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 
---------- 
 
¶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