Overview of the Bangladesh Economy in 2009

Ashek Ishtiak Haq

MBA 41-IBA, BBA 7th-DU
Phone: 01720594959
Address: 31st Siddeswari Lane, Dhaka-1217
http://www.facebook.com/ashek.haq

Bangladesh has remained an exemplary economy in the face of the global financial crisis. It has
proved to be decoupled from its effect. The economy not only registered a 5.9% GDP growth
performance but also recorded stellar performance of the agriculture sector, posted buoyant
remittance flow and ended with historically highest record level of forex reserves. Resilience is in
fact something that defines Bangladesh. Although, the country gets hit by mammoth natural
disasters almost every year, its per capita income has advanced to a level of USD700 (from
below USD200 in 1972) with major chunk of the achievement made since the opening up of the
economy in 1991. The central bank is predicting that by 2013 the country will achieve the status
of middle-income country. The annual GDP growth rate during this period ranged between 5% to
6.5%. The food production has tripled to a very impressive figure of 30 mn tonnes in 2008 from
a meager 10 mn tonnes in 1972. The country has also made impressive progress in social
indicators such as the infant mortality rate, access to healthy sanitation facility, primary school
enrollment, literacy rate, and life expectancy. In April, Moody’s and S&P assigned their first-ever
sovereign ratings to Bangladesh, which is three-level below the investment grade at a similar
level to the Philippines, Indonesia, and Vietnam, and well above the ratings for Pakistan and Sri
Lanka. Favorably the new ratings should help to ease the cost of capital, encourage more FDI,
and reduce import and export costs (as the price of LCs should now fall).

Bangladesh at a Glance (2008-09)

Population (mn,Provisional)
Nominal GDP (USD bn)
GDP, (USD bn, purchasing power
parity, est )
GDP per capita (USD; marker
exchange rate )
GDP per capita (USD; purchasing
power parity)
Exports (USD bn)
Exchange rate (av) Tk:USD
Source: Bangladesh Bank, IMF
144.20 Population growth 1.26%
89.38 Real GDP growth 5.90%
Inflation (12-months
242.40 average) 5.95%
Total investment % to GDP
620.00 at current market price 24.18%
Total consumption % to
GDP at current market
1,465.00 price 79.98%
15.60 Imports (USD bn) 20.3
Forex reserves (March
69.11 2010, USD bn) 10.14

However, the year 2009 has presented the economy with some severe challenges such as
significant volatility in export earnings, deficiencies in power, gas, and basic infrastructure,
decreasing job opportunities in the overseas market, inflationary trends gaining steam and
depressed investment trends.

GDP
The limited openness of the economy and strengthened domestic demand has helped
Bangladesh to mitigate the most of the effect of the global recession.
 Nominal GDP 2004-2010 Real GDP Growth, % yoy
100
6.6
80 6.4
6.2
in bn USD

60 6

%
5.8
40
5.6
20 5.4
5.2
0 FY04 FY05 FY06 FY07 FY08 FY09 FY10F
FY04 FY05 FY06 FY07 FY08 FY09 FY10F
Fiscal Year
Fiscal Year

The almost 6% GDP growth in FY09 has been possible due to the strong performance of the
agriculture and service sector, while the growth in the industrial sector has stalled due to the
weakened export demand. Agriculture sector’s growth in FY09 was 4.6% helped by favorable
weather and optimistic price expectation. Major growth drivers in the agricultural sector were the
crops and horticulture, and animal farming sub-sectors. The growth in service sector has
dropped slightly to 6.3% in FY09 from 6.5% in FY08. Accounting for some fluctuations, the
growth is spread over all the subsectors. The lower growth in the Wholesale and retail sector
resulted because of the fall in the industrial production and commodity imports.

Growth Rate of the Major Sectors, 2003-09

Sectorwise GDP Composition 2009
10

20.60%
8 29.70%

6
%

Agriculture
4
Services

2 Industry
49.70%
0
FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09
Agriculture Industry Services Overall GDP

Industrial Growth
The growth in industry sector has dropped to 5.9% in FY09 from 6.8% in FY08. The drop in
growth of the manufacturing subsector is the most significant, caused by decline in export in
most of the items except for apparels and textiles. From 7.2% in FY08 it dropped to 5.9% in
FY09. The mining and quarrying sub-sector enjoyed increase in growth. The growth for power,
gas and water supply subsector dropped 2.3% to 4.5% in FY09 signaling the inadequacy of
physical infrastructure. Both large and medium scale and small scale industries endured dip in
their growth, registering 5.7% and 6.6% expansion in FY09 compared to 7.3% and 7.1% growth
enjoyed in FY08. The shock to the small scale industry was relatively smaller due to its immunity
from the external sector. However, the things are looking up as, the Quantum Index of Industrial
Production showed a growth of 7.4% during FY09 over FY08. Quantum index of small scale
manufacturing industry also increased by 7.9 percent during FY09 over FY08. A survey by the
IFC also showed business confidence and investment have been picking up since October last
year.
 Trends in Industrial Growth
12

10

6
%

0
FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09
Industry, as a whole Mining and quarrying Manufacturing Large and medium scale
Small scale Power, gas and water supply Construction

Agriculture
A major structural change has been observed regarding the decline in the share of agricultural
GDP over the last four decades. From an agro-based economy in the 70s the country has
transformed into a service-based economy. The agricultural share has dropped from over half of
total GDP during 1970s to about one third during the 1980s. The current share contributed by
the agricultural sector is about 21%. Despite such decline, the impact of agriculture is still
predominant over the economy. It still employs half of country’s labor force most of whom are
concentrated in the rural areas.

Contribution of Agriculture in GDP

700
600
500
400
in bn tk

300
200
100
0
FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09
Agriculture Crops and horticulture Animal farming Forest and related services
Major policy decision such as the timely downward revision of fertilizer prices, subsidy for diesel,
timely availability of and subsidy for electricity for irrigation have contributed to the production of
32.16 mn MT rice and wheat in FY08-09. This amounted to 8.1% higher growth than the
preceding year. The target for FY09-10 has been set at 35.25 mn MT, which is 9.6% higher than
last year. It will majorly depend upon the output performance of the upcoming Boro crop, the
target for which has been set at 19.0 mn MT.

Inflation
After reaching the lowest level at 2.25% in June, point-to-point CPI inflation edged up to 6.71%
in October, with both food and non-food prices registering a significant increase. The inflation
rate crossed 9% mark in February 2010. The disquieting factor is the higher food inflation rate of
10.93%. According to the Bangladesh Bureau of Statistics (BBS) data, the inflation in urban
areas increased more compared to that in rural areas.
 CPI: Twelve-month Point to Point Basis
16

14

12

10

8
%

Oct, 09

Dec, 09

Jan, 10

Feb, 10
July 09

Sep, 09
Aug 09

Nov, 09
Mar 09
FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

Sep 08

Nov 08

Feb 09

Jun 09
Dec 08

May 09
Jul 08

Aug 08

Oct 08

Jan 09

Apr 09
General Food Non-Food

Bangladesh Bank predicts that inflation might go up further in the coming year as the prices of
commodities on domestic and international markets has started increasing for the last few
months of 2009. The main causes behind this increase are effect of unfavorable weather on the
crop production during the later part of the year, rising trends in prices of rice and other
commodities (price of oil increasing in the international market).

Three factors can push inflation to new heights, these are pay scale hike of the Government
employees, uptrend in Annual Development Program spending and pressure on food prices with
special emphasis on rice. If there is no disruption in agricultural output a leading financial
institution predicts CPI to average around 6.5% during FY10.

Remittance
Only a few years back the country used to receive USD1.0 to USD2.0 bn remittances per year. It
crossed the USD5.0 bn mark in FY 05-06. In just 10 years time the foreign currency reserve
grew from USD1.0 bn to USD10.0 bn.

The country has enjoyed record-breaking remittance earning in 2009, which helped the
international reserve to cross the USD10.0 bn mark for the first time. The remittance inflow for
November 2008 was USD1.05 billion- a record for a single month receipt. This has been possible
largely due to the resilient spirit shown by the migrants who sent more money than ever despite
the odds posed by the global recession. Remittance as percentage of GDP increased by 0.89% to
10.84% in FY09 from 9.95% in FY08. Although the year marked a decline in the labor export,
the remittance inflow reached USD10.72 bn by the end of 2009. The figure was only USD8.97 bn
in 2008. Bangladesh Bank’s series of effort to funnel the money through legalized channel has
helped the growth of remittance inflows. One alarming trend for the sector is, it is experiencing
drastic fall in the manpower exports.
 International Reserve

12000

10000

8000
In mn USD

6000

4000

2000

March 09

March 10
April 09
May 09
August 08

October 08

December 08

August 09

October 09
June 09
November 08
July 08

February 09

July 09

January 10
February 10
November 09
January 09

September 09

December 09
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09

September 08
Export
The export sector has suffered some lagged effect of the global slowdown in FY09. In the first
five months, the export earnings have fallen by 6.9%. The month of November has witnessed a
7.7% decline in export receipts. The decline has been witnessed in all products, led by the fall in
RMG export but exception has been observed in some export categories e.g. jute goods,
engineering products, petroleum products and handicrafts.
Export & Import
25000

20000
in mn, USD

15000

10000

5000

0
2009-10 F
1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

Export Reciept Import Reciept FOB

The two key export items garments and knitwear declined by 8.0% and 7.2%. One factor to be
noted here that Bangladesh still surpassed its closest competitors, including India, for absolute
textile exports. Other major items for which export fell were frozen food (17.9%), chemical
products (42%), and leather (6.9%). Export of the primary products declined 6.0% whereas the
manufactured product export fell by 6.2%. To boost the export sector, the Government has
allocated BDT18.0 bn worth of cash subsidy in FY10.

Import payments also dropped in FY10 due to the fall in rice and other commodity imports, and
due to the decline in commodity prices in the international market. Import fell 5.7% during July-
December 2009 over the same period of 2008. The fall in rice imports is the steepest (96.3%),
followed by crude petroleum (36.4%), fertilizer (35.9%), refined petroleum (26.9%), and yarn
(19.9%). Because of this decline, the trade deficit narrowed to USD1.5 bn from USD2.3 bn in
last year. Combining with the buoyant remittances this has cause the current account surplus to
widen further to USD1.3 bn vs a deficit of USD0.3 bn last year.

L/C
The growth in the L/C opening figure provides a brighter picture. In the first six months of FY09-
10 L/C opening has increased by 37.4%. L/C opening for industrial raw materials has reentered
the positive terrain with a rise of 2.9% over the corresponding period. L/C opening for capital
machinery imports has grown by 13.9% year-on-year in the July-October period. At the same
time Banks have started to report decline in the excess reserves whereas inter-bank call money
rates have started climbing from the near zero level. Collection of VAT has started to rise too.
Import LC's Opened 2009-10P
2600

2500

2400
in mn USD

2300

2200

2100

2000
Oct
Aug

Nov

Jan

Feb
Jul

Mar
Dec
Sept

This rise can particularly be attributed to improved business confidence and the recent rise in
commodity prices in the international market. L/C for the import of food grains have increased
by 37.4% and consumer goods by 156.5%.

FDI
Net FDI
0.9
0.8
0.7
0.6
in bn USD

0.5
0.4
0.3
0.2
0.1
0
FY04 FY05 FY06 FY07 FY08 FY09

According to UNCTAD the most severe decline in FDI has been witnessed in the first quarter of
FY09. Comparing to that, the net FDI inflow of USD941 mn in FY09- a 44.8% growth over FY08
is quite an achievement. The country received USD207 mn as FDI during the first four months of
FY10. The first five months of FY10 saw positive growth in the FDI flow to the Export Processing
Zone.

In January 2010, the Indian telecom firm Bharati Airtel invested USD300 mn in a 70% stake of
Warid Telecom. Moreover, several other foreign companies have expressed an interest in
investing in the energy sector (which is underfunded).
Capital Market
DSE General Index
6000 DSE Market Capitalization
35
5000
30
4000 25
20

In bn USD
Index

3000
15
2000 10

1000 5
0
0

FY04
FY05
FY06
FY07
FY08
FY09
Jan 09

Aug 09

Oct 09
Apr 09
Feb 09

May 09

Sep 09

Nov 09

Jan 10
Feb 10
Mar 09

Jun 09
Jul 09

Dec 09

Mar 10
FY04
FY05
FY06
FY07
FY08
FY09

Feb 09

Sep 09

Nov 09

Jan 10
Feb 10
May 09
Jun 09
Jan 09

Mar 09

Jul 09

Dec 09

Mar 10
Aug 09

Oct 09
Apr 09

Market Capitalization USD bn

All through 2009 the capital market was volatile. The market indicators showed an upward trend
during the first 7 months of FY10. With the listing of Grameenphone (the biggest issue in history)
in January 2010 the index reached 5,367.1 points, a rise of 102.6% over January, 2009. During
the same period, market capitalization of the Dhaka Stock Exchange has witnessed an
astronomical rise of 112.0%, from USD14.85 bn (16.7% of GDP) in January 2009 to USD31.39
bn (31.5% of GDP) by the end of January 2010. 18 companies have debuted in the countries
premium bourse Dhaka Stock Exchange (DSE).

Currency
Exchange Rate USD to BDT
70

68

66
in tk

64

62

60

58
May 09

Jan 10
Mar 09

Jun 09
Jul 09

Mar 10
Apr 09
Jan 09

Aug 09

Oct 09
Nov 09
Feb 09

Sep 09

Feb 10
Dec 09
FY04
FY05
FY06
FY07
FY08
FY09

A constant supply of USD from relatively stable export income, worker’s remittance inflow and
Bangladesh Bank’s continuous purchase of the USD from the local inter-bank market have
helped to keep the money market stable through FY09-10. The moves led to a stable Forex
market with BDT trading at around 69.06 against USD. From October BDT starts to depreciate
slightly with USD/BDT hovering around 69.20 marking 0.39% depreciation from the opening
level of 2009.

The Way Forward

With the manufacturing activities on the rise, higher growth witnessed in the service sector, pick
up in the export payments, remittance on a roll, and stable forex reserve it may be concluded
that things are looking up for Bangladesh. However, challenges like rising inflationary pressure,
declining FDI flow, PPP projects hitting snag, and weak infrastructure blunt this optimism.
Still, ongoing strong remittance flows will not only help to support private consumption but also
small-scale investment throughout 2010. The garment and textile sector (which accounts for
nearly 80% exports) is well placed to benefit, having gained global market share in 2009 as US
and EU demand shifted toward lower-cost Bangladeshi garments.

While FDI and capital flows suffered in 2009, they have improved in early 2010. Severe power
shortages are still a serious constraint on economic activity. Fortunately, even without further
FDI inflows in the short term, a number of new concessionary loans from bilateral and
multilateral donors in early 2010 (worth over 800 mn) have been pledged towards energy sector
projects.

In order to keep the country into the preferred growth trajectory the country has an uphill task
of sorting out the weak infrastructure problem, attracting more FDI, keeping the inflation at a
tolerable level, and overcoming the effect of the global slowdown. Adoption of an appropriate
policy framework and undertaking proper regulatory reforms will be critically important to
address the emerging challenges that are likely to confront the Bangladesh economy in 2010.