ADB is optimistic

Posted in economics by jrahman on April 25, 2011

In its latest outlook on the Bangladesh economy (available halfway through this), ADB expects the 2010-11 (FY11) growth of 6.3%, not as bullish as the 6.7% that underpins the FY11 Budget, but unchanged from ADB’s own forecast from a year ago (halfway through this).  That is, despite the power shortage, sharemarket crash and risks around remittances, ADB hasn’t changed its view about the FY11 prospects.  And on top of this, the outlook for 2011-12 (FY12) is an acceleration to 6.7%.

These are strong endorsements of Bangladesh’s economy.  The 1/11-induced slowdown and the impacts of the global financial crisis seems to be finally behind us.  And what is behind this resilience?  Short answer: exports.  Over the fold, detailed discussion.

The 6.3% growth in FY11 is expected to be based on:

  • 21% growth in exports, up from a mere 4.2% in FY10, and stronger than 11% expected this time last year — last year’s wage accord seems to have not mattered for competitiveness, essentially because wages in other countries rose even more;
  • robust 7.5% growth in the industry sector, on the back of a strong exports performance — although the total industry growth is same as that anticipated last year, the earlier forecast was from stronger construction sector, whereas now more manufacturing activity is expected;
  • acceleration of services sector to 6.7% (from 6.4% in FY10, and faster than 6.5% predicted last April), on the back of stronger trade and transport activities; and
  • 4.1% agriculture growth — this is a slight moderation from FY10’s bumper 4.7%, and compares with 4.1% predicted last year, but is still a pretty strong performance.

For FY12, the outlook is one of:

  • 22% growth in exports;
  • 7.8% growth in industry, with strong private investment growth;
  • 7.2% growth in services; and
  • 4.3% growth in agriculture.

Exporters to the rescue then.

It’s not that the ADB is impervious to the downside.  Remittances particularly has taken a big hit.  In April 2010, remittances were forecast to grow by 12.5% in FY11.  Now, the expectation is for a paltry 3%, rising to 4% in FY12.  The remittance slump is likely to dampen consumption and some services. Remittance slowdown is also expected to see the current account slip into deficit in FY12.

Remarkably, the ADB outlook is silent on the possible impacts of the stock market crash.  The only inference one can draw is that according to the ADB, the share market may have hit a lot of people, but for the vast majority, it doesn’t matter.

Moving from growth to other matters, inflation is expected to be 8% in FY11 (7.8% forecast last year), accelerating to 8.5% in FY12.  Taxes are coming in strongly, but the development budget remains under-implemented.  The result is likely to be a smaller budget deficit than expected earlier.

Risks to the outlook include: global slowdown hurting exports; inflation hurting investment; and power shortage hurting industry.  But these risks notwithstanding, ADB’s overall message is one of a strong economy.

So, how good are ADB’s forecasts?

Over the past decade, ADB has missed the economic outcomes by an average of half a percentage point, same as the IMF, and slightly worse than the government budget (0.4 percentage point).  However, the ADB misses on both up and downside, whereas the government budgets are consistently over-optimistic, and the IMF in consistently too pessimistic.  And unlike the IMF, the ADB is more transparent with its detailed, internally-consistent stories.

Will their forecasts prove right?  I certainly hope so.

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10 Responses

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  1. dhakashohor said, on April 27, 2011 at 6:41 am

    How much of the surge in exports has had to do with QE2 and the resulting devaluation of the US dollar against other currencies? Plus BB’s move to devalue the taka against the dollar since last October (I think), meaning further effective devaluation against a lot of other currencies?

    • dhakashohor said, on April 28, 2011 at 7:49 am

      And by “has had to”, I meant “will have to”. 🙂 Blame the late nights and erratic schedules.

      Also I fear ADB has underestimated the negative impact of DSE crash and remittance drop. Like, you I hope they have not.

  2. Diganta said, on April 30, 2011 at 2:50 am

    I am not really satisfied with the performance of Bangladesh economy. I started to read about Bangladesh since early 2000s and these reports are far better than what I used to read those times. However, given the poverty Bangladesh has, they should target growing 7% and above consistently and 8+% occassionally to get to a better position by 2020. For India the growth targets (8% and 9%) should be bit higher since India has much more disparity in income than that of Bangladesh. Otherwise, with the growing population, we may submerge into a “bottomless pit”.

    Apart from that, Bangladesh must think of a solution to capacity constraint problem. Otherwise, inflation may wipe out all our growth.

  3. jrahman said, on May 2, 2011 at 4:54 pm

    DS, exports would be helped by a real depreciation, not a nominal one. The factors driving the export performance are:
    – inventory replenishment in the key markets as they recover;
    – rising wages in competitive countries;
    – product and market diversification;
    – relaxed rules of origin to EU.

    Diganta, I’ve written about long term issues facing Bangladesh’s economy here:

    One thing I haven’t written in these pieces is the institutional capability. Typically, Bangladesh (and to a lesser extent, Indian) government announces some lofty target, and then fail to implement it because the state machinery doesn’t function. This is an area that deserves far more study.

    While I agree with your broad message that faster growth is needed, let me also note that institutional failures mean that the benefits of the current rate of growth might not be fully harnessed. Even 6.5% growth a year is a pretty solid effort. If population growth is 1.5%, then this leads to 5% growth in per capita income. If this growth is balanced, then average living standard would rise by a factor of 4 in 30 years. That is a huge deal.

    Of course 7/8/9% growth would be nice, but 6% steady and balanced growth might be better than faster growth that the state machinery cannot support.

    Think about it like a car. While faster you drive, the earlier you will reach your destination, which is desirable. But you also have to take into account the road conditions and your car’s capacity. Drive too fast and you’ll crash.

    • dhakashohor said, on May 3, 2011 at 3:21 am

      Damn, we keep having the REER conversation. Apologies. But in terms of REER isn’t the devaluation even greater than under the nominal thanks to our inflation rate? Agree that “real” developments such as EU norms and inventory replenishment are also key.

      Humbly request another post on food prices.

      • jrahman said, on May 3, 2011 at 6:56 am

        Faster inflation at home country means REER appreciation — our goods are more expensive — which hurts exports. However, in this case, it seems that wage inflation has been higher in the competing countries, so we probably had a REER depreciation.

        Request noted.

      • dhakashohor said, on May 3, 2011 at 7:19 am

        Argh, yes of course. Numerator/denominator confusion. I don’t get exchange rates intuitively at all.

        Awaiting the post with interest! 🙂

  4. Good news from exports « Mukti said, on May 5, 2011 at 5:46 pm

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  5. Exports « Unheard Voice said, on May 8, 2011 at 5:50 pm

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