Energy crisis biggest threat to economic growth
Energy crisis biggest threat to economic growth
FE Report
Metropolitan Chamber of Commerce and Industry, Dhaka (MCCI) said power conditions of Quarter1 (July to September) of FY11 remained almost the same as in the previous quarter.
"Although the demand for electricity has increased continuously, its production has lagged behind. Shortage of energy, in fact, now poses the biggest threat to Bangladesh's economic growth," the leading chamber of the country said while reviewing the economic situation of Quarter 1.
The present demand for electricity varies between 4200 megawatt (mw) and 6000 mw and it is expected to rise to 6850 mw within the next two years. Maximum generation currently available is between 3800 mw and 4200 mw. The estimated demand supply gap currently is 2000 mw in peak hours. On the other hand, gas shortages account for at least half of this gap.
Power and gas shortages have undermined external competitiveness. Readymade garments industry faces the biggest threat, 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 garments sector capacity idle.
To combat the acute power shortages, the government plans to increase power generation to around 7000 mw by 2013. However, power plants continue to suffer from gas shortages, despite some recent 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. The government has taken a policy to generate more power through higher public and private investment, reduce system loss to the minimum and harness natural gas, solar power, atomic power and hydro-electric resources.
Agriculture
In view of the good performance of the agriculture sector for the last two consecutive years, one might expect that the sector would meet up its growth target of 4 5 per cent in FY11, provided government support continues and no major natural disaster occurs. Growth rate of agriculture in FY10 was 4.4 per cent.
Total allocation in FY11 for crop agriculture and allied sectors, viz., livestock, fisheries, forestry, land, and water resources is Tk.114.09 billion, which are 6 per cent higher than in the revised budget of FY10 and 27.5 per cent higher than in the original budget of FY10.
Food grains production and stock
The target of food grains production for FYI 1 was primarily set at 36.53 million metric tons (mmt) consisting of 2.70 mmt of aus, 13.50 mmt of aman, 19.17 mmt of boro, and 1. 16 mmt of wheat. The FYI 1 target is 4.22 per cent higher than the target of FYI 0 (35.05 mmt) and also 9.96 per cent higher than the actual total production of food grains of 33.22 mmt in FY10. Tentative consensus estimates of BBS, DAE and SPARRSO for aus, aman, boro and wheat production for FY10 are 1.71 mmt, 12.20 mmt, 18.34 mmt, and 0.97 mmt, respectively.
To ensure food security, government plays a strong emphasis on building a reasonable food grains stock by public procurement and through imports. Public stock of food grains remained at a reasonably satisfactory level at the beginning of FY10. However, it gradually decreased over the subsequent months. At the end of FY10, the stock fell to 0.61 mmt due to increased off-take and less procurement of aman and boro rice. Up to the end of September 2010, the government had a stock of 660 thousand metric tons (tmt) of rice and 120 tmt of wheat, which are equivalent to a half of the food stock the government maintained at this time last year.
Fisheries, livestock and poultry
According to the Fisheries Directorate, the fisheries sector performed better in Q1 of FY11 than in the previous fiscal. Broadly, fisheries fall into three main categories: inland capture, inland culture, and marine. Inland capture plays the dominant role in this sub sector, accounting for more than 41 per cent of the total fish production with an average annual rate of growth of 5.6 per cent. Inland culture fisheries, which include pond culture, ox bow lakes (baors) and shrimp farms, contribute about 39 per cent of total production with an average annual growth of 6 per cent. Marine fisheries of the country are made up of marine industrial (trawl) and marine artisanal fisheries and contribute about 20 per cent of total fish production with a growth of 5.4 per cent per annum, of which marine artisanal fishery alone contributes 19 per cent.
Industry
The industry sector growth, especially the growth of manufacturing activities, accelerated during the second half of FY10, though they experienced significant depression in the wake of global recession and downturn of economic activities especially during the first six months of FY1 0.
Manufacturing industries
Data on industry sector performance are not available for Q1 of FY11 and hence it is difficult to identify the most recent trends. However, there are signs such as the rise in private sector credit and increased volume of L/Cs opened, which indicate that manufacturing activities have been on the rise. The increased disbursement of industrial term loan, which rose by 13.44 per cent during April June 2010, is also indicative of growing investments in the industry sector. The distribution of outstanding advances shows that most of the term loans went to domestic market oriented industries. It is, therefore, very likely that manufacturing industries catering mainly to the domestic market (including small scale industries) have performed better during the quarter under review.
The industrial sector performance could be much better had there been no shortage of electricity and gas supplies. Industrial establishments have long been complaining about insufficient availability of power and gas, which hampers industrial sector activity. Government has pledged to raise power generation in the short and medium term but a lasting solution of the industry sector problems should be found by raising the supply of gas to power plants and industrial establishments, on which accelerated growth of the industrial sector will depend.
Construction
The construction sector expanded at a steady pace, as indicated by the high growth in the production of cement and import of construction materials. Though data for the quarter under review are not available, we can say that the construction activities increased during this period.
Services sector
During the first quarter of FY11, several service sector activities showed good performance such as hospitals, IT services, travel agencies, education, social work, public administration, road and air transport, storage, hotels and restaurants. The trade sector also got a boost during the period because of more bank advances going to various trading activities. The increasing economic activity of the business sector led to an increase in services dependent on demand from this sector. On the whole, the overall performance of the services sector was good in the Q1 of the fiscal.
Money and credit
In line with the objectives of Bangladesh Bank's Monetary Policy Statement (MPS) for FY11 announced in July, BB's major focus in the first quarter of the fiscal under review was to keep inflation under control, encourage credit delivery to the productive economic sectors, including agriculture and SMEs, and maintain the stability of the exchange rate. In order to contain the inflationary pressure, the central bank remained vigilant to make its monetary policy instruments more effective and handled interventions in the foreign exchange market and the monitoring of excess liquidity in the banking sector with great care.
Reserve money recorded a decrease of Tk. 11.14 billion or 1.37 per cent in July of FY11 compared to the decrease of Tk. 19.43 billion or 2.8 per cent in July of FY 10. The decrease of reserve money growth occurred mainly due to the decrease in net domestic assets of Bangladesh Bank by Tk.28.30 billion or 14.05 per cent. But it increased by 18.96 percent during July of FY1 1 over July of FY10. However, net foreign assets of Bangladesh Bank increased by Tk.17.15 billion or 2.8 per cent during this period. Reserve money multiplier increased to 4.54 at the end of July 2010 from 4.46 as of June 2010.
Public finance
The FY11 national budget has set the annual target for NBR tax revenue collection at Tk.725.84 billion. Data on NBR tax collection was available for the first quarter of FY11 but not available on Non-NBR tax revenue in the same quarter, even for July 2010. In July-September 2010, collection of NBR tax revenue stood at Tk.151.76 billion, which was higher by 22.42 per cent over the corresponding months of the past fiscal. The increase in NBR's tax revenue in July-September 2010, relative to July-September 2009, can be attributed to the picking-up of economic activity and the broadening of tax base.
Exports and imports
According to the available data from EPB, merchandise export shipment in July-August of FY11 stood at US$3615.72 million, higher by US$808.57 million or 28.8 percent compared to the corresponding period.of the previous year (US$2807.15 million). During July-August of FY11, several commodities such as woven garments, knitwear, jute goods, frozen food and leather were exported to the Asian and NAFTA markets.
Imports in July-August 2010 were US$4591.9 million which is 38.7 percent or US$1280.8 million higher than imports in the same months of 2009 (US$331 1.1 million). This increase was mainly due to the increase in the import of consumer goods, mainly food grains and industrial raw materials. On the other hand, the settlement of import LCs in Bangladesh was US$4471.41 million during the July- August period of IFY1 1, which is 37.6 per cent higher than in the same period of the previous year, which was US$3248.67 milliorn (Table 7.3).
Balance of Payments
Trade balance recorded a higher deficit of $129 million in the first month of FY11, which is 14 per cent higher than the deficit of US$113 million in the same month of the previous fiscal year. The trade deficit widened mainly due to higher prices of most of the essential items, including food grains, in the global market. Also, current transfers in the same month was lower ($902 million) than in the corresponding month of 2009, when it was US$926 million. The current account balance therefore recorded a lower surplus of LIS$500 million in July of FY1 1 compared to the surplus of $532 million in July of FY10. There was a big decline in the overall balance, where the surplus fell to $78 million in July of FY11 from $486 million in the same month of the previous fiscal year.
Remittances
Bangladesh received US$2653.411 million as remittances, which shows a 2.1 per cent decline, or US$54.69 million, over the same period of the previous year (US$2708.1 million). The decline was due to the failing manpower export and also a growing number of returnees from overseas jobs. After 2007-08, manpower export has been falling every year. In 2007-08, 981 thousand Bangladeshi went abroad for work, but the number went down to 650 thousand in 2008-09, and further to 427 thousand in 2009-10. Manpower export, and hence remittance growth, is being held back by slow global recovery from recession over the past two years. Most economies, other than China and India, are not showing a strong rebound.
Foreign exchange reserves
The country's foreign exchange reserves crossed the US$10 billion-mark in November 2009 and stood at US$10833.55 million at the end of Q1 of FY11.
Reserves in September of FY11 were 15.71 per cent above the reserves in the corresponding month of FY10 (US$9362.57 million). It is worth nothing, however, that the reserve position in September was slightly lower than in August 2010. The fall in reserves can be attributed to the increase in imports and lower inflow of remittances.
Price Situation
Recent price trends in the domestic and international market indicate that, despite a slight easing of the price pressure, the inflation rate remains high, and that the upward inflationary pressure is likely to continue during the coming months. A steady recovery from global recession would increase demand for investments (credit growth), which might eventually contribute to demand-pull inflation. Therefore, both demand and supply side measures need to be taken for maintaining price stability.
Data on price situation are available only up to the first month (July) of the quarter under review. The annual average rate of inflation (12 month annual average CPl, 1995/96=100) increased to 7.63 per cent in July 2010 from 7.31 per cent in June 2010 and 6.04 per cent in July 2009. Food inflation stood at 8.98 percent in July 2010, up from 8.53 per cent in June 2010 and 6.31 per cent in July 2009. On the other hand, non-food inflation stood at 5.54 per cent in July 2010, also up from 5.45 per cent in June 2010 and down from 5.72 per cent in July 2009. These data showed that nonfood inflation is relatively more stable than food inflation.
The point to point CPI inflation declined to 7.26 per cent in July 2010 from 8.70 per cent in June 2010. For the food category, inflation stood at 8.72 per cent in July 2010, lower from 10.88 per cent in June 2010; and for the non-food category, inflation in July 2010 was 4.87 per cent, which was also lower than that of the previous month (5.24 per cent).
