UNB, Dhaka

The London-based Economist Intelligence Unit has revised down its forecast on Bangladesh’s economic growth to 5.7 per cent in 2007-08 in their latest revision of country report on Bangladesh.

It fears inflation in the country to entrench further as the Bangladesh Bank has not tightened monetary policy and is not expected to do so in the near future.

In its March issue, EIU said the GDP growth of Bangladesh to slow down to the level compared to 5.8 per cent as projected in their February report due to less favourable external environment in 2008.

‘The outlook for Bangladesh’s external environment is expected to be less favourable in 2008, as economic growth slows in the country’s main export markets,’ according to the report.

The projection was made in the light of EIU’s latest revisions of GDP forecasts for the US and the euro area, two major export destinations of Bangladesh. The World Bank, the International Monetary Fund and the Asian Development Bank projected the country’s GDP at 5.5 per cent while the Bangladesh Bank expected it to be around 6 per cent.

The EIU is a specialist publisher serving companies establishing and managing operations across national borders. For 60 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide.

EIU said world GDP (measured at purchasing power parity exchange rates) is forecast to ease from 4.6 per cent in 2007 to 3.8 per cent in 2008 before picking up slightly to 3.9 per cent in 2009. The slowdown reflects a substantial downward revision to the growth forecast for the US, where real GDP to slow from 2.2 per cent in 2007 to just 0.8 per cent in 2008 (compared with 1.5 per cent in our February report).

‘Our forecast assumes that there will be a recession in the US during the first half of the year,’ the EIU report said. ‘We still expect the US economy to recover in 2009, but at 1.4 per cent the pace of growth is likely to be slower than previously projected. We have also revised down our forecast for GDP growth in the euro area in 2008, to 1.7 per cent, down from 2 per cent previously.’

The report said the expected poorer economic performance in the US and the euro area would have a negative impact on Bangladesh’s external sector, as the two regions combined absorb 55 per cent of total Bangladeshi exports. It expected international oil prices (dated Brent Blend) to average $79.5/barrel in 2008, before falling to $72/b in 2009.

‘Because Bangladesh imports nearly all of the oil products that it requires, high world oil prices will have a detrimental effect on Bangladesh’s balance of trade and are expected to contribute to record trade deficits in 2008 and 2009.’ On the expenditure side, the report said the growth of exports and services are expected to slow to 4.4 per cent, from an estimated 11.4 per cent in 2006/07, as the textile sector adjusts to weaker external demand and tries to overcome production problems arising from recent labour disputes.

It, however, added that the growth would be driven by private consumption, which accounts for some 65 per cent of total GDP, and an increase in investment activity, led by the government and foreign investors.

On the supply side, the composition of GDP growth in 2007/08 and 2008/09 will be similar to that in 2006/07, as record inflows of workers’ remittances underpin activity in the services sector and the manufacturing industry continues to make a strong contribution.

The rates of growth in agriculture will again lag behind those in manufacturing and services in 2007/08, as the sector strives to overcome the devastation caused by floods and cyclone Sidr.

Assuming normal rainfall, a strong recovery in agriculture should boost GDP growth to 6.2 per cent in 2008/09. Record inflows of remittances are expected to spur consumer spending in 2007/08 and 2008/09 and would help prop up the balance of payments. ‘The main near-term risk to economic growth is inflation, which peaked at a nine-year high in December 2007,’ said the report.

‘The fear is that high inflation could entrench itself, particularly since the central bank (unlike its counterparts in the region) has not tightened monetary policy and is not expected to do so in the near future,’ it added. The EIU report said the upward price pressures — particularly those resulting from rising food costs — are expected to persist throughout the forecast period.

It said food prices would continue to be driven upwards by the hoarding of goods by local food merchants and the rising cost of imports from India. ‘We expect consumer price inflation to average 8.7 per cent in 2008. Assuming that harvests return to normal, consumer price inflation is forecast to moderate to 5.1 per cent in 2009,’ the EIU report said.

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