The 2020 outlook

Posted in economics, macro by jrahman on November 8, 2019

When trying to get back to the habit of writing, it is useful to start with something that is in one’s comfort zone.  That, for me, is obviously the economy, except it has been years that I have seriously read or paid attention to the Bangladesh economy.  I guess doing a post on the macroeconomic state of play months out from the new decade is a good excuse to read up on the subject.

Back when I used to think about this stuff more regularly, 7-8 per cent growth was considered outlandish.  In its October World Economic Outlook, the IMF forecasts Bangladesh’s economy to grow by over 7 per cent a year on the back of remittance inflows into the next decade, coming off recent high of 8 per cent.  Inflation is expected to be around the Bangladesh Bank’s target of 5½, and strong export growth is expected to underpin a sustainable current account deficit.

As the chart shows, Bangladesh’s recent growth performance and outlook is quite impressive compared to our own past record, or set against comparable countries like Pakistan or Vietnam.

However, economic statistics such as this generates a number of critiques, some of which are more valid than others.

For example, there is a notion that growth doesn’t matter.  This is nonsense.  Economic growth is not the only thing that matters — distribution of income and wealth is important, because ultimately what matters is that wellbeing of all sections of society improves.  But without economic growth, it is impossible to improve people’s life in a material way.

There are, however, more nuanced arguments: while growth matters, the much touted 7-8 per cent growth failed to lift people’s living standards; or perhaps the country hasn’t really seen 7-8 per cent growth; or even if there really has been apparently impressive growth, it isn’t sustainable, risks and imbalances are mounting, and we are careening towards a crisis.

Finally, there is a political argument about how much credit (or blame) does the regime deserve for the economy.  After all, the regime offers an implicit bargain to the urban populace (at the least) whereby political acquiescence is traded for economic gains.  Of course, it’s not just Bangladesh where an authoritarian regime rests its claim to power, at least in part, on economic performance.  And many a government tries to misoverestimate  economic growth for political gains.  Therefore we should take these 7-8 per cent numbers with a bit of skepticism.

Let’s say the economy has really been growing at 6 per cent a year, as was the case a decade or so ago.  That is still a pretty solid performance.  At that pace, the size of the economy doubles every 12 years (at 8 per cent clip, it take nine years for the economy to double).  If the economic performance in the 2020s replicated that of the 2000s, average Bangladeshi would see their real (that is, inflation adjusted) income  double in every 14-15 years.

Instead of quibbling about the exact rate of growth, the important question to ask is, what risks are out there that could trigger a crisis that would stop the economy from growing at a 6 per cent pace?

Under Article IV of the IMF’s Articles of Agreement, a team of Fund staff visit the country once a year, collects economic and financial information, and holds extensive discussions with officials on policy matters.  This is then published in its website.  The latest Article IV report for Bangladesh came out in September, and is a pretty good starting point to answer that question.

One set of economic risks highlighted in the report, with medium-to-high likelihood and medium-to-high impact if they were to materialize, is around exports faltering because of global slowdown in the near term and rising protectionism in the longer term.

Then there is the risk around banks — Failure to effectively address the problems in the banking system, including high non-performing loans.  This is considered as a medium likelihood event, with a medium-to-high impact in the near term if it hit — High and increasing non-performing loans and low capital adequacy would hamper the banking sector’s ability to finance business investment, add fiscal burden, and hamper growth.

We should not accept the Fund’s forecasts as holy scripture.  They may well be too optimistic, and not just about Bangladesh.  But these risks appear to be the right ones to think about when it comes to the country’s economy as we head into the 2020s.


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