As far as I know, this blog is the only place that publicly criticised the appointment of Dr Atiur Rahman as the Governor of Bangladesh. How has he performed in the last few years as the central banker? Given the share market bubble and crash and several controversial developments — scams, ‘political’ banks, l’affaire Yunus – in the banking sector, it’s reasonably straighforward that he has failed in his task of maintaining financial stability. On the other hand, Bangladeshi economy has shown remarkable resilience — growth has been steady around the 6% mark despite shocks such as the share market crash or the fiscal strains related to the rental power plants. Inflation has been much higher than the Bank’s target picked up during most of the governor’s term, but has subsided recently to be within the Bank’s target (see the chart of inflation through the year, actual vs Bangladesh Bank target – source: CEIC Asia and BB).
So, on balance, a mixed record for the Governor so far. And over the next few months, his record can swing either way. Unfortunately, the latest monetary policy statement suggests that there is a high risk that my fears about him will yet come true.
Zombie ideas are those that refuse to die, no matter how strongly you debunk them. I suspect they exist in every discipline, but they’re particularly prevalent in economics. Tax cuts will solve every economic problem, or globalisation is bad for the so-called 99%, these are good examples in the western context. Syndicates of corrupt businessmen and politicians — Tarique Rahman and his Hawa Bhaban cronies, or the army, or Mujib Coat wearing men –are behind high and rising food prices — that’s the zombie idea in Bangladesh. For the past five years, I’ve been trying to slay this zombie idea, without much success.
In one of my first Forum pieces, I linked food price rises to the taka-rupee exchange rate — the basic idea is that rice market in Bangladesh is closely linked with that from India, and as taka depreciated against the rupee, domestic rice prices rose. Of course, by early, food prices were rising globally, thanks to American biofuels subsidies — I wrote about it here. By the end of 2008, with commodity prices tumbling world wide and taka appreciating against the rupee, I predicted that the incoming government would have a respite on the prices front.
And lo and behold, that’s exactly what happened.
This chart shows the three month moving average of retail price of a kg of coarse rice in Dhaka market. In the three months to June 1996, when the first Hasina Wajed government assumed power, rice price averaged 14.60 taka/kg. When she left office in July 2001, it was 13.36 taka/kg. In the countryside, prices were even lower. This was the origin of ’10 taka/kg rice’ boast. When BNP was toppled from power in January 2007, average rice price in Dhaka was 19.22 taka/kg. It rose to about 35 taka in mid-2008, before easing to 30.67 taka when Hasina Wajed returned to power. And then it fell even further, to reach 23.52 taka/kg in September 2009.
Yeah right! If only!
Okay, okay, that’s a slightly misleading title. What I meant to say was that inflation forecasts of the government, the Bangladesh Bank and the ADB are all way off. As the chart shows, except for a few months in 2008 and 2009, when the world looked to be imploding, inflation in recent years have been stronger than everyone’s prediction.
In more recent times, ADB has raised its inflation forecasts. As with economic growth, ADB has a more pessimistic outlook (8.5%) for inflation in 2012-13 than the government (7.5%).
Who’ll be right?
Couple of months ago, I analysed some indicators used by the Economist to see whether the Bangladeshi economy was overheating. The verdict was that ‘it was getting hot’. An overheated economy is not only more vulnerable to an external shock, it also usually leaves the policymakers with less options to boost the economy in case of adverse shocks.
In addition to their vulnerability indicator, the Economist also has a ‘wiggle room’ index for monetary and fiscal policy in 27 emerging markets. The concept is explained here, while here are country details. As of January, Egypt, India, Poland, Argentina, Brazil, Hungary, Turkey, Pakistan and Vietnam had little policy tools spared for a downturn.
That is, according to the Economist’s analysis, Argentina, Brazil, India, Turkey and Vietnam are economies that were dangerously overheated in mid-2011, and whose governments had little policy options to combat a downturn earlier this year. You wouldn’t want to be an econocrat in those countries!
What about Bangladesh? Over the fold, I look at the indicators for Bangladesh. Short answer: no room for monetary policy, but fiscal policy has spare capacity.
Notice (12 March, 0610 BDT): charts have gone funny, and will be updated in the next 48 hours.
Updated (13 March, 1001 BDT): charts have been fixed.
With yet another confrontation looming between Bangladesh’s two major political parties, I thought it would be interesting to see how they compare against each other. There are, of course, many ways of doing this. I am going to do this by looking at four indicators: GDP per capita growth, manufacturing output growth, inflation, and foreign aid-to-GDP ratio.
Why these indicators? Simply because I have good data handy for these metrics. But they still tell us a good deal. Growth in GDP per capita is a standard measure of welfare. Manufacturing growth is associated with strong employment in the ‘modern’ sectors of the economy – by and large a good thing. Inflation is self-evidently important. Reliance on foreign aid is clearly something we can do without. And improvements in these economic indicators, over time and across countries, are highly correlated with decline in poverty and rise in living standards.
Nonetheless, they miss out a lot. For example, I don’t have up-to-date data on inequality. Further, these economic indicators don’t tell us anything about governance or civil liberties. A government might preside over fast growth and rapid fall in infant mortality, but could also gag the media, and be extremely corrupt. Nor do I have any time series on crime statistics – arguably, maintaining law and order is a government’s first priority. And I am not even sure how one could quantify foreign policy success or failure.
Therefore, the rankings presented below should be taken with a grain of salt.
I am also going to ignore the governments of the first decade. While a good old fashioned Mujib-Zia food fight is enjoyed by all, given the impacts of the Liberation War, I don’t think the 1970s is comparable with the subsequent decades.
So the comparison is between six governments – Ershad, first Khaleda, first Hasina, second Khaleda, 1/11 regime, and second Hasina – over the four categories. In each category, the best performing government gets five points, while the worst one gets zero. Add all up, and we get the final tally.
The worst government of the past three decades turns out to be, with zero points, the Ershad regime. This shouldn’t come as surprise to anyone who knows anything about economic history of Bangladesh. But evidently, few people know anything about economic history, because if I had a cent for everytime I hear ‘things were great under Ershad’, I’d be in the 1%.
And the winners? Read on.
I have a vague recollection of CPD’s Debapriya Bhattacharya talking about Saifur Rahman attempting to drive a big car in a narrow alley. He was talking about the late finance minister’s policy settings, which saw Bangladesh economy accelerate. If I remember correctly, Mr Bhattacharya’s point was that the economy was accelerating too quickly while structural problems were not addressed, and like a car in a narrow alley, speed could mean accident up ahead. Fortunately for Bangladesh, the economy didn’t suffer a crisis under BNP (or the army, or under the current government, until now).
What happens when an economy grows too fast relative to its capacity? Typically, imbalances start developing — inflation sets off, the country runs up large external deficits, private and public sectors become too leveraged, asset prices enter bubble territory. Economists typically call such economies overheated.
The London Economist has an index that checks the ‘temperature’ of 27 emerging markets. The concept is explained here. Essentially, the index is based on six indicators: inflation, GDP growth, unemployment, credit growth, real interest rate, and current account. As of June 2011, they considered seven countries — Vietnam, Turkey, Indonesia, India, Hong Kong, Brazil, Argentina — to be in the ‘red hot’ territory, at risk of a crisis.
Bangladesh wasn’t in their list. I decided to look at the data using their methodology to assess its risks. Short answer? It’s definitely getting hot in here. Fortunately, it’s not in the red zone yet, and policymakers can make a difference. Long answer, over the fold.
Indian economy may be in a bit of rough spot. After a spate of bad news, the rupee slumped against the dollar in November. Then the government officially acknowledged an economic slowdown, while making a case that the fundamentals remain intact.
What does this slowdown mean for Bangladesh?
Not much, directly, as far as the production side of the economy is concerned. After all, as Bangladeshis never tire of pointing out, Indians don’t buy Bangladesh stuff. With about 2% of its export going to India, any slowdown there isn’t likely to matter much for Bangladeshi producers.
But there might be good news for the households. Food prices in India are on the wane. That’s likely to affect prices in Bangladesh. Further, as the rupee falls against taka, inflationary pressures should ease. In fact, rupee had already fallen by over 10 paisa against taka between July and November. This was accompanied by food price inflation in Bangladesh easing to 10.4% in the year to December, compared with 13.4% in the year to July. Rice price isn’t likely to fall to 10 taka a kg, but if the rupee falls further, there will be some respite on the prices front (assuming, of course, all else equal — which might not be the case thanks to Messrs Muhith and Ataur Rahman).
There is, however, another channel through which Bangladesh might be affected. What if the slowdown proves sharper and more prolonged than currently believed? What if India has a hard landing? There is no statistics, official or otherwise, about the undocumented Bangladeshis working in India. But there is no question that if the Indian economy seriously falters, it will have an impact on these folks. Perhaps the result will be a return of the monga?
I’ve been looking at some data recently, and thought it would be a good idea to share some charts.
The first chart shows government’s domestic debt — simply debt from hereon.
Debt had been rising since 2005-06, and when the current government assumed office, it stood at about 520 billion taka. For the next two years, the government kept a lid on debt. Then in 2011, it started rising rather quickly. By June, debt stood at over 730 billion taka. By October, it had risen to nearly 880 billion taka.
What’s causing the explosion in debt? I’ll tackle that in a follow up post. Over the fold, some implications of this debt surge.
Sadiq Ahmed of the Policy Research Institute has written recently on the Fy12 Budget. The first one, titled A high reward high risk budget is available here. The money quote:
Indeed, there is a serious risk that the recent policy actions to curb the growth of money supply in order to reduce inflationary pressures might get compromised by the increasing budgetary demand for bank financing. In the past two years monetary growth much exceeded prudent limits even with limited pressure from the fiscal front. With pressure now being built up from the fiscal side, the ability to keep monetary expansion within prudent limits to prevent inflation and contain the balance of payments pressure will again become a substantial macroeconomic policy challenge in FY2012.
In English: the government will ask the Bangladesh Bank to print money to pay for various programmes, the pro-poor governor of the Bangladesh Bank will oblige (just as he did the last time the government needed some help), there will be too much cash chasing too few goods, and prices will go up even more quickly.