Bangladesh economy: Poised for higher growth?

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1 Bangladesh economy: Poised for higher growth? Published: Thursday, Jun 30, 2016 FE-PRI EAU Posted : 30 Jun, :00:00 Mid - Term State of the Economy Bangladesh economy: Poised for higher growth? As the world economy is reeling under the Brexit shock, with a host of uncertainties slamming the already anaemic growth in the European economies, the near term outlook for the Bangladesh economy could take a turn for the worse, notes the latest review of The Financial Express (FE)- Policy Research Institute of Bangladesh (PRI) Economic Analysis Unit (EAU).Muhammad Shafiullah, a senior Economist of the PRI, prepared the latest mid-term analytical report for the FE-PRI Analysis Unit. PRI's Senior Research AssociatesSyed Mafiz Kamal, Saeba Ruslana Abedin, Mehrin KarimandAzmina Azad and Research AssociatesShoeb Mohammad Ekramul HaqueandNaveed Ahmed ChowdhuryassistedDr Shafiullahand made their contribution to preparation and finalisation of the report Britain and the European Union (EU), as the report find, are the largest export destinations for Bangladeshi exports. Brexit, the exit of UK from the EU, foretells further economic weakness for both Britain and Europe - not good for Bangladesh's economic prospects. In its introductory part of the report, the team of analysts who prepared the report under a team of mentors/anchors for the EAU of FE-PRI, notes the Bangladesh economy experienced so far modest improvements in its broad economic indicators in fiscal year (FY) During this time, the country welcomed its promotion from a Low Income Country (LIC) to a Lower Middle Income Country (LMIC). External and internal balances appear on a steady course, providing the grounds for higher growth. Despite the global economic slowdown, Bangladesh, it observed, continued to exhibit strong macroeconomic performance and development progress. FY also saw improvement in regional cooperation - with the ratification of the Bangladesh, Bhutan, India and Nepal Motor Vehicle Agreement (BBIN-MVA). The BBIN- MVA is expected to streamline the inter-country movement of motor vehicles carrying passengers and cargo among these nations, contributing to increased economic integration of the region. It is against this backdrop that this analytical report, it said, assesses the performance of the Bangladesh economy in FY , based on available economic data at mid-year Macroeconomic and Fiscal Performances Bangladesh economy : Poised for higher growth?

2 Bangladesh's macroeconomic performance, in FY , showed modest improvements. The Bangladesh Bureau of Statistics (BBS) estimates the provisional gross domestic product (GDP) growth rate (7.05%) of FY is expected to cross the coveted '7.0%' threshold for the first time in the country's 45-year old history; up from 6.55% in FY This expectation is consistent with the Seventh Five Year Plan (FYP) growth target but exceeds the (already optimistic) projections made by the World Bank, Asian Development Bank (ADB), International Monetary Fund (IMF) and PRI (see Table 1). If this expected growth rate can be realised this fiscal year, it will be a welcome development for the emerging economy. All broad sectors of the Bangladesh economy - agriculture, industry and services - are expected to experience healthy rates of growth (in terms of absolute gross value addition). The sectoral share of agriculture continues to shrink - from 16% in FY to 15.33% in FY The share of industry in Bangladesh's continued on its robust upward trend with almost a 1.0 percentage point increase from 30.42% in FY to 31.28% in FY Similar to the agriculture sector, the services sector lost its share marginally - from 53.58% in FY to 53.39% in FY It is worthy to note that the declines in the agriculture and services sectors are no cause for alarm as they point towards to the dynamics of the development process of Bangladesh. Bangladesh economy : Poised for higher growth? In the context of relative political stability in the country and improving business climate, Bangladesh has the scope to remain upbeat about reaching this long-awaited economic growth landmark. The fiscal sector is expected to experience modest improvements in FY As it can be seen in Table 2, the National Board of Revenue's (NBR) total revenue receipts will grow substantially in absolute terms between FYs and However, total revenue receipts as percentage of GDP will grow only modestly in FY , with a 0.5 percentage point gain from that of FY The government's total expenditures are expected to grow faster than revenue receipts between FYs and In terms of its share in GDP, total expenditure is also expected to grow at a higher rate than that of total revenue - gaining 1.8 percentage points since FY The Annual Development Programme (ADP) expenditure growth will slightly outpace that of revenue expenditure during this time. This modest improvement in the ADP utilisation rate is a promising sign that project implementation is picking up pace. There are visible signs that some of the top priority and transformational infrastructure projects are on the move: e.g. Padma Multipurpose Bridge, Dhaka-Chittagong Four-lane Highway, Dhaka Metro Rail Project, and several Power Projects. The outpacing of revenue growth by expenditure growth will likely widen the overall fiscal balance (deficit) in

3 both absolute terms and as a share of GDP. The consequence of this growing financing shortfall is the increased government borrowing from domestic and external sources. Financing from external sources will quadruple with loans and grants more than doubling while amortization remaining virtually constant between FY and FY Government financing from domestic sources will also rise significantly with a dramatic rise in bank-sourced borrowings from Taka 5.1 billion in FY to Taka billion in FY In contrast, non-bank financing is expected to fall by more than a third - from Taka billion in FY to Taka in FY While the reduction in non-bank financing will increase domestic credit for private sector, this will increase the interest cost of the budget because the nonbank domestic borrowing involves the use of high-cost national savings certificates. The revenue, expenditure, fiscal balance and financing targets for FY are ambitious and contingent on reaching the targets of FY In particular, past NBR revenue targets have not been met, while ADP implementation is almost invariably substantially below the original budget. Furthermore, the revenue growth target is based on substantial increases in tax revenue - a feat NBR struggled to achieve over the years. Consequently, while such ambitious targets are not impossible to reach, whether or not the government has adequate policy and administrative instruments to reach these targets remains the main question. Inflation and Monetary Policy The inflation in FY also slowed down, in line with the sustained downward trend since January At the end of April 2016, it stood at 6.04 per cent compared to 6.10 per cent at the end of March 2016 and 6.57 per cent at the end of April Point-to-point (p-t-p) Consumer Price Index (CPI) inflation also declined to 5.61 per cent at the end of April 2016 as compared to 5.65 per cent at the end of March 2016 and 6.32 per cent at the end of April This is mainly due to declining food inflation, which decreased p-t-p to 3.84 per cent in April 2016 compared to 5.48 per cent in December However, non-food inflation rose to 8.34 per cent at the end of April 2016 compared to 7.05 per cent at the end of December Non-food inflation has been following a downward trend since then. By March 2016, the monetary sector saw substantial improvements with broad money (M2) growth being 13.5 per cent compared to 13.1 per cent in February The stock of broad money is projected to grow at 15.0 per cent by June Nominal interest rates have been coming down noticeably approaching the single digit level. The monthly interest rate spread (the difference between deposit and lending interest rates) for all banks remained below 5.0 per cent during FY :Q3.A growing economy supported by declining interest rate has helped improve the growth in private sector credit, which increased to 15.2 per cent in March 2016 (year-on-year basis) from 13.6 per cent in March 2015 (year-on-year basis). At the end of the quarter (October-December 2015), the bulk of Private Credit Advances -- (37.2%) -- was used for 'Trade', followed by advances for 'Working Capital Financing' (19.1%).Trade loans increased by Taka billion to Taka 2, billion as compared to increases of Taka billion at the end of the preceding quarter (July-September 2015). 'Transport' loans increased by Taka 1.37 billion to Taka billion during the October-December quarter in 'Agriculture' loans increased by Taka 7.61 billion to Taka billion at the end of the quarter (October-December 2015) as compared to increases of Taka 1.70 billion and Taka billion at the end of the preceding quarter (July- September2015). 'Construction' loans increased by 1.32% to Taka billion and 'Working Capital Financing' loan increased by 2.70% to Taka 1, billion. The ratio of non-performing loans (NPL) to total loans of all banks showed a decrease in the last quarter of

4 2015 -amounting to 8.79 per cent and down from 9.89 per cent in the third quarter of This decline in NPLs to aggregate loans' ratio can be attributed partly to some progress in recovery of long outstanding loans and partly to write-off of loans classified as 'bad' or 'loss'. This follows the overall declining trend in the NPL ratio in the banking sector, especially in the Data-owned commercial banks (SoCBs), since The above indicators exhibit noteworthy improvements in the monetary sector as well as the investment climate of Bangladesh. Inflation has been the lowest in more than three years. The continued decline in inflation will ease cost of living as well as cost of doing business in Bangladesh. Credit to key investment areas is also seen to rise, albeit at a subdued pace. The decline in NPLs is welcome; however, the financial scams continue to haunt the 'banking and finance' sector. Overall, there is scope for cautious optimism regarding Bangladesh's inflation and investment climate. External Sector Developments Bangladesh's export performance for the fiscal year (FY) has been good but fell below the official target. Exports grew by 8.95% in July-May period of FY over the corresponding month of FY Raw jute, engineering products, woven garments and pharmaceuticals are some of the export items that achieved double digit growth in the period of July-May of FY at 54.2%, 16.25%, 11.6% and 11% respectively. As far as the non-traditional exports are concerned, exports of petroleum by-products have grown remarkably since October of The export growth of headgear/caps has also been significant. Exports of petroleum byproducts and headgear/caps experienced a growth of 336% and 126% respectively during July-May period of FY , compared to the corresponding period of FY Ready Made Garment (RMG) products continue to dominate the export basket accounting for shares of above 80%. Among other leading export sectors, notable performers included leather products (+56%) and non-leather footwear (+16%). Imports continued to remain sluggish, growing by only 4.8% during July-April period of FY over the corresponding one of FY , thus resulting in a reduction of the balance of trade of about US$600 million. Imports of consumer goods increased by 9.1% mostly driven by edible oil imports, which grew by 51.34% during July-April period of FY The imports of food grains have declined by 31.9% with rice imports experiencing the largest decline of 77% during July-April period of FY16 compared to the corresponding one of FY Import of intermediate goods, the largest component of imports, increased modestly by 3.7% driven by imports of pharmaceutical products, crude oil, oil seeds and POL (Petroleum, Oil and Lubricants). This provides a signal that the manufacturing sector still lacks the dynamism that was widely expected following the return of political stability. For the period of July-April FY , L/C opening of capital machinery and industrial raw materials were the only categories that achieved positive growth by 13% and 2.4% respectively, suggesting a modest uptick in investment activity going forward. Remittances experienced a decline of 2.4% during July-April period of FY compared to the corresponding one of the previous year, indicating that total remittance by end of the current fiscal year might fall short of the $14 billion in FY2015. However, the number of people who have left abroad for employment have increased significantly, experiencing a growth of 51% during July-April period of FY compared to same period of last fiscal year. This is partly due to lifting of visa bans and opening up their labour markets to Bangladeshi workers in some of the biggest destinations (such as Saudi Arabia) - a result of the Government's sustained diplomatic efforts. So, the decline in remittances could be a temporary response to the falling oil prices and would likely recover. Paradoxically, for a rapidly developing country like Bangladesh, the current account balance continues to show a surplus standing at $3.1 billion or 1.4% of GDP, thus continuing to reflect the overall under-investment scenario, while the capital and financial account balance stands at $1.4 billion as of July-April FY A

5 positive development is the foreign direct investment (FDI) inflows which increased by 20.9% during July-April period of FY compared to the corresponding period of FY The net result is a continuing surplus in the overall balance of payments (BOP), thus contributing to further accumulation of official reserves. As of early June 2016, foreign exchange reserves stood at $29.2 billion. Overall, the above findings indicate healthy developments in the external sector of Bangladesh, though the economy would be better served with larger investment rate. Barely short of double digit growth, Bangladesh's export performance in FY is healthy compared to the meltdown of Indian exports, which declined by 22% this past year. Most emerging markets fared no better as low commodity prices and a global slowdown, driven by anailing Chinese economy, is all set to take exports to their lowest levels in five years in Simultaneously, the subdued import growth could be worrisome at a time when economic recovery appeared to be on track. The substantial decline in food grain imports bodes well for local famers and may be indication of growing self-sufficiency of Bangladesh's agriculture sector. However, the relative slowdown of intermediate goods imports may be related to the stagnation of investment in Bangladesh and can be considered an area of concern. In contrast, a healthy current account balance as well as the strong growth of FDI and foreign exchange reserves are encouraging indicators for the Bangladesh economy in FY Concluding Observations: The analytical report of the FE-PRI EAU, in its concluding part, notes that recently available economic data shows that the Bangladesh economy experienced in FY , modest but sustained improvements in most of its 'provisional' macroeconomic indicators, giving confidence that the grounds have been laid for achieving higher growth rates targeted in the Seventh Five Year Plans. In fact, over the last few years, it experienced strong and stable macroeconomic performance relative to its peers. It is important to view the 'modest improvements' as a strength of the economy, as it gets ever closer to reaching its full potential. The 'modest improvements' are also in line with the expectations and projections of the 7th FYP. Bangladesh is poised to finally breach the '6.0% growth trap' in FY , while enjoying healthy growth in the broad economic sectors, exports, NBR revenue receipts, ADP utilisation rate and domestic credit, inter alia. Prudent monetary policies have also been able to continually reduce inflation in recent times. However, there are areas of concern such as stagnating private investment, a decline in intermediate goods imports and remittances, and lingering weaknesses in the financial sector. While there is no reason for alarm, Bangladesh must not remain complacent and strive to make progress in these areas. In addition, Bangladesh must strive to integrate into regional value chains such as that of South Asia as well as East Asia. The BBIN-MVA could play the catalyst in this quest. However, Bangladesh must work to forge similar agreements with other regional blocs, particularly the Association for South East Asian Nations (ASEAN). This will be conducive for achieving and sustaining GDP growth rates in excess of 7.0% (and even 8.01%) which is crucial for its economy to 'take off' and achieve its goal of becoming a middle income country by A higher rate of economic growth will also enable sufficient jobs growth to take advantage of the demographic dividend Bangladesh is currently enjoying. It would be folly to conclude this brief update on the state of the economy and its prospects in mid-year 2016 without a take on the Brexit fallout. Analysts point to the enormous uncertainties posed by this new development though most agree that this could trigger another global recession like the one in Bangladesh economy weathered the earlier storm almost unscathed. This time it might not be that fortunate as the source of the problem lies in its main trading partner - the EU. Time to fasten our seat belts and hope for the best.

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