Economic outlook — Autumn 2011

Posted in economics by jrahman on November 2, 2011

In the past few weeks, the IMF, the ADB and the World Bank have released their latest outlook for the Bangladesh economy — major risks notwithstanding, the economy is expected to grow steadily in 2011-12. 

Details over the fold.

Recall that the official Budget projection for 2011-12 is GDP growth of 7%.  All three multilateral institutions were somewhat less bullish than the official projections in their Spring outlooks, though everyone agreed that growth would strengthen in 2011-12.  In its latest assessment, the ADB has revised up 2011-12 forecasts to 7%. 

This is somewhat of a milestone.  If it comes to pass, not only will this mean the two fastest years of growth in the two decades that the Bangladesh Bureau of Statistics has official data for, but also imply the strongest macroeconomic performance in the fifty years that the World Bank estimates date back to.

Looking beyond the headline number to drivers of growth, the ADB sees continued strength in exports.  The Budget had exports growing by 14.5% in 2011-12, the ADB sees a rate of 15%.  Like the Budget, the ADB also sees exports leading to strong performance in the manufacturing sector, which is expected to boost employment, income, and domestic demand. 

The official 10% growth in remittance have been considered too optimistic by many.  At the time of Budget, the ADB was expecting remittance growth of 4% in 2011-12.  Now they have revised it to 12%.  Remittance, plus expansionary macro policies and steady agriculture growth at 4.6% (supported by government policy), are expected buoy domestic demand growth. 

The ADB also nods to the government’s efforts to tackle the power crisis:

Government efforts to tackle power issues by commissioning new plants and buying power from independent producers is expected to mitigate power shortages and boost industrial production.

Compared with the ADB, the IMF is a bit less optimistic in its latest World Economic Outlook, expecting growth of 6.3% in 2011, slowing to 6.1% in 2012.  The thing to note is that in the current global circumstances, 6%+ growth for years at stretch is actually a pretty good performance. 

The IMF doesn’t tell us any story.  In fact, it barely mentions Bangladesh in the whole document.  The World Bank provides more details — 6.7% is achievable in 2011-12, even though there are considerable downside risks:

Overall, given the growing external and domestic risks, the growth performance in FY12 remains uncertain. Real GDP grew at 6.7 percent in FY11. This strong performance can be repeated in FY12 if exports continue to grow and if garment exports receive a boost from the agreement reached during the recent India-Bangladesh Summit, remittances continue to recover, and if investment is boosted by an expansion in the production of power. However, looking ahead, growing downside risks decrease the chances that Bangladesh would be able to sustain its strong growth performance in FY12.

They have a comprehensive story around the channels through which a renewed global economic crisis could affect Bangladesh.  Like the last time, exports might be helped by the Wal-Mart effect and commodities slump will help with both imports bill and inflation.  But remittances and aid flows might be hit harder this time.

The World Bank’s views on the domestic risks are more instructive:

On the domestic front, the appetite for domestic and foreign investment can be affected by the weak investment climate, shortages in energy supply and the poor quality of road transport. The reversal of trade reforms as well as weakening of the financial sector can also affect export growth and investment. Also, expansionary macroeconomic policies could increase risks on the current account and make inflation management more difficult.

The macroeconomic policies have come under fire recently.  Particularly, Bangladesh Bank is failing to curb money growth, and the government is borrowing excessively — both are fuelling inflation.  Inflation has been running at its highest level since 1999.  The Bangladesh Bank’s target is to contain inflation to 7.5%.  ADB expects annual inflation to be 8.5% in 2011-12.  IMF expects inflation of 10.1% in 2011 and 7.4% in 2012.  The World Bank says:

Even the targeted growth rates in reserve and broad money for FY12 may be insufficient to reduce inflation to 7.5 percent.

Of course, anyone familiar with the Bangladeshi economy knows that Bangladesh Bank has consistently missed its stated targets in recent years. 

The ADB sees a small current account deficit of 0.3% of GDP in 2011-12.  IMF expects a slightly bigger deficit — 0.8% in 2012.  These deficits in themselves are not worrying.  But in the context of rising inflation and government borrowing, they can trigger a crisis, particularly if the political situation worsens. 

According to the ADB, here is what needs to be done:

Government policies aim to facilitate rapid growth in FY2012, but close coordination between monetary and fiscal policies will be needed to ensure macroeconomic stability— controlling expansion of credit, both to contain inflation and balance-ofpayments pressures, while providing a steady flow of credit to the private sector. In this effort, the authorities will need to keep a close eye on budget finance from the bank system.

As I said back in 2009, this is exactly what will not happen when you appoint unqualified partisan folks as your central bank governor

But the risk of a crisis notwithstanding, the central projection for the economy is essentially positive.  That’s a good news.

(Cross-posted at UV).

3 Responses

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  1. tacit said, on November 3, 2011 at 10:58 pm

    Jyoti Bhai, how do you see increased government lending from private banks affecting the above forecasts? Secondly, do you think the state of the current account is satisfactory?

    • jrahman said, on November 7, 2011 at 1:20 pm

      In general, I think a small current account deficit is perfectly fine. In fact, one might argue that a small, developing country like Bangladesh should run a small (1% of GDP) current account deficit, provided the deficit reflects strong investment, and not weak savings. But I am not sure how I feel about Bangladesh running a CA deficit.

      CA is the difference between investment and savings. CA deficit means savings are not sufficient to cover investment. If both private and public savings are high, but investment is even higher, then the CA deficit is fine. If private saving is high, public saving is low, and investment is high, then it’s something to keep an eye on, but it’s not necessarily a bad thing.

      But if private saving is high, public saving is actually negative (ie government runs a deficit) and investment is actually low, then we have a problem. And arguably that’s what’s happening in Bangladesh. Government borrowing from the private banks means government relying on household savings. What are they spending the money on? Well, the media tells us that crores were spent to ‘fix’ roads before Eid-ul-Fitr, and we’re now at Eid-ul-Adha. Also, a lot of money is being spent on the rental power plants. And finally, private banks charge a lot on interest — so the government may be setting itself up in a debt trap.

      So the current account deficit we have might be problematic, and the government borrowing is part of the problem. Whether the possible problem becomes an actual crisis depends on how the market feels about Bangladesh. To the extent that people read these publications, we may be okay. But everyone knows the market is fickle. All it takes is a few bad inflation numbers and some unfavourable publicity and we can have a run on taka. On the other hand, nothing at all may happen.

      In the longer run, government borrowing is crowding out private investment. The ‘quick fix’ rental power plants are turning out to be amazingly stupid policy. Interest payments will at some point begin to bite. These don’t bode well for the trend growth rate.

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