FE Report
The Metropolitan Chamber of Commerce and Industry (MCCI) has said inflation rate has continued rising in the third quarter of 2010-11 fiscal and is likely to continue, although the central bank re fixed it to 7.0 per cent for June 2011 from the previously set target of 6.5 per cent.
Assessing the third quarter (Q3) performance, the chamber in its report published on Tuesday said the upward inflationary pressure is likely to continue as commodity supply and price trends in domestic and international markets seem to indicate.
The MCCI, however, is optimistic about achieving the country's 6.7 per cent GDP growth in the current 2010-11 fiscal, saying that positive export trends and healthy output growth in real estate sectors raise the optimism about achieving the target.
The MCCI report which stated the performance of the economy during the quarter was mixed with traces of both successes and failures and suggested giving top priority to developing the physical infrastructure and improving the power situation, which are now the major constraints to growth.
The report referred to the performance in industrial investment, driven by higher credit flow and a rebound in export orientation, agriculture output due to favourable weather and related support, record revenue collection as positive performance during the period. But it said poor public investment, slashing of annual development project size by nine per cent, import growth, stagnant inward remittances, decline in net aid inflow and pressure on balance of payment, where government should give more focus.
The Q3 report said on the domestic front, output performance in agriculture has continued to remain healthy, thanks to good weather conditions and favourable government and BB support to the sector.
"With the expansion of SIVIE loans by banks, SIVIE production is also expected to increase considerably," it said suggesting intensifying revenue collection efforts to raise more revenues in the next fiscal to meet the government's growing expenditure needs.
It said since public investment has a strong crowding in effect on private investment; a speedier implementation of the ADP will be needed.
On the external front, the report said although exports recovered strongly, import growth was robust, too, but inward remittances remained stagnant.
Despite some improvements that occurred in FDI inflows, the chamber observed that net aid inflow underwent a significant decline and the balance of payments position was under pressure because of higher trade deficit and increased payments on services and financial accounts.
The Taka has depreciated because of larger import payments and fall in foreign aid and remittances. BB's reserve position was also slightly lower and was equivalent to 4 months' imports, the report said adding that the likely slowdown in remittance and aid flows may worsen the country's foreign exchange reserve position.
Improvement in agriculture sector performance is extremely important for overall economic growth of Bangladesh as agriculture contributes 20 percent to the country's GDP and employs around 48 percent of the total labour force, the report said.
It said fisheries, livestock and poultry sectors, which contribute around 8 percent to national income and also 32 percent of the total agricultural GDP, require adequate government support in the coming days.
According to the Fisheries Directorate, the fisheries sector performed well in Q3 of FY11. All three main categories of fisheries, inland capture, inland culture, and marine, did well, depicting 5 to 6 percent growth.
It said around 3.7 million cattle (and buffaloes) are slaughtered annually in the country, of which 20 percent are imported. Due to higher consumer preference for meat of local breeds, cattle and goat fattening has become an important income generating activity for small holder-farmers.
Poultry rearing has increased across the country to meet the growing local demand. The poultry industry does not only meet substantial local needs; it has found newer opportunities for value addition. Food industries have grown up based on chicken that produce soups, nuggets, sausages and other products. Some of these local poultry-based products have also found export markets.
The industry sector, especially its manufacturing component, has been gradually coming out of the slump experienced in the years of the global economic recession. The growth of Industry sector is projected to rise to 7.5 percent in FY11.
Data on the manufacturing sub sector's performance are not available beyond the first two months (July August) of FY11, when the quantum index of production (QIP) of medium and large scale industries increased by 13.06 percent. The rise in private sector credit and increased volume of LCs opened in recent months indicate that manufacturing activities have been on the rise in line with the rising trend observed in July August, 2010.
The report said the increased disbursement of industrial term loans, which rose by 31.04 percent during Q2 of FY11, compared to the same period of the previous fiscal, is also indicative of a pick up in investments in the industry sector. Since most of the term loans went to domestic market- oriented industries, it is very likely that manufacturing industries catering mainly to the domestic market (including small-scale industries) have performed better during the quarter under review.
Sharp declines were noticed in food, beverages, and tobacco (by 10.4%), textiles, leather, and apparel (by 8.9%), and basic metal industries (by 16.7%). The weak performance of small and medium scale industries can in large part be attributed to power and energy shortages. While large-scale industries mostly have captive power plants, medium and small scale industries cannot often afford their own generators. Escalation in industrial raw material prices, transport costs, wages, and other business costs are among other causes of poor performance by small and medium scale industries, the MCCI added.
The report suggested increasing SME loans and said total SME loans at the end of December 2010 were 21.07 percent of all industrial loans as against 19.91 percent at the end of December 2009. During this one year period, SME loans have increased by Tk.18379 crore or 35.93 per cent to Tk.69527 crore from Tk.51148 crore.
The construction sector expanded at a steady pace during the quarter under review, as indicated by the high growth in the production of cement and the import of construction materials. The construction in the housing sector is, however, at a disadvantage at the present because of the shortage of power and gas. Since the government stopped giving new power and gas connections early last year, real estate agents could not hand over apartments to the clients. Since the transfer of apartments has got stuck, both buyers and sellers of apartments are counting loss every day. The real estate agents also
protested the government's directive to install solar panels in the housing projects as it involves huge costs.
Despite the installation of some additional generation capacity and some increase in power production, the power situation did not improve much in Q3 of FY11 as the production of power has lagged behind the growing demand, the MCCI report observed.
"Shortage of energy, in fact, now poses the biggest threat to Bangladesh's economic growth," the report said.
The present demand for electricity is 6000 megawatt (mw), while actual generation varies between 4000 mw and 4400 mw. The estimated demand supply gap currently is thus 2000 mw in peak hours, but its shortage accounts for at least half of this gap. The government has added 1403 mw electricity to the national grid in the past two years, but the shortfall remains because of higher demand.
MCCI welcomed the decision that the government also ordered establishing a separate fund named 'electricity maintenance and development fund' diverting 5.17 percent of the hiked bulk tariff for rehabilitation and maintenance of old power plants.
It said the government enhanced the power tariff by 11 percent for bulk consumers and 5.0 percent for retail consumers with effect from 01 February 2011. The bulk tariff will again be raised by another 6 percent from 1 August 2011, effectively raising the bulk tariff to 18 percent.
The business community has, however, expressed their concern over the power tariff hike, saying that it would jeopardize industrial growth and also hurt consumers. It has been reported that the decision to hike power tariff rate has been taken in order to reduce PDB's losses and contain the government's mounting subsidies. The government has no doubt a strong rationale to raise the power tariff, even though it will lead to some increase in costs to industries and consumers. Now that the power tariff has been raised, people will expect the government to intensify its efforts to increase power generation in accordance with the power sector roadmap it unveiled two years ago.
The services sector is expected to grow by 6.7 percent in FY11, up from 6.4 percent in FY10, the MCCI observed adding that during the Q3 of the fiscal, most service sector activities such as hospitals, IT services, travel agencies, education, social work, public administration, road and air transport, storage, hotels and restaurants showed good performance. The telecommunications sub sector is expected to sustain high growth with the introduction of new products and services. Financial services are also expected to grow. The trade sector also got a boost during the period because of more bank advances going to various trading activities.
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