Economy of Bangladesh

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A Macro Economic Analysis Of Bangladesh.

Submitted By:
Zia Uddin Bablu.
Section: A, Roll: 93,
Batch: 16th
Department of Management Studies,
University of Dhaka.
Submitted To:
Mr. Md. Kazi Raihan Uddin.
Department of Management Studies,
University of Dhaka.
Date of Submission: 03-04-2013.

contents| Page no.|
Introduction| 3|
Fiscal channel| 3-4|
Implication of increased government borrowing| 4|
Monetary channel| 4|
Inflation | 4-6|
Food and non-food inflation| 6-8|
Causes of inflation in recent context of Bangladesh| 8-14| Trade and current account channel| 14|
Balance of payments| 14-17|
Remittances| 17-19|
Foreign exchange reserves| 19-21|
Gross domestic product(GDP)| 21-29|
References| 30|
Table of Contents
Against the backdrop of the global economic slowdown, the Bangladesh economy has performed strongly over the past few years. Despite the fallout from the Euro debt crisis still contributing to an uncertain environment, the Bangladesh economy has pursued accommodative monetary and fiscal policies. However, if the global economic slowdown is much more prolonged than the current forecasts indicate, the impact on Bangladesh is expected to be adverse. The economy has persevered so far in the face of global recession, but the domestic challenges are manifold with respect to soaring inflation, import-export imbalances, devaluation of the currency, a slow growth of remittances, increasing budget deficit and government borrowing. The analysis below presents a brief snapshot to show how the Bangladesh economy has performed during the recent past years. It is done here by analyzing the three channels: fiscal, monetary and trade. Fiscal channel:

The government fiscal management has been mediocre in this regard. Along with spending pressures from fuel subsidies, other sources include spending on agricultural input subsidies and higher cost of crude oil. The government borrowing from the banking sector has also increased quite significantly. Increased borrowing is leading to concerns of higher inflation in the economy. It is mainly due to a large spending on subsidy in the power and energy sectors and on social safety net coverage.

Since FY 2008, government borrowings have increased substantially with only a dip in FY 2010. Loans to the government from the commercial banks has reached around Tk 163 billion (US $1.96 billion) in addition to those from the central bank, during the first nine months from July 2011 to April of the fiscal year 2012. From the commercial banks alone, the government has borrowed around $1.3 billion. However, the government loan was less than a billion US dollars ($0.92 billion) during the first nine months of FY 2011. The good news was that tax revenues exceeding around 10 per cent of GDP in FY 2011 (Fiscal Year) - a record first for Bangladesh. Implication of Increased Government Borrowings:

* The increased borrowing may force up interest rates and crowd out private sector investment in Bangladesh. * The government may need to increase the tax burden in the long-run, leading to a dampening of demand and economic growth, as well as being deeply unpopular. * The increase in national debt would mean that the annual interest payments will rise - money that could have been spent in priority areas of the economy. Monetary channel:

Bangladesh has been facing growing inflationary pressures since FY01. General inflation has been increasing since FY 2009. The initial target for the general inflation was around 6.5 per cent in FY 2011, but it ended up being around 9 per cent. The rate of inflation on a point-to-point basis crept up steadily since July 2009, rising from a low of 2.3 per cent in June 2009 to a peak of 12 per cent in September 2011. The inflation rate declined slowly after that and stood at 8.6 per cent in June 2012.

Figure: Total inflation scenario in Bangladesh.
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