Bangladesh Economic Update from Unnayan Onneshan

Unnayan OnneshanNGO News Report :: The Unnayan Onneshan, an independent multidisciplinary think-tank, in its current issue of the Bangladesh Economic Update reveals that the rate of growth in industrial sector has decelerated due to reduction in investment demand, increased cost and reduced supply of investible capital and inapt policy regime.

The fresh opening of letters of credit (LCs) for industrial raw materials and capital machinery has plummeted to USD 7982.42 million during the 1st six month of current fiscal year from USD 8255.56 million, a decrease by 3.31 percent than that of the corresponding period of previous fiscal year.Simultaneously, settlement of LCs has decreased by 8.23 percent. During July- September, FY 2012-13 industrial term loan was Tk. 97203 million which was Tk. 4979.1 million less than that of April-June, 2011-12. The rate of growth in industrial term loan was 9.68 percent in FY 2011-12 which were 24.30 percent and 29.56 percent in FY 2010-11 and FY 2009-10 respectively. The quantum index of production (QIP) dropped to 571.64 in September, 2012 from 603.69 in January 2012, according to the most recent available data.

The major causes the Unnayan Onneshan has attributed are reduction in investment demand owing to inadequacies of supply of utilities and infrastructural tailbacks, increased cost and reduced supply of investible capital due to contractionary monetary policies and rise in government borrowings, and short-supply of matching level of public investment in infrastructure suiting to the size of the economy.

Pointing out that the current policies fall short of servicing the constraints facing the sector and inducing the required rate of growth for the country’s quest for being a middle-income economy, the Unnayan Onneshan recommends for a re-think and re-draw a strong and active industrial policy for increasing domestic demand, diversifying products in new markets, and absorption of huge new entrants of young generation in labour market.

The average rate of growth in broad industry experienced a lower trend in the last five fiscal years compared to the previous five fiscal years. The average rate of growth was 7.48 percent in the last five fiscal years (FY 2007-08 – FY 2011-12) compared to 8.25 percent during the period of FY 2001-02 to FY 2006-07, indicatig a slower rate of contribution of industries in GDP.

The think-tank discerns that the high rate of interest, an outcome of contractionary monetary policy, is contributing to the mounting savings-investment gap as well. “If the existing policies remained unchanged, savings-investment gap might be 5.14, 5.47 and 5.81 percent of the nominal GDP in FY 2012-13, FY 2013-14 and FY 2014-15 respectively, hindering the required level of investment for industrialisation,” the Unnayan Onneshan projects.

The Unnayan Onneshan notes that the rate at which the contribution of industry is increasing is lower than that of the rate at which the contribution of agriculture sector. The yearly average rate of decrease in agriculture is 40 percentage points whereas the yearly average rate of increase of industry is 37 percentage points during the FY 1997-98 to FY 2011-12.

Referring to the long-running neglect of addressing the structural bottlenecks in the backdrop of policy makers’ apathy of having strong and active industrial policy and the paradigmatic swing in favour of trade liberalization and export orientation, the Unnayan Onneshan adds that import-substituting industrialisation has been neglected in the country due to structural adjustment programme, pursued as a diktat of the International Monetary Fund (IMF) and the World Bank.

“Again, the IMF has dictated the country to pursue contractionary monetary policies under a three-year reform programme. The contractionary monetary policy has led to decline in imports of intermediate goods, industrial raw materials and capital machineries’’, adds the leading think-tank.

As regards the rising cost of utilities, the research organisation points out the rent-seeking characteristics of the policymaking.  The price of the electricity is rising despite the increments in subsidy, which has increased fiscal deficit and reduced the availability of credit to the private sector due to increased government borrowing.

Overall price of electricity in industry is rising. In September, 2012 the power price for the small industry witnessed the highest peak from Tk. 4.56 in February, 2012 to Tk. 6.95 in September, 2012. The price for heavy industries (33KW) stood at Tk. 6.48 in September from Tk. 4.11 in February, 2011.

The government budgeted Tk. 64000 million as subsidy in the power sector for the current year but the Power Development Board (PDB) has estimated Tk. 89513.10 million. Subsidy in power sector was Tk. 63570 million and Tk. 40000 million in FY 2011-12 and FY 2010-11 respectively.

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