Buoyant exports, robust private consumption with higher remittances key movers
The Asian Development Bank (ADB) has forecast 8% GDP growth, the highest in Asia, for Bangladesh for the current fiscal year as against the government’s 8.2% projection based on buoyant exports and domestic consumption.
However, developing Asia’s gross domestic product growth is forecast to slow from 5.9% in 2018 to 5.4% in 2019 and 5.5% in 2020.
Inflation across developing Asia is forecast to increase from 2.5% in 2018 to 2.7% this year and in 2020.
The regional lender made the projection in its Asian Development Outlook 2019 report launched yesterday.
“Bangladesh economy is in a good shape and is likely to continue to grow at 8% in FY2020. ADB's outlook indicates that Bangladesh is likely to continue as the fastest growing economy in Asia and the Pacific,” said ABD Country Director Manmohan Parkash.
Buoyant exports, robust private consumption with higher remittances, accommodative monetary policy, ongoing reform to improve business climate for private investment and public infrastructure investment would sustain the growth, said Parkash.
In the last fiscal year, Bangladesh registered a 8.13% GDP growth according to Bangladesh Bureau of Statistic data.
On the supply side, sustained strong growth in industry and agriculture is expected to be the main drivers of the growth in FY2020, Parkash mentioned.
However, the ADB projects the inflation to accelerate to 5.8% in FY20 on upward adjustments to domestic natural gas rates, higher prices for goods and services as value added tax (VAT) coverage expands, and taka depreciation as demand rises for foreign exchange.
"Despite a weaker global growth, favorable trade prospects are expected to continue here. Exports and remittances are likely to be further strengthened. Strong public investment due to continued policy environment and expediting implementation of large infrastructure projects are also envisaged," said Parkash.
Regional GDP Projection
Growth in developing Asia remains robust but is now expected to moderate more than forecast in Asian Development Outlook 2019, said the ADO update 2019.
This Update projects that the region will grow by 5.4% this year, or 0.3 percentage points below the April forecast, and that growth will edge up to 5.5% next year, or 0.1 points lower than earlier forecast, it adds.
As per the Update, among South Asian countries, India's growth forecast for fiscal year 2020 is 7.2% while it is 2.8% for Pakistan.
On the other hand , the ADB forecasts 6% growth for China, 6.7% for Vietnam, 3.2% for Thailand, 1.4% for Singapore, 6.2% for the Philippines, 4.7% for Malaysia and 5.2% for Indonesia. Bangladesh forecast remains what was made in ADO 2019 in April, while that of other countries mentioned in the forecast is lowered in the update.
Challenges for sustained development
To sustain this momentum in the medium to long-term, there are several challenges the country needs to overcome.
"Bangladesh requires expanded industrial base, a diversified export basket, equitable development in urban and rural areas, and a sound financial system as we indicated in the previous Bangladesh country chapters," said Parkash.
He further said that the authorities must speed up reforms to improve the business environment for vibrant private sector development and offer incentives to attract FDI.
The implementation of the VAT law was a welcome development, but further expansion of tax base and promotion of efficient administration would be required for improved resource mobilization, he stated.
The ADB said that Bangladesh also needed to further develop human capital to meet growing needs from private sector.
Growth in remittance inflows is likely to slow to 9.0% in FY2020 as fewer people will take jobs overseas. While import growth picks up, continued strong expansion in exports will broadly stabilize the trade deficit, says the ABD forecast.
As per the update, agriculture is expected to edge up to 3.8% growth in FY20 as government policy improves farm prices, while industry growth is expected to stay high at 12.5% with domestic demand continuing to be powered by remittances and the central bank promoting investment in productive pursuits.
Services are expected to grow by 6.4%, supported by sustained growth in agriculture and industry.
As remittances will still be sizable, the current account deficit is projected to edge up slightly in FY2020 to equal 1.8% of GDP, while with import payments exceeding export receipts, some pressure on foreign exchange reserves will continue, causing them to fall moderately.
Development expenditure is envisaged to grow by 22.0% to expedite the implementation of high-priority projects to enhance growth, while budget deficit is targeted equal to 5.0% of GDP, with 53.0% financed domestically, the report says.
The Value-Added Tax and Supplementary Duty Act, 2012 came into effect on 1 July 2019 with provision for four rates: 5.0%, 7.5%, 10.0% and 15.0%. The new VAT law is expected to generate additional revenues with more comprehensive coverage, better auditing, and market price accounting.
Other revenue-enhancing measures are expected to help improve revenue mobilization, but various VAT exemptions and tax holidays will likely offset some of these efforts.
Despite global economic slowing, export growth is expected to be strong at 10.0% in FY2020 as Bangladesh benefits from trade redirection. Exports should benefit as well from reduction in the cost of doing business.
Imports are expected to grow by 9.0% in FY2020, though less than forecasted in ADO 2019 as expansion in public investment moderates more than expected in April 2019.
Still, import growth will be substantially higher than in FY2019 as the implementation of large infrastructure projects picks up and boosts imports of capital equipment and raw materials.