MACROECONOMIC SCENARIO1

Bangladesh attained a respectable 6.7% growth in gross domestic product (GDP) in FY2011, aided by strong
export growth and favorable weather for agricultural production. However, macroeconomic management came
under pressure in the first quarter of FY2012, with inflation rising rapidly, a sharp rise in government borrowing
from the banking system, and growing pressure on foreign exchange reserves and exchange rate. The balance
of payments is under strain owing to increased demand for oil and capital goods imports and elevated levels of
commodity prices. Fiscal pressures have emerged due to rising subsidy costs, mainly on account of increased
fuel consumption.
Although the industry sector faces several obstacles including unmet demand for gas, power, and other basic
infrastructure; the large and medium scale manufacturing sector saw a turnaround, with growth reaching 10.4
percent in FY11, up from 6 percent in FY10. Except for chemical products, pharmaceuticals and tea, exports
rose across the board: garments, raw jute and jute products, leather, frozen food, engineering products and
agricultural products. A rise in the volume of exports to the United States (US), and relaxed rules of origin under
the Generalized System of Preference (GSP) in European Union (EU) markets (effective January 2011)
contributed to higher export of readymade garments (RMG), which account for a major share of manufacturing.
Agriculture sector grew by 5% in FY11 following 5.2 percent growth in FY10 because of favorable weather
conditions along with broad-based government support. Agricultural credit disbursement in FY11 increased by
9.60 percent compared to previous period. Agricultural sector is expected to grow at respectable rate in FY12 if
favorable weather condition continues.

MONETARY & FINANCIAL DEVELOPMENT1

Broad money grew at 19.6 percent year-on-year in September 2011. Rapid credit expansion has put liquidity
pressure on some banks, exacerbated by the December 2010 stock market correction, heavy funding needs of
government, and weak secondary market development. In response, BB imposed a ceiling on banks credit-todeposit ratios (CDRs) of 85 percent (90 percent on Islamic banks) in mid-2011 to better align bank credit and
deposit growth. As of end-August 2011, 13 banks exceeded the CDR limit.
The weighted average nominal (takadollar) exchange rate depreciated from Tk 70.7 to $1 at the end of
December 2010 to Tk 81.8 to $1 at the end of December 2011 (a depreciation of about 15.0%). Taka
depreciated mainly due to rising import demand, and as the pressure on reserves intensified. Bangladesh Bank
occasionally intervened in the interbank foreign exchange market to limit the excessive volatility in the
exchange rate, while at the same time allowing taka to depreciate to ease pressure on the reserves.
Banking sector deposit grew by 13.90% at the end of September 2011. About 62.13% of the total deposit
shared by private sector banks (PCB) followed by state owned banks (SCB) having 26.51%. Private sector credit
growth experienced a sharp rise to 21.98% year-on-year in September 2010. Disbursement of term lending
stood at BDT 226769 million during first three quarters of 2011, 9.37% higher than the same period of 2010.
Economic purposes classifications of private sector credit show that major portion of bank advances belonged
to trade financing at the end of 3rd quarter of 2011 followed by advances to industry sector and working capital
financing.
The interest rate spread increased to 5.32% in September 2011 from 5.18% in September 2010. At the end of
the third quarter of 2011 average lending rate of all banks increased to 12.74% (September, 2010: 11.18%). On
the other hand, in the third quarter of 2011 average deposit rate in the banking sector also increased to 7.42%
(September, 2010: 6.0%). The interbank call money rate remained almost stable as Bangladesh Bank increased
its monitoring of the day-to-day liquidity position. Average call money rate was 10.38 percent during 2011.
At the end of June 2011, the gross NPLs of the banking system accounted for 7.1% of outstanding loans
compared with 7.27% in December 2010. Gross NPL ratio of state-owned commercial banks (SCBs) dropped to
14.1% at the end of June 2010 from 15.6% in December 2010. NPL ratio of private commercial banks (PCBs)
marginally increased to 3.5% in June 2011 (December 2010: 3.15%), while gross NPL ratio of foreign
commercial banks (FCBs) marginally increased to 3.1% at the end of June 2010 from 2.99% at the end of 2010.
However, net non performing loan ratio of the industry was 1.3% at the end of June 2010.
Capital adequacy ratios (CARs) have improved across all banks, with 40 out of 47 in compliance with new Basel
II-consistent requirements at end-June 2011 (i.e., a minimum CAR of 9 percent). However, minimum CAR
increased to 10% from July 2011 . At the end of second quarter of 2011, CAR (under Basel II) of PCBs was
10.4%, FCBs was 17.1% and SCBs was 9.5%. Provision maintenance ratio at the end of June 2011 for PCBs was
100%, FCBs was 109.3% and SCBs was 100%. Return on assets (ROA) of the FCBs was 3.6% and PCBs was
1.6% at the end of June 2011.

INDUSTRY OUTLOOK2
In FY12 the economy faces a different set of challenges related to both global and domestic factors. Global
growth prospects in 2012 remain highly uncertain in key trading partner countries, particularly in Europe. In
recent months global economic conditions have significantly deteriorated Bangladeshs export and remittance

Source: Please see annexure.

2 Source: Please see annexure

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growth may slow down, as is the case with other countries. As such Bangladesh Bank (BB) is projecting GDP
growth in the range of 6.5-7.0%
Monetary stance in second half of FY12 will take recent economic developments into account and pursue a
restrained monetary growth path in order to curb inflationary and external sector pressures, while ensuring
adequate private sector credit to stimulate inclusive growth. Ensuring government borrowing from the banking
system does not crowd out available liquidity for commercial banks. Credit to the private sector is envisaged to
remain at 16.0%. However, this private sector credit growth rate could rise if government borrowing from the
banking system is less than anticipated. At the same time interest rate spreads will be closely monitored, and
apart from specific sectors such as SME and consumer lending, BB has advised banks to keep these in lower
single digits.

References:
1. Bangladesh Bank Publications.
2. Quarterly Economic Update by ADB.
3. IMF Country report 11/314.