Originally posted in The Financial Express on 3 June 2024
Bangladesh economy is currently under significant strain due to several ongoing challenges. While external factors such as the Covid-19 pandemic and the Ukraine war have left their mark, persistent domestic issues—such as policy weaknesses, poor governance, and failure to implement necessary reforms—have also contributed to the difficulties. These ingrained structural weaknesses have exacerbated the pressures on Bangladesh’s economy.
During the first three quarters of the current fiscal year (FY2024) Bangladesh economy has faced significant pressure. This was evidenced by subdued revenue mobilisation, resulting in a shrinking fiscal space, a high reliance on government borrowing from commercial banks to finance the budget deficit, tightened liquidity in scheduled banks, elevated prices of essential goods, and a deteriorating external sector balance and foreign exchange reserves. Indeed, these challenges were also evident in FY2023 which led the government of Bangladesh (GoB) to initiate a 42-month programme supported by the International Monetary Fund (IMF) in February 2023 to improve balance of payment (BoP) and restore macroeconomic stability. After more than a year of the IMF programme, the economy is yet to show any improvement on the attendant concerns. Recently, the central bank has adopted policy measures such as market-based interest rates and exchange rates in an attempt to control inflation and improve foreign exchange reserves. The success of these policies will depend on consistent fiscal policies. In this regard, it is expected that the upcoming national budget for FY2025 to be placed at the national parliament on June 6, 2024, will address these issues and help the economy to bounce back and support people who are in distress.
CRITICAL CONTEXT: Ongoing macroeconomic instability and consequent policy adjustments, largely influenced by the IMF conditionalities, surely affected the country’s economic growth prospects. In this context, the debate concerning the trade-off between economic growth and macroeconomic stability has once again come to the fore. While stabilising the macroeconomic situation with corrective measures might entail some adverse impacts in the short term, they ultimately prove to be beneficial in the medium to long term if supported by complementary macro-management policies (Stiglitz et al., 2006). It must also be mentioned that stabilisation packages prescribed by multilateral agencies such as the IMF often prioritise stability over growth (Bird, 1996; Przeworski & Vreeland, 2000). However, as was observed from the past experiences of developing countries, there are divergences in the results of such packages (Abbott, Andersen & Tarp, 2010; Taylor, 1988).
In Bangladesh, it is a matter of regret that it has become customary to set targets concerning the macroeconomic framework that are not consistent with ongoing realities. For FY2024, the government initially targeted a gross domestic product (GDP) growth of 7.50 per cent despite existing distresses in the macroeconomic scenario. As per the Monetary Policy Statement (MPS) of the Bangladesh Bank, released in January 2024, this target was revised down to 6.50 per cent. Several multilateral agencies were less optimistic regarding Bangladesh’s GDP growth prospects. For instance, the Asian Development Bank (ADB) projected Bangladesh’s GDP growth in FY2024 to be 6.1 per cent. Similarly, the IMF and World Bank projected the corresponding figure to be 5.7 per cent and 5.6 per cent, respectively.
GDP GROWTH: The provisional estimates of the Bangladesh Bureau of Statistics (BBS) predicted a GDP growth rate to the tune of 5.82 per cent in FY2024 – a marginal increase from the growth recorded in FY2023 (Figure:1).
This estimate, however, was made largely on the basis of the data of the first six to seven months of the ongoing fiscal year and the original programmed national budget, which were surely overestimated. Hence, the final estimate may be revised downwards once the required data for the entire fiscal year becomes available. This has been the case for the last two fiscal years, i.e., FY2022 and FY2023.
Sources of provisional GDP growth. In the incremental GDP of FY2024, the agriculture and industry sectors are expected to contribute about 6.0 per cent and 41.7 per cent, respectively. The services sector accounted for nearly half of the incremental GDP in FY2024 (49.2 per cent). One of the major contributors to incremental GDP in recent decades, the manufacturing subsector, is projected to contribute only 27.2 per cent to the incremental GDP. This is considerably lower than the corresponding figure for FY2023 (36.0 per cent).
The agriculture sector is estimated to grow modestly by 3.21 per cent, whereas the industry sector posted a growth of 6.66 per cent. Within the industry sector, manufacturing and construction subsectors registered notable growth of 6.58 and 7.45 per cent, respectively. The services sector grew by 5.80 per cent in FY2024. Within services, wholesale and retail trade combined with the repair of motor vehicles, motorcycles, and personal and household goods recorded a growth of 6.19 per cent.
Per capita income. Per capita GDP stood at US$ 2,675 in FY2024, while per capita GNI stood at US$ 2,784, recording 1.21 per cent and 1.27 per cent annual growth rates, respectively. While the growth, although marginal, is encouraging, the per capita income in dollar terms is still below that of FY2022. The rapid depreciation of Bangladesh Taka against US Dollar is a significant contributing factor to this end. Indeed, the exchange rate considered for this estimation (Tk. 109.97 per US$) will also not be valid by the end of FY2024 in view of the recent significant depreciation (Tk. 117.77 per US$). It must also be noted that these average measures conceal a highly skewed income distribution. One may apprehend further deterioration of the inequality situation in the country considering high food inflation as food costs consist of a much higher share in the total consumption basket for lower-income households.
Investment. During the last five years (FY2020-FY2024), the gross investment-GDP ratio has decreased by 0.33 percentage points. Gross investment was 31.31 per cent of GDP in FY2020, while it crawled down to 30.98 per cent in FY2024 (Table:1). Private investment-GDP ratio decreased from 24.18 per cent in FY2023 to 23.51 per cent in FY2024. An uptick in public investment compensated for this slack in private investment. Given the current sluggish implementation of the Annual Development Programme (ADP), whether the provisional estimate for the public investment-GDP ratio will hold remains a question.
Disaggregated dynamics of GDP. It is encouraging to see that BBS is publishing quarterly estimates of GDP on a regular basis. The availability of the provisional GDP estimates for the entire FY2024 as well as the first two quarters creates the opportunity to investigate the growth dynamics of Bangladesh in a more disaggregated (e.g., quarterly or half-yearly) manner.
According to BBS estimate, there was a 6.74 per cent growth of the Bangladesh economy during the second half (H2) of FY2024. This is a divergence from the trend of the last two fiscal years, as GDP growth usually declines during H2 of a particular year. Also, the below 5 per cent growth rate in H2 FY2023 and H1 FY2024 indicates economic distress. In this scenario, the key question is whether the economy will actually be able to attain a 6.74 per cent growth during H2 FY2024, or not. The growth in H2 FY2024, as predicted by the BBS, is expected to be primarily driven by manufacturing, followed by wholesale and retail trade, repair of motor vehicles and motorcycles; public administration, health and education; and transportation, accommodation and food service, information and communication sectors. In fact, recovery, in terms of growth, is expected in all four sectors. However, the actual scenario might end up being quite different. For instance, from the Index of Industrial Production (IIP) data released by the BBS, it was observed that manufacturing production exhibits a generally upward trend during the H1 period of a fiscal year, and the reverse happens during H2. If this trend continues in FY2024, then the anticipated GDP growth in the manufacturing sector during H2 FY2024 might not materialise. The trends in import payments for capital machinery and intermediate products during the early months of H2 FY2024 also support this notion. Also, it is highly likely that budgetary targets were considered while estimating the GDP for public administration, health and education. Since these targets are usually not attained, the estimated GDP growth in this sector may be revised downward.
Furthermore, the consideration of GDP deflator is also a matter of concern. During H2 FY2024, only a 1.34 per cent growth of GDP deflator was considered. However, this is far from the reality, as CPI inflation has remained over 9 per cent throughout FY2024.
GDP AND EMPLOYMENT: The quarterly GDP estimates and labour force survey (LFS) data from BBS have extended an opportunity to look into the growth-employment nexus on a regular basis. From Figure:2, it can be observed that the employment elasticity of GDP (i.e., how employment varies with economic output growth) shows a downward trend. This implies that the economy’s ability to generate employment is slowing down. Another salient feature that can be inferred from Figure 2.2 is that the pattern of employment is reverting to its original state. This means that people are gradually shifting from primary (i.e., agriculture) to secondary (i.e., industry) and tertiary (i.e., services) sectors. As may be recalled, the reverse trend happened in the aftermath of the Covid-19 pandemic (often labelled as the reverse structural transformation).
While the aforementioned trend is encouraging, it needs to be kept in mind that a high degree of informality still prevails in Bangladesh’s secondary and tertiary sectors. As the LFS 2022 data shows, 90.5 per cent of the industrial employment and 67.8 per cent of the service sector employment fall under the informal category (BBS, 2023). As such, the concern about decent employment remains. Regrettably, the quarterly LFS reports, in their current format, do not provide any data on informality, wages and income. This needs to be changed in order to get a more accurate representation of the labour market.
Dr Fahmida Khatun, Executive Director, Centre for Policy Dialogue (CPD); Professor Mustafizur Rahman, Distinguished Fellow, CPD; Dr Khondaker Golam Moazzem, Research Director, CPD; Towfiqul Islam Khan, Senior Research Fellow, CPD; Muntaseer Kamal, Research Fellow, CPD; and Syed Yusuf Saadat, Research Fellow, CPD. fahmidak.cpd@gmail.com; moazzem@cpd.org.bd; towfiq@cpd.org.bd
[The paper is also contributed by Abu Saleh Md Shamim Alam Shibly, and Helen Mashiyat Preoty, and Foqoruddin Al Kabir, Senior Research Associates; Mashfiq Ahasan Hridoy, Research Associate; Jebunnesa, Faisal Quaiyyum, Anika Tasnim Arpita, Ibnat Hasan Sarara Jafrin, Sadab Rahman Chowdhury, and Ms Faiza Tanaz Ahsan, Programme Associates, CPD.]