Energy crisis key challenge for Bangladesh: UN agency

The New Nation May 12, 2012

Severe energy shortage remains key challenge for the growth of Bangladesh economy which requires an urgent response, says a survey of the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP).

“On the physical infrastructure side, Bangladesh is facing severe electricity shortages which is a key policy challenge for the government,” it added.

The Economic and Social Survey of Asia and the Pacific 2012, the annual flagship publication of ESCAP, launchedon Thursday simultaneously in 32 locations around the world, including Bangladesh capital, Dhaka. Neal Walker, the UN Resident Coordinator in Dhaka, launched the Survey while Dr Mustafa K Mujeri, Director General of BIDS and Syed Nuruzzaman, ESCAP representative, were present.

The 2012 edition of the ESCAP publication titled “Pursuing Shared Prosperity in an Era of Turbulence and High Commodity prices aimed at analyzing the short and medium-term challenges for the region and the outlook for the year ahead.”

“Bangladesh can address the problem by setting up viable new power projects, minimizing transmission and distribution losses, including theft of electricity; increasing exploration of natural gas, crude oil and coal, tapping of regional markets and setting up infrastructure for energy imports and incentivizing the development of renewable energy resources,” it suggested.

It added that due to limited availability of public resources, involvement of the private sector should be enhanced and public-private partnerships should be encouraged to overcome the crisis. It also emphasized on managing the balance between growth and inflation, using several inflation fighting measures beyond monetary policy alone, coping with capital flows and dealing with considerable exchange rate volatility and addressing jobless growth and unemployment by encouraging domestic consumption.

“The economy of Bangladesh has grown steadily over the pastfive years, averaging 6.2 percent per annum, despite the adverse effects stemming from the global financial and economic crisis and some major natural disasters,” according to ESCAP.

GDP grew 6.7 percent in fiscal year 2011 compared to 6.1 percent in the previous year. All of the sectors of the economy benefited from government initiatives to overcome infrastructural bottlenecks in the power, energy and communication sectors. Given the brighter prospects for the agricultural and industrial sectors, GDP is projected to grow by 6.6 percent in 2012. At the same time, growth in domestic demand is expected to be supported by strong remittance inflows, it added.

The Survey Report

Country briefing note

Strong growth momentum maintained

•  The economy of Bangladesh has grown steadily over the past five years, averaging 6.2% per annum, despite the adverse effects stemming from the global financial and economic crisis and some major natural disasters.

•  GDP grew 6.7% in fiscal year 2011 compared to 6.1% in the previous year. All of the sectors of the economy benefited from government initiatives to overcome infrastructural bottlenecks in the power, energy and communication sectors.

•  Given the brighter prospects for the agricultural and industrial sectors, GDP is projected to grow by 6.6% in 2012. At the same time, growth in domestic demand is expected to be supported by strong remittance inflows.

Inflation remains stubbornly high

•  In Bangladesh , inflation has been rising since the middle of 2009 due to both domestic and external factors. Rising food and fuel prices in the international market and monetary expansion in the domestic economy exerted upward pressure on inflation in the country. Inflation rose to 8.8% in fiscal year 2011 as compared to 7.3% in the previous year.

•  Monetary policy has been tightened to contain inflationary pressures. At the same time, well-targeted support programmes such as selected rationing and fair price supply and open market sale of essentials for poor households struggling with high food prices are being pursued by the Government.

Budget deficit remains large and need to be contained

•  Budget deficits are generally high in countries of South Asia . In Bangladesh , budget deficit rose to 4.4% of GDP in 2011 from 3.7% of GDP in 2010. Also notably, the country’s tax to GDP ratio, which crossed the 10% mark in 2011, has been rising in line with growing tax revenues.

•  Higher tax revenues have been facilitated by reforms in the country’s tax policy and administration, which entailed the following: modernization and automation of the tax administration, expansion of the tax net and coverage, reduction of tax exemptions and building awareness in society about paying taxes. The debt financing strategy being pursued by the Government aims to obtain more concessional financing to minimize the cost of debt financing and also avoid crowding out the private sector.

Both exports and imports grow strongly; large remittances also continue to grow

•  In Bangladesh , the slowdown in export growth to 4.1% in fiscal year 2010 was sharply reversed to 41.5% in fiscal year 2011. Similar to exports, imports also staged a strong recovery, growing by 41.8% in 2011 as compared to 5.5% in 2010.

•  Workers’ remittances have been increasing despite the global financial crisis. However, the rate of growth has been declining as seen in 2011 when it fell to 6% in 2011 as compared to 13.4% in 2010. Due to the widening trade deficit and slower growth in remittances, the current account surplus narrowed in 2011.

•  The nominal exchange rate depreciated on the back of higher import demand and slower growth in overseas workers’ remittances, FDI inflows and external assistance.

Workers’ remittances play a major and positive role in the economy

•  Remittances from overseas workers are quite substantial and play a major role in the South Asian economies. Governments should consider some special and innovative institutional arrangements to protect migrants and provide social protection coverage. In this regard, a commission should be created to put forward a uniform stance of countries in South Asia to oversee migration and enhance its positive aspects.

•  Once established, the South Asian Migration Commission could formulate the framework for a coherent and comprehensive response to the issues surrounding migration generally applicable to all the countries in South Asia . By looking into best practices regionally and internationally, the Commission could help in designing policies that harness the benefits of migration in the best possible way for all stakeholders and minimize their negative effects.

Severe energy shortages require urgent response

•  On the physical infrastructure side, several countries in the subregion, such as Pakistan , Nepal and Bangladesh , are facing severe electricity shortages.

•  To address energy shortages, the following measures must be undertaken urgently: setting up viable new power projects; minimizing transmission and distribution losses, including theft of electricity; increasing exploration of natural gas, crude oil and coal; tapping of regional markets and setting up infrastructure for energy imports; and incentivizing the development of renewable energy resources.

•  Due to limited public resources, involvement of the private sector should be enhanced and public-private partnerships should be encouraged.

Widespread poverty continues to be a major long-term development challenge

•  Widespread poverty continues to be a major challenge in South Asia despite some notable success in reducing it over time. Even today, at least one in every three persons in South Asia is classified as poor.

•  To fight against poverty, countries need to continue to implement economic reforms to improve productivity, strengthen public institutions, improve economic governance and build social safety nets to protect the more vulnerable segments of the population.

•  To promote more inclusive growth, the provision of basic services, such as health care and education, should remain the principal priority in the policy agendas of all governments. Generating ample employment opportunities are crucial for the poor to earn a

POLICY BRIEF: Living with high commodity prices

Breaking the historical downward trend in prices, commodity markets have been experiencing a boom since 2000. A determinant factor contributing to rising prices is rapid economic growth of emerging economies. This growth has been driven mainly by manufacturing in Asia, which has increased demand for a broad range of primary and intermediate products for production, trade and transport.

The boom in commodities has ended a secular decline in commodity terms of trade. Over the past decade, the major exporters of energy resources or minerals enjoyed the highest increases in their terms of trade. On the other hand, countries whose main exports are manufactures have seen their terms of trade deteriorate as a result of rising commodity prices and declining prices of manufactures. Bangladesh suffered the highest decline during the past decade (6.7% per annum).

Countries that export manufactures were affected by increases in the prices of commodities and reductions in prices of the manufactures exported by Asia’s powerhouses. For example, Bangladesh is net importer of commodities, including oil and food, and exporter of mostly garments for which prices fell due to a highly competitive market, especially at the lower end. Bangladesh’s trade was squeezed between higher import prices and lower export prices.

The current boom in commodity terms of trade is not totally unprecedented. The rise of Western Europe and their dependents during the first period of globalization in the nineteenth century also created conditions for a commodity price boom. High prices prompted poor periphery countries to further specialize in primary products, missing the opportunity to industrialize. That process gave rise to the great income divergence between the rich countries and the poor periphery, which persists to this day.

This time around, the dynamics are more complex because there are not two groups of

countries but four: (a) the “incumbent” high income economies; (b) the ”catching-up” countries which are growing through industrialization and structural transformation; (c) the “commodity-boom” countries, which are benefiting from high commodity prices; and

(d) the “aspiring’ countries”, those developing countries that have not benefited from high commodity prices and have to further enhance their productive capacities through diversification.

Executive Summary of the Survey 

The V-shaped recovery from the depths of the 2008-09 global financial crisis proved to be short-lived as the world economy entered a second stage of the crisis in 2012 with a sharp deterioration in the global environment with the accentuation of the euro zone debt crisis and a continued uncertain outlook for the economy of the United States of America. As forewarned by the Economic and Social Survey of Asia and the Pacific 2012, the growth rate of Asia-Pacific developing economies declined to 7.0% in 2012 from a robust rate of 8.9% achieved in 2010.  The growth rate of the economies of the region is forecast to decline further to 6.5% in 2012 with a slackening demand for the region’s exports in advanced economies and as a  result of higher costs of capital.

The growth slowdown will be felt across different subregions depending upon the extent of their global integration. The growth rate in East and North-East Asia is forecast to slow to 7.1% in 2012 (from 7.6%). North and Central Asia is forecast to experience relatively moderate slowdown, to 4.3%, in 2012, benefiting from the high prices for energy. The Pacific island developing economies are forecast to experience lower aggregate growth in 2012 of 5.7%, due mainly to lower growth in Papua New Guinea, although a number of other countries are likely to maintain fairly stable performance. The South and South-West Asia subregion is forecast to see a slowdown to 5.8% in 2012 from 6.7% in 2012, although this will be more on account of monetary tightening than the global slowdown. Although South-East Asia, is an open subregion with many of its economies affected severely by the state of the global economy, it is forecast to see a slight increase in growth in the subregion as a whole, to 5.2% in 2012, due to the strong recovery of growth in Thailand following the floods in 2012. With the growth slow down, inflation in Asia and the Pacific is forecast to moderate from 6.0% in 2012 to 4.8% in 2012.

Despite the slowdown, Asia and the Pacific will remain the fastest growing region globally and an anchor of stability in the world economy. The region’s growth engines are projected to continue to grow at robust rates. China is forecast to grow at 8.6% in 2012 after decelerating from the 9.2% rate achieved in 2012. India, on the other hand, is expected to improve its growth performance from 6.9% to 7.5% in 2012 as moderating inflation would allow an unwinding of the cycle of monetary tightening during the current year, thus unleashing growth impulses. With its continued dynamism, the Asia-Pacific region has begun to act as a growth pole for other developing regions, namely Latin America and Africa, helping them to reduce their dependence on low-growth developed economies as South-South trade becomes an important trend. Click here to download the rest of the executive summary.

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