BANGLADESH – Update: June 01, 2008

Current Political Events:
Long awaited dialogue between political parties and the present caretaker government have just started on 22nd May with the small parties and uncertainty still exists regarding dialogue with two major political parties (AL & BNP). It remains to be seen how the Caretaker Govt. handle this situation.

Public Reaction to date:
By & large the general public is very much confused over the political uncertainty and also the National Election which is supposed to be held on December 2008. With the prices of essentials, especially of food stuff, hunger is yawning in many households; corruption is grinning at the vaunted drive against corruption; fear is germinating even in the fearless mind. Failure to stem the tide would mean irrevocable erosion of any reputation that the transition government may have earned by virtue of each adviser’s personal integrity.

Price hike & its Impact on the economy:
Bangladesh, a net importer of food grains, has been seriously affected by food price shocks, driven by higher international prices and domestic production shortfall following successive natural disasters. Although upward price pressures somewhat eased by early May 2008, the prices of rice and wheat in the domestic market are still 60% higher over the past Year. The food deficit remains sizeable, estimated at 0.34 million tons in FY2008. The severe flooding and cyclone during the first half of FY2008 seriously affected the aman rice crop; production is estimated at 9.7 million tons, 1.1 million tons lower than the preceding year. But with the bumper boro rice production of 16.5 million tons, food-grain production in FY2008 is estimated at 28.5 million tons, higher than the 28.1 million tons in FY2007. Although larger imports (estimated at 4.4 million tons) in FY2008 compared with 2.4 million tons in FY2007 more than offset the food-grain production shortfall. The Government's administrative actions, such as anti-hoarding measures were counterproductive and failed to arrest upward trends in prices. The domestic cost of rice production has increased even with subsidized agriculture inputs such as diesel and urea fertilizer.

The immediate effect of rising food prices is on inflation, fiscal outlays, and external balance. Fiscal outlays to subsidize food consumption heighten budgetary pressures. Pressures also mount for upward adjustment of money wages. Monetization of the fiscal costs with accelerating wage increases may trigger further inflation. Failure to contain inflation could seriously undermine macroeconomic and political stability of the country.
The fiscal implications of subsidies on food and related inputs into food production, such as, fertilizer and fuel for irrigation, amplified by recent price rises, are sizeable. The Government's selling price under open market sale was Tk25/kg as against the import cost of Tk30/kg. Food subsidies, including inputs of production, such as, diesel and fertilizer are estimated at $1.3 billion or 1.7% of GDP in FY2008. The fiscal deficit in FY2008 is likely to rise to 4.8% of GDP from 3.2% of GDP in the preceding year. This is also putting a lot of pressure to local Money Market because Govt. Borrowing from Banking Sector. The fiscal pressures will be heightened in the FY2009 budget because of the planned buildup of a huge buffer stock of food for price stabilization and safety net programs, and increased subsidies for agricultural inputs, such as, fertilizer and diesel. Higher food prices significantly contribute to a surge in the trade deficit (estimated at 6% of GDP in FY2008). But the balance of payment impact of higher food prices has been partly offset by higher aid flows and workers' remittances and increasing export.

Bangladesh Export in the face of the slowdown in the US Economy:
Due to the slowdown in US Economy, the paces of growth of export to US will definitely slowdown but overall export will not be affected. From May,08 onward, RMG is getting unexpected export order due to the china’s business cost gone up and More than 100 buying houses set up their liaison office in Bangladesh and they are eying to buy more from Bangladesh.

Impact on HBL Business: Due to price hike, Most of the Customers have approached us for enhancement of their existing credit line.