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Near & medium term outlook for Bangladesh economy  

| Updated: March 31, 2022 16:21:17


Near & medium term outlook for Bangladesh economy   

The overall macroeconomic performances and prospects of the world economy immensely depend on the improvement of the existing pandemic and its successful prevention through implementation of public health related safety measures including rapid vaccination for the common people especially in the emerging markets and developing economies.

However, some big sources of uncertainties till existed in the world economy. The first source of uncertainty is the emergence of more transmissible and deadlier SARS-CoV-2 and Omicron variants which can create a prolonged pandemic situation and may further pullback the economic activities. The second source of uncertainty lies in the persistence of supply-demand mismatches which may lead to rise in inflationary expectations due to price pressure. The third source of uncertainty rests on a set of factors comprising financial market volatility. A faster pace of vaccination can overcome the uncertainties and strengthen the economic recovery by boosting confidence of consumers and firms along with rising spending and investments. Besides, implementation of structural investment plan can lead to more robust near-term growth.

According to the International Monetary Fund (IMF)'s Global Financial Stability Report of October 2021, extraordinary policy measures have eased financial conditions and supported the economy. Twelve months forward earning per share ratio have elevated with profitability exceeding the amount at pre-pandemic time in several economies. Expectation of low default rate has secured the credit quality in bond market. Households have received benefit from lower interest rate which has improved their financial position. The risk of defaulting mortgage and other consumer loans have decreased because of reduction of debt service ratios. Moreover, the ongoing economic recovery and robust global risk sentiment have boosted the flows of portfolio in emerging economies. And , banks have become resilient and continued to play an important role in enhancing credit flow to the economy. But actions taken during the pandemic may have unintended consequences such as stretched valuations and rising financial vulnerabilities. Besides, persistence of excess liquidity and low interest rate may prompt the volatility in financial market. In many economies the restriction in loan writing-off may constrain the growth of loan and a slowdown in international lending may pose a threat to emerging economies. Coordinated efforts of all the policy stakeholders will be the key to sustain the ongoing economic recovery. In this regard , the monetary authority should take prudential measure against unexpected price pressure in future while fiscal policy should be planned to assist vulnerable firms and households.

BANGLADESH: Despite repeated waves of the Covid-19, Bangladesh economy has managed to return to the recovery phase aided by appropriate policies and 28 stimulus packages.

After recent rebasing from the fiscal year 2005-06 (FY06) to FY16, BBS has calculated real Gross Domestic Product (GDP) growth rate at 6.94 per cent for FY21, which was 3.45 per cent in FY20.

After being severely affected by Covid-19 pandemic in the fiscal year FY20, the economy of Bangladesh showed nascent signs of recovery backed by reopening of factories, rebound in exports, strong remittance inflows and robustness in service sector over the first three quarters of FY21.  The livelihood of people was restored gradually along with improvement of food security in poor and slum areas. Considering the gradual recovery of the ongoing pandemic situation, the government has set a target of real GDP growth at 7.2 per cent for FY22. This growth outlook is underpinned by how fast mass vaccination as well as strong recovery process can be achieved.

 However, during the last quarter of FY21, the economy of Bangladesh further revolved around the unpleasant outcome of Covid-19, when economic activities were badly disrupted as consequence of back-to-back restrictions announced by the government. Nevertheless, the Covid-19 management programme at the national level emerged as a key driving force underpinning recovery of Bangladesh economy in near term.

Despite slowdown of growth due to severe impact of Covid-19, the economy of Bangladesh steadily recovered over FY21. The government took some prudential measures to put the economy on the growth track. The growth of export-oriented industries and service sector was higher compared with that of the same period of the preceding financial year. The government's stimulus and social safety packages contributed to the early recovery and was considered as the dominant factor to keep the economy alive in the upcoming periods. The scenario of industrial sector, especially apparel production, has also improved because of the re-installation of earlier suspended international orders and new orders to come in the first half of FY21 and in the first quarter of FY22. Relying on the ongoing global Covid-19 containment and economic recovery measures, many international organisations including the World Bank, IMF and ADB have already upgraded their growth forecasts for the World economies including Bangladesh in their latest economic updates. The recent sectoral trends suggest that the government's real GDP target for FY22 can be achieved subject to improving the Covid-19 situation with no major external or internal shocks.

The average inflation rate came down to 5.56 per cent in FY21 from 5.65 per cent in FY20 because of restrained pressure from demand side, moderate agricultural production along with co-ordinated fiscal and monetary policies. However, the targeted ceiling of average inflation rate was 5.4 per cent for FY21 which was not met because of upward inflationary pressure of food components. In this backdrop, the government has adopted several necessary steps to increase food stock from domestic and international sources.

Accordingly, the government has set the target of average inflation rate for FY22 at 5.3 per cent. However, excess liquidity stemming from the stimulus packages may engender inflationary bubbles in the upcoming months where strong vigilance will be required.

BB has announced its monetary policy stance (MPS) for FY22. The stance is essentially expansionary and accommodative for all growth supportive needs while ensuring inflation target as well. The prime objectives of the MPS FY22 are to support investment and employment generating activities and create enabling conditions for the businesses to normalise production and supply chains. The MPS undertakes a strategy to provide adequate financial support to the priority sectors and to ensure required funds in the system through various policy options.

To mitigate the impact of the Covid-19 pandemic and to ensure safety of the mass people, Bangladesh began to administer Covid-19 vaccination since January 2021. As per latest available information of the Directorate General of Health Services (DGHS) of Bangladesh, more than 42 million people got at least two doses of vaccines up to 10 December 2021. The government kept working on the ongoing mass vaccination program to bring the whole population in vaccinated zone by June 2022. There have been signs of visible improvement in terms of management of the pandemic and economic recovery. However, the rapid mutation of the Coronavirus is still posing serious risk to a complete recovery.

 

The full BB Annual Report 2020-2021 is available at the central bank's website (https://www.bb.org.bd/ pub/annual/anreport/ar2021/index2021.php)

 

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