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Same storyline, different bottom-line

Zahid Hussain
BANGLADESH Bureau of Statistics (BBS) has provisionally estimated FY14 GDP growth at 6.12 percent and revised down the final estimate of FY13 growth to 6.01 percent (preliminary growth estimate was 6.18 percent) Considering the losses incurred by the economy due to political turmoil in the first half of FYI4 and the decline in business and consumer confidence in general, the increase in growth in FYI4 relative to FY13 is remarkable.
The consensus forecast earlier was that GDP growth in FYI 4 would dip below 6 percent. These forecasts were based on a storyline that hinged on weak growth in private consumption and stagnant or even declining private investments. These two account for nearly 93 percent of GDP.
There were solid reasons to expect growth in private consumption to slacken considerably. Domestic consumers could not spend as much as they would under normal circumstances as streets became unsafe and shops and restaurants could not stay open.
Demand for consumer goods, including durable consumer goods, suffered badly during the prolonged political unrest. Most people postponed purchases of these items, hurting their domestic production, import, distribution and marketing.
Sales of consumer goods like clothing, shoes, cosmetics, personal hygiene products, packaged foods and drinks were also badly hurt in the first half of FY14.
In part, consumers faced a suppressed demand situation, where services were just not available due to blockades and hartals. The 3.5 percent drop in workers’ remittances during the first 10 months also contributed to the softening of domestic demand.
Private investments have been stagnant even before the deepening of political instability in 2013. The turmoil added to pre-existing political uncertainties and lack of significant progress in improving the investment climate in choking private investments.
This was evident from various indica-
tors such as disbursement of industrial term loans for large, medium and small industries, advances other than working capital financing for the manufacturing sector, import of capital goods, FD1 and trends in new real estate projects.
The credit growth rate in the private sector increased slightly in April from the previous month but still remained very low as investors maintained their wait-and-see stance because of continued political uncertainty.
So what was the forecast on the sources of growth in FY14?
It was expected that public expenditure would provide some boost. ADP implementation during the first half of the fiscal year tends to be slack because of the timeconsuming processes.
Only 33.2 percent of the FY14 ADP was spent in the first seven months, compared with 38.3 percent during the same period the previous year.
Expenditure of ADP allocations increased significantly in February-May, with the utilisation rate rising to 66.6 percent compared with 69.2 percent during the same period the previous year.
Public consumption expenditures were also expected to increase because of the 20 percent Dearness Allowance given to all public sector employees later in 2013.
The other expected source of growth was net exports, which were projected as the major driver of FY14 growth from the demand side. Export performance remained resilient to a series of adverse developments on the domestic front.
Total exports in the first 11 months of FY14 increased by 12.6 percent. The European Union continues to remain the largest destination of Bangladeshi exports, primarily due to RMG products.
Imports have remained fragile. Following less than 1 percent growth in FY13, merchandise import payments have remained flat in the first 10 months of FY14 relative to the same period in FY13. Consequently, net export growth was projected to exceed last year's pace.
How does this storyline compare with the national expenditure estimates prepared by BBS for FY14? These estimates show that the private consumption to GDP ratio declined from 72.85 percent in FYI3 to 71.38 percent in FY14 while the private investment to GDP ratio declined from 21.75 percent to 21.39 percent.
General government consumption increased from 5.12 percent in FYI 3 to 5.2 percent in FYI 4 while public investment increased from 6.64 percent to 7.3 percent.
Exports of goods and services increased from 19.54 percent in FYI3 to 19.76 percent in FY14 while imports of goods and services declined from 26.76 percent to 25.23 percent.
It is hard to imagine a set of national expenditure estimates more consistent with the storyline that provided the basis for expecting GDP growth to be lower than last year.
BBS data has firmly reaffirmed the growth scenario sketched on the basis of proxy indicators and anecdotal evidence. Yet the bottom-line is very different!
Growth is estimated to have been higher than last year despite declining private consumption and investment rates.
How do we account for the difference in the bottom-line? Part of the explanation may be an over-estimated public investment, amounting to Tk 986 billion (about $12 billion) in FY14.
BBS estimates public investment from budget data. The public investment data reported in the national accounts show
large variance from the government budget.
Not all government expenditures classified as "capital'’ expenditures (recapitalisation of state-owned banks for instance) constitute creation of real wealth. Such capital expenditures are not investment expenditures from a national point of view.
The items constituting investment expenditures (based on the revised FYI 4 budget) amount at best to Tk 510 billion. This leaves unexplained Tk 476 billion which could be attributed to investments by public enterprises and local governments from own sources.
Most large public enterprises run an operational deficit. Local governments rely on central government transfers to meet their operating and investment costs. It is therefore difficult to see how the public enterprises and local governments could possibly fund such large investments, equivalent to 3.5 percent of GDP, from their own sources.
It is possible that the proxies and methods used to estimate production and expenditures work well in a normal year, but fail to capture the impact of disruptions in an abnormal year.
We hope the blue book on National Accounts Statistics BBS publishes every year will provide more information on where the increase in growth in FYI4 relative to FYI3 came from. Without knowing the underlying data, the debate on the growth estimate will only generate more heat than light.
The author isa lead economist atthe World Bank, Dhaka.