Country Report Bangladesh July 2000 Updater

Economic forecast: External sector

Exports will continue to recover over the forecast period. Merchandise export growth hit a recent all-time low of 2.9% (national accounts basis) in 1998/99, because of floods in 1998, but subsequently recovered to 7.2% year on year by December 1999. This recovery is likely to continue, with export growth (in US dollar terms) of 7% during 2000 and more than 12% in 2001 as the economic situation improves after the election. Export competitiveness will suffer in the early part of the forecast period because the taka still remains overvalued vis-a-vis the currencies of the South-east Asian countries, and because of the deepening energy crisis, narrow export base and the increasingly unstable political environment.

In addition to these concerns, export growth will be hindered by a failure to raise production, and by the poor quality and reliability of goods in the key readymade garments industry (RMG). However, subdued import growth, owing to a weakness in import-intensive manufacturing activities during the rest of 2000, and a lower food import requirement, will prevent a further deterioration in the trade deficit in 2000. The trade deficit will narrow in 2001 as exports strengthen, helping to offset part of the increase in the import bill resulting from stronger domestic demand and commodity prices.

An increase in interest payments on the external debt will cause a deterioration in the income balance over the forecast period and exert further pressure on the current account. We expect inward workers' remittances, which helped to keep the current-account deficit at around 2% of GDP (national accounts basis) in the last fiscal year, to rise in 2000/01, assuming a sustained recovery in oil prices and in South-east Asian economies. However, remittances will not totally cover the trade deficit and Bangladesh will still need bilateral and multilateral loans to meet its financing requirement. As a result of these factors, we expect the current-account deficit to be around 1.4% of GDP in 2000 and 0.9% in 2001.

The foreign-exchange reserves position is currently weak, with import cover of barely two months. According to the Bangladesh Bank (the central bank), foreign-exchange reserves (excluding gold) stood at US$1.6bn at the end of June. Despite weak import pressures and weak domestic demand, relatively poor export growth in 2000 will prevent any strong improvement in the reserves position. Foreign direct investment (FDI) fell in 1999, as a result of political instability, and although it is forecast to rise in 2000 and 2001, it will fail to raise reserves, as it is concentrated in the gas sector where imports of capital equipment have resulted in a subsequent outflow of US dollars in profit and dividends.

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