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ECONOMIST INTELLIGENCE UNIT REPORT

Bangladesh's GDP growth to fall far short of target

Star Business Report
THE Economist Intelligence Unit (EIU) forecasts 6.3 percent GDP growth for Bangladesh in the current fiscal year, far short of the government's estimate of 7.2 percent.
The growth will continue to be supported by the steady expansion of private consumption and investment, the EIU said in a report on Bangladesh.
“The main determinants of private consumption growth in the period will be the performance of the agriculture sector, together with remittances from the country's diaspora and from the Bangladeshis working abroad,” said the EIU, an independent business within The Economist Group.
It said workers' remittances will be increased steadily in the next five years, underpinned by relatively strong employment prospects in the Middle East. The EIU expected a 6 percent average growth in private consumption, and 8.2 percent in gross fixed investment in the forecast period of 2012-16.
“This component of GDP (gross domestic product) is dominated by the private sector, which accounts for 80 percent of fixed investment in Bangladesh,” it said.
Private investment is expected to benefit from improving business sentiment in the next five years, said the EIU, which offers forecasting and advisory services and provides country, industry and management analysis worldwide.
"It is also likely to be boosted by government efforts to attract greater flows of foreign direct investment from India, China and Russia, as well as from members of the Bangladeshi diaspora in OECD countries.”
The external sector is also expected to exert a drag on GDP growth from 2013 as strong invest-
ment growth sucks in greater quantities of capital and intermediate goods, it said.
The report said tire agriculture sector is expected to grow by 3.7 percent in 2012-16 and will account for less than 20 percent of GDP at factor cost
The sector will continue to be the largest employer and the main
source of income for around one-half of the working population.
The GDP growth on a factor-cost basis will also continue to be driven by services and industry. "Services will continue to account for around 50 percent of GDR while industry will contribute about 30 percent,” the EIU said.
Industrial output is expected to grow by at an average 7.6 percent rate a year in 2012 -16, while the services sector is expected to grow at a fairly rapid pace, the EIU said.
The report, however, said the government will continue to fail to balance its budget in 2012-16 fiscal years, as it confronts a host of domestic challenges, ranging from shortages of power, water and gas to the need for higher welfare spending.
Rises in public expenditure will continue to outpace revenue growth. "Officials expect spending to increase by 21.6 percent in 2012-13, while revenue is forecast to rise by 18.9 percent."
It said the budget will also remain in deficit throughout the forecast period, as the government attempts to tackle a number of problems while also making progress towards the UN's Millennium Development Goals.
“One of the biggest short-term challenges will be to improve the supply of electricity. The main obstacles are a shortage of gas (the main fuel used by generating plants in Bangladesh) and the large number of old, inefficient power stations,” it said.
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Although the government is expected to make gradual progress in boosting electricity supplies, these are unlikely to improve significantly until work on two planned nuclear power plants commences in2014, it said.
About monetary policy, it said the Bangladesh Bank is expected to maintain a pro-growth stance during the remainder of this year.
“The publication of a new inflation gauge, which points to a much slower rate of inflation than the previous measure, could prompt the central bank to adopt an easing policy stance from 2013,” it said.
The EIU said the central bank will resume a tightening stance from 2014 as domestic demand gathers momentum.
It also expects consumer price inflation to moderate to an average of 8.5
percent in 2012, from 10.7 percent in 2011, amid an easing of global noncommodity prices and reasonable domestic harvests.
About exchange rate, the EIU said the taka may depreciate against the US dollar in the forecast period, weakening on an annual average basis from Tk 82.6: $1 in 2012toTk93.1:$lin2016.
“Deterioration in the current account, stemming from strong import growth, is expected to exert downward pressure on the local currency,” itsaid.
The report said the current account will remain in deficit in 2012-16.
“Merchandise export growth will be underpinned by Bangladesh's favourable access to European markets, but the value of imports will continue to exceed that of exports by a wide margin, resulting in a trade deficit throughout the forecast period.”