth scenario is built around real investment growth of 7.5 percent, compared with this year’s 3.8 percent, with public consumption growth sustaining at the current year’s 6.5 percent and private consumption growth declining from 7 percent this year to 6 percent. However, if energy constraints remain tight, a slowdown in investment growth is likely to influence FY11 GDP growth more than other components of demand - leading to GDP growth that may end up at around the same level of 5.5 percent growth projected for FY10. 

Table 1: Projected GDP Growth for FY10 and FY11

   
Faster progress on the structural reform agenda will be critical for unleashing Bangladesh’s latent growth potential. A major challenge is to improve tax policy and administration, and the level and quality of public investment and expenditure will need to improve (see special focus in next section on some of the major concerns in this regard). Well-designed public-private partnerships can help partially alleviate the infrastructure and energy deficits. Major investments in electricity generation and transmission, along with sector reforms, especially in pricing of electricity and gas, are needed. In addition, the cost of doing business must improve in order to encourage greater private investment. Also, trade policy reforms and better trade logistics are necessary to improve prospects for export diversification. Finally, implementing recent agreements with India has the potential to help raise sustainable growth.