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CPD economic review

FDI crucial to maintain balance of payments

By Inam Ahmed
The medium-term orospects for foreign capital inflow, both official and private, will be a crucial factor both for maintaining a viable balance of payments and financing in vestment growth.
However, how much foreign direct investment Bangladesh could attract at this crucial stage when prospects for FDI are considerable would largely depend on the improvement of the country’s political climate.
This was observed in the Independent Review of Bangladesh's Development (IRBD) 1997
Renowned economist Prof Wahiduddin Mahmud prepared the chapter on macro economic management for the Centre for Policy Dialogue, a local think tank, that undertakes a stock taking of the economy every year.
Most of the FDI that are currently under negotiations will go to the power and gas sectors and will not directly generate export earnings and will not also help the foreign reserve position because of their very high import content.
"Unless the flow FDI can be expanded into other industrial activities, the medium-term outlook for the balance of payments on this count may worsen rather than improve," Prof Mahmud observed.
On the other hand, the annual gross aid disbursement of about 1.5 billion dollars in 1996-97 represents only a marginal improvement over that in 1995-96 and was lower than the level in the preceding years.
This implies that the decline in aid disbursement in 1995-96 cannot perhaps be attributed entirely to the political unrest of that year. Ratner, stricter aid conditionalities can also contribute to the trend.
The growth of GDP. after stagnating around a trend rate of about four per cent annually for the last lo years or so, has shown some signs of improve-
ment in recent years, the' IRBD said. The increase in the GDP growth rate to well over five per cent in both 1995-96 and 1996-97 could be attributed entirely to very high agricultural growth which more than compensated for a sharp decline in the growth of manufacturing production.
"Even to maintain this higher GDP growth rate, manufacturing activities will have to be vigorously reactivated, since agricultural production is not likely to continue to have above-trend rates of growth," Prof Mahmud said.
In spite of the robust GDP growth performance, the strains in macroeconomic balances emerging since 1994-95 have not entirely disappeared by the end of the first quarter of fiscal 1997-98, the IRBD said. The external current account deficit had been reduced from an unsustainable level of over five per cent of GDP in 1995-96 to less than three per cent in 1996-97.
The contraction of the external deficit had been made possible mainly because of a sharp decline in the growth of import demand, which in turn appeared to have resulted from a subdued level of manufacturing and investment activities.
The widespread disruptions in the power supply was one apparent factor adversely affecting manufacturing production in 1996-97, but whether there were other deep-seated reasons for the decline in industrial Kowth need to be investigated, of Mahmud maintained.