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Unformatted text preview: October, 2010 Economic Policy and Poverty, and Finance and Private Sector Team South Asia Region The World Bank Bangladesh Economic Update 1 Bangladesh Economic Update October 2010 Summary Bangladesh is estimated to have grown at a healthy rate in FY10, despite the slow global recovery and severe power shortages . Much of this growth (revised estimates put it at 5.8 percent) came from the services and industrial sectors, driven by growth in consumption fueled by strong remittance inflows, especially in the first part of the year. In FY10, inflation rose to 7.3 percent, up from 6.7 percent in FY09, driven mainly by rising food prices. In particular, prices of rice rose because of shortages in domestic production and rising prices in India. Monetary growth remained high in FY10, driven by strong growth in credit to the private sector and continued accumulation of net foreign assets by the Bangladesh Bank. On the external side, exports weakened compared to FY09 and remittances slowed towards the end of the fiscal year because of global economic conditions. Domestic power shortages also interrupted the production of readymade garments. Foreign exchange reserves rose to a level equivalent to 5.5 months of imports. Overall, fiscal prudence was maintained in FY10, with the fiscal deficit remaining at around 4 percent of GDP. Reforms progressed in FY10, despite some setbacks . The ongoing and prospective changes in tax policy and administration could be critical for Bangladeshs growth prospects. There has also been progress in reducing structural constraints to investment. There was improvement in the institutional framework for facilitating public and private investments (Special Economic Zones Act, Public-Private Partnership guidelines, Bangladesh Infrastructure Finance Fund). Regulatory reforms in the capital market came as a firefighting response while, in areas of core governance, there were setbacks (amendments to the Telecommunication Act and proposed amendments to the Anti-Corruption Commission Act). GDP growth is projected to be 6.1-6.3 percent in FY11 . This estimate emanates largely from higher public and private investment. However, there are several downside risks to growth in FY11. A weaker than anticipated global recovery could dampen the recovery in exports and further slow down remittances. Meanwhile, on the domestic front, continued power shortages could choke growth. The downside risks may dominate the upside potential. Recognizing the importance of reliable power for industrial growth, the government has contracted domestic and foreign private power producers . This involves a trade off. While providing power would help sustain growth (electricity shortages in Bangladesh have a significant impact on production and therefore growth), it also imposes additional fiscal costs....
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- Spring '11