While the third wave of Cov-Sars-3 in its new incarnation as Omicron has placed the Bangladesh economy in tenterhooks threatening to derail the economic recovery, forecasts are being made by multi-lateral institutions (MLI) that sound like sweet music to the ears of policy makers. Coming from institutions that are normally conservative about their estimates of Bangladesh economies growth prospects, the recent forecasts and estimates appear too good to be true. A quick look at these forecasts and estimates may reveal if these are serious exercises or mere speculation made in a generous mood to dispel the lingering worry that hangs over policy makers in Bangladesh as almost everywhere else.
The most cheerful estimate about the growth of Bangladesh economy in the midst of the insidious pandemic has been made by International Monetary Fund (IMF), the traditionally conservative MLI. According to its finding and calculation the Bangladesh economy's resilience in turning around has been so steady and robust that it has crossed the US$1.0 trillion dollar mark in value, a landmark event by any reckoning. In its serial estimates the size of Bangladesh economy was US$ 267.99 billion dollar in FY 2006, US$ 540.42 billion in FY14, US$966.48 billion in 2019 and has become US$1061.57 billion recently in 2022 crossing the trillion dollar mark (Bonik Barta, January 14, 2022).It has been estimated that on this trend Bangladesh economy's size will be US$1.5 trillion by 2026. This sounds like a fairy tale, particularly in the current hard times. Since life is not a fairy tale and no other MLT have come up with this landmark estimate IMF's estimate calls for scrutiny.
There are two methods of measuring the size of an economy. The first uses the current prices of goods and services in the economy for which the estimate is being made (in this case Bangladesh) and the prices of similar goods and services of the country the comparison is being made (America in this case).The second method uses the Purchasing Power Parity (PPP) of two countries, keeping the same basket of goods and services that are measured to arrive at the respective PPPs. In calculating the value of Bangladesh Gross Domestic Product (GDP) in dollar terms, IMF has used the PPP for measurement. The PPP, as a method of measuring GDP, gives more or less an accurate figure provided price levels in the two countries remain stable. In other words, the value of the two currencies should remain unchanged for effective comparison in real time. Everyone knows, following the pandemic the consequent enhanced public expenditures by governments and the cheap money policy of central banks have inflated the broad money (M2) supply resulting in rise in price levels. This negates the basic assumption of measuring economies with the help of PPP. With inflation at different rates the use of PPP cannot give an accurate comparative estimate to measure the size of an economy. Since both the American and Bangladesh economies are experiencing unprecedented inflationary pressures (more in America than in Bangladesh) the estimate of the size of Bangladesh economy using PPP cannot give an accurate figure. Therefore, IMF's pronouncement that Bangladesh economy has crossed the trillion dollar mark has to be taken with a grain of salt.
Secondly, estimate about the size of Bangladesh economy has not been preceded or followed by higher forecasts made by IMF about the GDP growth rate of Bangladesh than it has made in the recent past or at present. It has never agreed with the higher growth projections of Bangladesh government (GOB) from year to year. If the growth rate is not higher than IMF's calculation then how can it expect the GDP size to grow to cross the trillion dollar size? To refresh the memory it may be recalled that while GOB has fixed 7.2 per cent for GDP growth rate during the current fiscal, IMF has now raised the rate to 6.6 per cent from 6.4 per cent in October last year. IMF, like the other MLIs, has never agreed with the increasingly higher target of GDP growth fixed by GOB. There is a clear disconnect between its estimate of the size of the economy and the forecasts. For its most recent forecast of GDP growth rate at 6.6 per cent, IMF has identified two driving factors, rising exports, particularly garments and progress in vaccination. It has added the caveat that if the external conditions (meaning the export market) and vaccination remain satisfactory, the growth rate can 7.1 per cent in next fiscal (2022-2023). At the same time it has admitted that both the factors, export demand and vaccination, remain uncertain making risk tilted to the downside. This is clearly a double speak, rendering its own forecast tentative and unreliable .What it ( also other MLIs) should do is make different forecasts for possible scenarios of internal and external conditions instead of making one circumscribed by caveats.
It is surprising that in making the estimate ( size of the economy) and forecast for GDP growth IMF has not dealt with the problem of rising inflation and how it can damage the macro-economic management with adverse impact on the economy that is still reeling under the battering by the pandemic. According to the Bangladesh Bureau of Statistics (BBS) inflation has been on the rise since August 2021as prices of both food and non- food items have registered upward increase on year to year basis taking inflation to 5.5 per cent, crossing the target of 5.3 per cent as fixed in current year's budget. In December, 2021 inflation increased, going above 6 per cent. The inflationary pressure has kept its pressure since then indicating that it will go higher in future. The cause for rise in prices is the same as in other countries, developed, emerging and developing viz. increasing expenditures to cope with the pandemic. Apart from inflicting distress on consumers at micro level, inflation can destabilise the exchange rate forcing the currency to depreciate. As the currency loses value through depreciation exports shrink in volume losing the comparative advantage. This is the danger that is lurking for Bangladesh exports, particularly garments. A concrete idea of this potential risk to exports can be had from the movement of Real Effective Exchange Rate (REER), the index of international competitiveness. REER in Bangladesh was recorded at 114.9 in September 2021 compared to 110.55 in June, 2020.With higher REER the country's exports volume declines, a development that may take place if inflation impacts adversely on REER. So the assumption behind IMF's forecast for GDP growth may turn out to be false.
On the other end of trade, imports have surged by 54 per cent to US$ 33.7 billion during the first five months of the current fiscal year (FY22). The trade imbalance caused by current account deficits(import bill exceeding exports) have increased by US$ 4.46 billion during this period making the total amount US$ 6.5 billion during July- September period of FY22 against US$ 2.04 for the same period during last fiscal( The Financial Express, 21 November, 2021). Both these developments, depreciation of Taka and widening current account deficit, bode ill for macroeconomic development.
As regards the problem of incipient inflation, the South Asia chief of IMF said in a press briefing after the completion of its annual appraisal that Bangladesh Bank's (BB) monetary policy (MP) was adequately appropriate to address the problem satisfactorily through its various instruments.
In a separate exercise captioned 'Monetary Policy Transmission Mechanism in Bangladesh,' the Asian Development Bank (ADB) has observed that various instruments and tools of monetary policy in Bangladesh have lost their effectiveness. As an example the study report mentioned that major changes in broad money (M2) supply by BB has had no impact on balance sheets of commercial banks. Furthermore, it has been pointed out that reduction in repo rate and increase in reserve money has not resulted in increase of broad money supply. Finally, it has been pointed out that the government's use of saving certificate as a source of borrowing has compromised the effectiveness of monetary policy (MP) as a result of which MP's role in controlling inflation has been reduced. So much for the optimism of IMF that the MP of Bangladesh Bank will be able to rein in inflation adequately with its monetary policy instruments.
The ADB in its estimate of the growth rate of GDP for the current fiscal has given a figure almost similar to that of IMF (6.8 per cent). It has also mentioned about the same downside risks except sharing the optimism of IMF about BB's successful handling of inflation. The deteriorating health of the financial sector has also drawn its attention.
The third multilateral institution that regularly makes annual review of Bangladesh economy and estimate of the growth rate of GDP is the World Bank. For the current fiscal World Bank also has come up with more or less the similar figure of 6.4 per cent as those of IMF and ADB. In making assumptions the World Bank (WB) has however, added consumer expenditure, along with exports and remittance as the main drivers of growth in post-pandemic Bangladesh or the present state of its economy. The inclusion of consumer expenditure comes as a surprise not only because this is the first time it has been identified as such but also because of the common knowledge that consumer expenditure has been depressed by the pandemic for all classes of people except the rich.The incomes of these classes other than the few rich have declined so much and so suddenly that they had to cut down expenditures even on essentials, including food. Many of them are yet to restore expenditures on many items to pre- endemic levels. Moreover, consumer expenditure has never been a major contributor to GDP growth and there is no question of it becoming so soon after the second wave of the pandemic when the people are apprehending another assault on their income even before fully recovering from the loss or decline of the same over the past two years. Under the circumstances designating consumer expenditure at this juncture as a major driver of growth by WB comes as a surprise as much as it is unrealistic.
As regards remittance by wage earners, one of the two main drivers of growth, the record in recent months does not give much hope of being robust in its growth in volume and value. Though the 2.0 per cent incentive given for the amount sent through of official channel has been effective in motivating wage earners to use the official channel and the rate has been raised to 2.5 per cent recently, the continued depreciation of Taka in recent months has made many wage earners inclined to use the unofficial channel because of higher amount being given in exchange by unofficial agents, according to some account as much as Tk.10 per dollar. Unless the rate of incentive is raised higher (3 per cent demanded by them) it will be difficult to lure them back.
According to Bangladesh Bank remittance in November 2021 amounted to 1.5 billion US dollar which was 5.56 per cent or 93.17 million dollar less than in the previous month, October. BB's figures show remittance dropped by nearly 21 per cent to US$8.61 billion during July- November period in FY22 from $10.89 billion for the same period during last fiscal (FY21). The World Bank also recognises this and mentioned in its Report on 'Covid-19 Crisis: Through the Migration Lens'. According to this report ' the slowing growth in terms of money sent back by migrants in the first nine months of 2021 suggests 'downside risks' for 2022. The report attributes this 'to a lull in net migration keeping remittance flat this year.' It is therefore contradictory for WB to designate consumer expenditure as a driving factor behind the strong recovery and growth that they predict.
All the multilateral institutions have caveats to their forecasts regarding Bangladesh's bright economic outlook and so these cannot be taken for granted. This is not very helpful to policy makers as it only throws them into uncertainty and confusion. To be helpful the MLI should make alternative forecasts depending on assumptions and scenarios these outline.
As regards measuring the size of the economy, caution has to be exercised about the use of price level. To be realistic it should be based on current prices and not nominal prices that do not take in to account the increase in price levels. The Standard Chartered Bank in Bangladesh has calculated the size of GDP using inflation-adjusted prices and has concluded that Bangladesh may become a US$ 500 billion economy with per capita income of Tk 3000 by 2025-2026 on the back of steady growth. This estimate and forecast is much more reliable than the IMF's euphoric estimate.
The question that is most pertinent and immediate is how should the policy regime be designed in these uncertain times? Since the policy decisions taken in the aftermath of pandemic outbreak has been successful in restoring the economy gradually and is poised to reach the pre- pandemic level these should continue if the fourth wave of the pandemic does not prove toxic requiring drastic measures like lockdown of shops and manufacturing units. The continuation of the recovery policy should give attention to aspects of the economy viz. inflationary pressure and worsening of poverty situation. Unfortunately, the alleviation of the latter will inevitably entail rise in prices as government injects money to implement anti- poverty programmes. To obviate this the emphasis in the short term should be on productive and income generating activities rather on giving relief under social safety net programmes. The other strategy to dampen inflationary pressure during the recovery phase should be relying more on monetary policy (MP) rather than the fiscal. To ensure better and more effective transmission of the MP and its various tools the bottlenecks in this as pointed out in the recent study by ADB should be resolved.
This review of the outlook of Bangladesh economy may be rounded off by quoting from a children's book that has become popular with economist. In Lewis Carrol's 'Through the Looking Glass' the queen told Alice that one had to run as fast as he could to be in the same place. When Alice wanted to know what should be done to go to a place ahead, the queen replied : one has to run twice as fast than before. Her pronouncement fits neatly into the present situation of Bangladesh economy. It is running as fast as it can to be in the same place i.e. the pre-pandemic level. To go beyond that, achieving a growth rate higher than 8.5 per cent, it has to strive harder. It can do that if, and it is a big if, the fourth wave in the form of Omicron does not overwhelm it. If it does, all bets will be off and the economy will be in uncharted waters. This dooms day scenario need not be true if the vaccination programme and other public health measures are carried on vigorously.
