VZCZCXRO0783
RR RUEHCI
DE RUEHKA #0551/01 1431108
ZNR UUUUU ZZH
R 221108Z MAY 08
FM AMEMBASSY DHAKA
TO RUEHC/SECSTATE WASHDC 6786
INFO RUEHRC/DEPT OF AGRICULTURE WASHDC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RHHMUNA/USCINCPAC HONOLULU HI
RUEHNE/AMEMBASSY NEW DELHI 0656
RUEHCI/AMCONSUL KOLKATA 1303
RUEHKT/AMEMBASSY KATHMANDU 9689
RUEHLM/AMEMBASSY COLOMBO 8455
RUEHIL/AMEMBASSY ISLAMABAD 2184
UNCLAS SECTION 01 OF 02 DHAKA 000551
SENSITIVE
SIPDIS
STATE FOR SCA/PB, EB/IFD/OMA NICOLE WEBER AND J WEYER
DEPT PLS PASS USTR FOR ADINA ADLER AND VICTORIA KADER
NEW DELHI FOR FAS
TREASURY FOR SUSAN CHUN
E.O. 12958: N/A
TAGS: ECON EFIN ETRD EAGR PGOV PINR BG
SUBJECT: BANGLADESH ECONOMY LOOKING UP?
REF: DHAKA 485
SUMMARY
-----------
1. (SBU) Recent upsurges in Bangladesh's export earnings,
remittances and Government of Bangladesh (GOB) revenues point to an
economic rebound in the last half of the country's fiscal year,
which runs from July 1 to June 30. This is good news after the
shocks of the first half of the year, including a devastating
cyclone and two floods. International experts estimate that
Bangladesh's economy may grow by 6 percent this fiscal year, up from
projections several months ago of 5.5 percent growth. Challenges
remain, however, including inflation, food security and heavy
subsidies, all of which put a strain on government coffers.
Bangladesh's Caretaker Government has some plans to address the
challenges, but it has limited maneuvering room.
GOOD NEWS - EXPORTS, REMITTANCES, REVENUE
-------------------------------------------
2. (SBU) Strong growth in exports and remittances in the last few
months has boosted Bangladesh's overall growth prospects. Officials
have reported that Bangladesh's export earnings increased by 12.4
percent in the first nine months of FY 2008. (In the first six
months of FY 2008, exports grew by less than three percent.)
Exports of ready-made garments (RMG) drove this growth. According
to the World Bank, RMG exports from Bangladesh remain strong as a
result of three factors:
--consumers in the United States and elsewhere buying low-cost
apparel of the type produced in Bangladesh;
--increasing production costs in China, which makes Bangladesh-made
garments more cost-competitive; and
--appreciation of the Indian rupee, which also makes Bangladeshi
garments more competitive.
3. (SBU) Remittances from Bangladeshi workers overseas continue to
set records. According to the International Monetary Fund (IMF), in
March alone workers sent USD 850 million back to Bangladesh, a
monthly all-time high. Experts predict that remittances could top
USD 8 billion in FY 2008, up from slightly less than USD 6 billion
in FY 2007.
4. (SBU) Another bright spot is GOB revenue collection. In a
briefing for international donors, the IMF reported the Government
of Bangladesh (GOB) is expected to increase tax revenues to 9
percent of Gross Domestic Product (GDP), up from 8.3 percent in FY
2007. While some of the progress in tax collection is due to the
Caretaker Government's anti-corruption campaign, which has cracked
down on concealed wealth, the IMF noted the GOB has also improved
some tax collection practices, including acceptance of self-assessed
tax documentation and measures to increase the number of taxpayers.
5. (SBU) These factors have led the IMF and others to raise their
overall GDP growth projections by 0.5 percent or more. According to
the IMF, Bangladesh's economy grew by 6.2 percent in FY 2007. Early
this fiscal year, experts predicted the economy might grow by as
much as 6.5 percent. In the wake of Cyclone Sidr and severe
monsoonal flooding in 2007, however, economists revised their growth
estimates to 5.0 or 5.5 percent. Following recent good news on
export earnings and remittances, Bangladesh Bank (the nation's
central bank) revised its growth estimate for FY 2008 to 6.2
percent. IMF officials said this estimate was likely a bit high,
but acknowledged that 6 percent growth was possible.
BAD NEWS - INFLATION, FOOD SECURITY, SUBSIDIES
--------------------------------------------- ----
6. (SBU) Challenges to economic growth remain, however. Inflation
is hitting Bangladesh's citizens - 84 percent of whom subsist on
less than two dollars a day - hard. The IMF estimates the annual
inflation rate will hover around 10 percent by the end of FY 2008.
High prices for food worldwide have exacerbated Bangladesh's recent
food shortages, caused by Cyclone Sidr and two floods (reftel).
Farmers are now harvesting the nation's largest rice crop of the
DHAKA 00000551 002.2 OF 002
year, which is expected to be good, but there is no sign yet of
decreasing prices. High prices are one of the main reasons for
current public dissatisfaction with the Caretaker Government.
7. (SBU) Food security is a long-term threat to Bangladesh.
Undernourishment as a result of a lack of adequate nutrition and
food shortages affect more than one-third of this nation's
approximately 150 million people. The GOB has programs to
distribute food to these vulnerable groups and plans to expand these
programs in the FY 2009 budget. According to the World Food
Program, however, these programs provide inadequate amounts of rice
and other food to poor families.
8. (SBU) Another major challenge to the GOB's ability to foster
economic growth is its subsidy program. The GOB heavily subsidizes
fuel and fertilizer. While these subsidies have buffered
Bangladeshis from the worst of high petroleum prices worldwide, the
GOB pays tens of millions of dollars a month to offset the cost of
fuel subsidies. Government officials estimate subsidies will cost
the GOB close to USD 3 billion in FY 2008. As a first step to
adjusting some of these subsidies, the Caretaker Government recently
doubled the price of compressed natural gas (CNG), which fuels most
buses and auto-rickshaws. The Finance Adviser last week said
publicly that the government had no alternative but to increase fuel
prices in Bangladesh. At the same time, the Caretaker Government
plans in FY 2009 to better target subsidies, particularly for
farmers, to mitigate price increases for key constituencies,
including the poor.
COMMENT
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9. (SBU) Bangladesh's economy continues to demonstrate its ability
to rebound from adversity, whether it is caused by natural disasters
or poor governance. Bangladesh's human capital, at home and abroad,
continues to drive economic growth. In addition, Bangladesh's
central bank is reluctant to raise interest rates to fight
inflation. Bankers and investors have claimed over the last year
that high interest rates have discouraged investment, and they have
called on the GOB to lower interest rates. The technocrats that
lead the Caretaker Government well understand the threats to
continued growth, but have limited capacity to tackle these
problems. For example, though the GOB desperately needs to improve
its subsidy program and to raise prices in certain areas, public
tolerance for further price hikes, particularly in the current
inflationary environment, is low.
Moriarty