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World Bank's projection of GDP growth: Too early to say?

The economic performance of only one quarter and speculations or too many 'ifs and buts' for the remaining three quarters should not be a basis for a projection of 5.7% growth.

Mahfuz Kabir
RECENTLY, the World Bank (WB) gave a projected figure of the country's GDP growth in the current fiscal year to be 5.7%. This is a regular exercise of the Bank based on the economic performance of the first quarter, global economic indicators, possible upcoming apprehensions and opportunities, and the trend of major macroeconomic and external sector variables. Growth is one of the most debated and sensitive questions at national policy level and amongst influential international organizations like WB, IMF and ADB.
In early October 2012, IMF predicted the growth in FY 2013 to be 6.1%, while in late October WB said the economy would grow at a rate around 6%, significantly lower than the government's projection of 7.2%, because of ongoing global financial crisis. ADB was a little bit generous in early December by projecting GDP growth to be 6.2%. However, early December was also too early to predict something because a series of violent strikes, unwanted events and shutdowns in the following months were never foreseen and therefore not included in the ADB’s projection. What do these numbers mean? They mean nothing but the fact that these mighty players are putting unnecessary pressure on Bangladesh Bureau of Statistics (BBS) to exercise its objective authority in national income accounting process.
True, the country is going through a period of political upheavals and uncertainties. The current fiscal year started with a 'low level equilibrium trap' emanating from lower economic growth than stipulated, low private investment, low aggregate demand and low external sector performance. Nevertheless, economic growth depends on many factors, including political stability, private consumption and investment, exports and performance of the domestic economy. Almost the whole of the last fiscal year suffered from a series of negative incidents in political and economic spheres including credit scam, export downturn in the first half, violent strikes and showdowns, etc. that deterred private investment.
Conversely, the first four months of the current fiscal year witnessed fewer strikes, and the current political crisis is unsustainable in nature considering the recent developments. Thus, it is rationally expected to be over before long through a peaceful transfer of power that would result in a new momentum of the macro- economy. Accordingly, the unstable day-count of the current fiscal year would be much lower than that of the last fiscal year, indicating higher output given the intrinsic strength of our economy developed over time.
Economic growth also critically hinges on implementation of public investment programmes as these include development of critical physical infrastructure that facilitates economic activities and investment. Even though it is an election fiscal year, the rate of ADP spending has been a bit dismal in the first two months (6% of total allocation) compared to that of the last fiscal year (8%) as per the IMED report. The rate of ADP implementation of the top ten ministries was also lower in this period although the first two months are unlikely to predict the expenditure pattern of the next months.
However, the pace of ADP implementation is widely believed to have significant effect on GDP growth, especially through public investment programmes as these facilitate private investment and generate employment, thereby expanding aggregate output. By contrast, spending was 96% in the last fiscal year, which was the highest in the history of Bangladesh, but was unable to assist in attaining the targeted growth of 7.2%. It is still too early to say that this two months' expenditure pattern is growthdiscouraging.
The external sector has remained quite stable in the last few months. The Rana Plaza tragedy and subsequent GSP suspension could not deter the buyers from increasing orders. Export performance in the first quarter of this fiscal year was quite encouraging; it recorded more than 21% growth compared to that of July-September 2012. However, low business confidence would cause the economy to suffer and restrain further expansion of businesses. This would be the outcome of a combination of complex factors that include low institutional quality, lack of permanent way out of energy crisis, feeble infrastructure and transportation network, and GSP suspension, among others. The US government has given a 15-point list to regain GSP, on which the Bangladesh government is working hard and is likely to succeed before long. Therefore, this is not likely to be a big hurdle in acceleration of eco-nomicgrowth.
Exchange rate has been quite stable so far, but it is at the cost of stressful sterilisation by Bangladesh Bank due to an excessively healthy forex reserve of more than $ 17 billion, which is criticised by many. On the other hand, discussion is rising on how to guide the large inflow of foreign remittance into productive channels. This is where the policymakers need to pay greater attention. In fact, it is better to avoid unnecessary consumptive imports as it might be required to finance imports of raw materials and capital machinery in the days to come to achieve the export target.
A potential hurdle is Tk.800 billion plus excess loanable fund in the banking system, but this is due to downward trend of interest rate. This is leading the private sector to look for external credit that offers quite low interest rate and flexible terms. The other components of monetary policy like targeted growth of broad money and credit are not a barrier as 'credit-driven growth' hypothesis may not prove successful and sustainable; rather it creates destructive bubbles. Our growth has received considerable admiration by many due to its quality and stability overtime.
The WB cautioned about potential inflation in the coming months, which may hurt the economy by reducing growth. Consumer price inflation reveals a downward trend at only 7.13 while non-food inflation was only 5.94 in September 2013; an opposite trend of the last fiscal year. Demand pull inflation has an employment-generating and output-enhancing impact. Given the rate of export growth, low international price, especially of food and petroleum items, and inflow of remittance and high reserve a demandpull inflation is likely to appear, which would again expand employment and output in the short run. This is expected to have a positive impact on growth, not a harmful one.
In sum, the economic performance of only one quarter and speculations or too many 'ifs and buts1 for the rest three quarters should not be a basis for a projection of 5.7% growth. Rather, it should remind the government about the factors that would be harmful for growth through simulations based on likely impact of the factors individually and jointly. Also, projection must be based on the data of a credible time period.
The writer is an Economist and Senior Research Fellow at BUSS, Dhaka. E-mail: mahfuzkabir@yahoo.com.