Has the economy turned the corner?
After the Padma Bridge issue broke, a large number of pundits ranging from Abdul Ghaffar Chowdhury to Anu Muhammad argued that the World Bank is an imperialist organisation working to make Bangladesh a basket case again. Well, someone must have forgotten to tell the Bank economists who work on Bangladesh — they have just published a 300 page book that, I suspect, will become a must read on Bangladesh economy.
I’ll read it thoroughly over the holiday season, but at first glance, the report is quite positive and optimistic on Bangladesh. Also optimistic is the Bank’s assessment of the economic conditions and near term economic outlook. Although there are risks and patchy spots, according to the Bank, the economy appears to be a more stable and resilient trajectory compared with early 2012. And the Bank may well be right.
The Bank supports the IMF forecast of 6% GDP growth in 2012-13 (FY13). This is much slower than the Budget forecast of 7.2%. But one would be wrong to conclude that a 6% growth outcome is ‘poor performance’. The economy faces external headwinds. While the human tragedy of garments industry is, justifiably, in everyone’s mind, exporters have found it hard to navigate the recession in Europe. Annual growth in exports screeched to a halt in the September quarter (see the chart — data from CEIC, smoothed by 3 month moving average).
The World Bank expects exports to grow by 5% in FY13, much slower than the double digit rates expected in June.
The export slowdown notwithstanding, the overall balance of payments have moved from a moderate deficit to a small surplus on the back of import slodown and strong remittance growth. The Bangladesh Bank used the opportunity to build up reserves, which are currently covering 3.6 months of imports (anything over three months is considered safe).
The 6% growth rate, if it comes to pass, mean that the economy will slow for two years in a row (FY11 growth rate was 6.7%, FY12 was 6.3%). But when you consider the slowdown in India (8-9% to 5-6%) or other emerging economies, the slowdown in Bangladesh doesn’t seem all that bad.
Ultimately, for Bangladesh to grow significantly faster than 6% on a sustained basis, investment’s share of GDP will have to rise. The Bank report reiterates the usual suspects — electricity and gas shortage and poorly functioning roads and ports –holding investment back. These are not something short term macro policy can fix, and it’s good to see that Bangladeshi policymakers are not trying to stimulate the economy through easy money.
And the report makes it clear that not only has the Bangladesh Bank has tightened monetary stance and reduced inflation, but also that the pick up in inflation in 2011 was largely due to the misguided monetary expansion. As for fiscal policy, the Bank’s assessment is that it’s ‘back on track’, thanks to the government following the IMF program. The report also gives the government credit for moving forward with structural reforms like a new VAT law, renewal of 2G licenses, gradual removal of electricity subsidies. Against the positive appraisal of monetary-fiscal-structural policy actions, there are words of caution on the financial sector, which appears to show signs of stress.
Next year is, of course, an election year. And all the positive news on the resilience of growth or build up of reserves or fiscal prudence or structural reform will not matter if food prices shoot up. On that front, the government should be encouraged by the World Banks’s assessment:
Food inflation in Bangladesh has been declining, driven mainly driven by falling rice prices. Adequate production in two consecutive years and higher government procurement resulted in increased stock levels of food grains and steady supply situation. A number of safety net programs are in place to safeguard the poor from the impact of possible global food crisis. With favourable weather condition and satisfactory stock level, Bangladesh food outlook for FY13 seems to be stable.
Overall, the report is a rather positive one for Bangladesh. Whereas the economy was potentially facing a crisis at the beginning of 2012, the World Bank’s assessment is that the economy has turned a corner.
Going into the end of the year, I share that assessment.