State of the Bangladesh Economy in FY06 – Early Signals and Immediate Outlook

This report has been prepared as part of CPDs ongoing assessment of macro-economic performance of Bangladesh under CPDs programme titled Independent Review of Bangladeshs Development (IRBD). Based on data and information on the dynamics of major macroeconomic variables during July-December 2005, the analysis attempts to trace and track the movements of key macro economic performance indicators including in such areas as: public finance, monetary and financial sector, real economy and external balance. The discussion is contextualized by recalling the initial conditions of FY06 and budgetary measures envisaged to deal with the macroeconomic challenges of FY06. In presenting the analysis of some of the recent trends in the economy the review takes note of the robust trends in terms of private sector investment, good prospects of food grain production, moderate growth of exports and buoyant flow of remittances. However, in the absence significant rise in the net flow of foreign aid and mobilization of domestic resources, the report apprehends that quality of fiscal balance may deteriorate further in the coming months. The report points out that without augmentation of foreign aid flow, high export growth and sustained remittance flow the external balance may experience severe pressure in the second half of the fiscal year. The report highlights some of the emerging trends in the economy which may frustrate the overall economic growth prospect and undercut macroeconomic stability during the period of electoral transition. The interim IRBD 2006 report presents elements of a plausible scenario in view of the emerging situation. Thus the government is likely to accelerate its spending in the coming months under both revenue and ADP accounts. There is a possibility of slowdown in the private sector investment as well. The report makes a number of suggestions to address the policy challenges emanating from rising inflation, high interest rate, dwindling reserves and deteriorating balance of payment (BOP).