Four factors may subdue growth, fuel inflation: BB

Four critical factors are likely to undermine the growth potential of the country in the current fiscal year (FY24), according to the latest annual report of the central bank, released this morning (Thursday). 

“In the light of governments’ ongoing development activities and further development opportunities created with the completion of some of government mega investment projects, the targets for real GDP growth and inflation rate have been set at 6.5 per cent and 7.5 per cent respectively for the FY24,” said the Bangladesh Bank Annual Report (2022-2023). 

“High inflationary and exchange rate pressures, high non-performing loans (NPLs), and decreasing trend of foreign exchange reserves may pose severe challenges to this growth and inflation outlook,” the report added.

It mentioned that the country experienced a high inflationary pressure in FY23, both from food and non-food items due mainly to fuel price adjustment, global commodity price hikes, exchange rate pass-through effects and market failures. 

The annual average rate of inflation stood at 9.02 per cent in FY23 which was 6.15 per cent in FY22.

“Since global commodity prices are projected to decline in 2024 (according to World Economic Outlook, October 2023), inflationary pressures to the economy is expected to ease in the coming months, though easing of exchange rate pressure is still remained as a big challenge,” cautioned the report.

To contain inflation to the desired level, the central bank adopted a contractionary monetary policy stance for the first half of FY24 along with ‘ensuring the necessary flow of funds to productive and employment-generating activities to support the growth target.”

In the report, the Bangladesh Bank also mentioned that the increase in investment in both the private and public sectors is crucial for the growth outlook. 

“The withdrawal of the deposit rate cap is inducing to increase savings growth which may also influence to increase investment,” it further added. 

As the government has invested a big amount of money in power and energy, and transportation and communication sectors as part of its Annual Development Program (ADP) especially in the recent years, central bank report pointed out that the economy is now getting benefit from the completion of some mega projects of the government.

“It is expected that domestic economic activities will further gear up with the opening of railway connectivity over the Padma Bridge,” the report continued. 

“Moreover, metro rail and elevated expressway in Dhaka city, Karnaphuli tunnel in Chattogram, Dhaka-Cox’s Bazar railway and many other bridges and roads across the country are expected to bring positive impact on Bangladesh economy,” added the annual report of Bangladesh Bank.

It also mentioned that credit to the public sector has increased sharply in recent years due to financing for mega development projects. 

“In the past two years, government’s borrowing from the banking system, particularly from BB has increased tremendously, which ultimately contributed to inflation hike,” said the report. 

As the higher government borrowing from the banking system could increase the six-month moving average rate of Treasury bill (SMART), the central bank report predicted that the lending rate in the coming months may also shoot-up. 

“Resultantly, credit flows to the private sector might be slowed down in FY24,” it projected.

Again, due to the adaptation of import-limiting measures, though the trade deficit narrowed in the last fiscal year, the deficit in the financial account became larger.

The trade gap came down to $17.16 billion in FY23 from $33.25 billion in FY22. The financial account balance, however, turned into negative $2.08 billion in the last fiscal year which was at a surplus of $16.70 billion in FY22.

The central bank is now expecting that the continued import-limiting measures would further improve the trade balance in the coming days. Import, in terms of free-on-board (FoB) value, declined by 21 per cent in the first five months of the current fiscal year compare to the same period of the past fiscal year.   

“But the reduction of imports may affect overall economic activities in the economy negatively,” the annual report cautioned. 

“To prevent the deficit in the financial account, all possible ways will have to be explored,” it added.

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