Originally posted in The Business Standard on 5 February 2021
The success of the Bangladesh economy rests on the contribution of the 3Rs – ‘Rice’, ‘RMG’ and ‘Remittance’
The recent UNDESA report, released on January 25, found that the GDP growth rate for Bangladesh fell to 0.5 percent in 2020 from 8.4 percent in 2019 when measured in terms of a calendar year. However, the growth rate has been estimated at 4.3 percent for the FY 2019-20 and 5.1 percent for FY 2020-21.
On the other hand, estimates from the World Bank and the IMF projected the growth rate for the FY 2019-20 to be 2 percent and 3.8 percent, respectively. Centre for Policy Dialogue (CPD) estimated the GDP growth rate for fiscal year 2020 to be at best 2.5 percent. However, all of these estimates also held Bangladesh as a better performing economy, compared to its South Asian counterparts.
Why do different estimates project a different GDP growth rate?
Generally, the GDP growth estimates prepared by the government (i.e., Bangladesh Bureau of Statistics based on data collected by its field surveyors) is the most robust. However, there always seems to be some degree of controversy regarding the reliability of these estimates, at least in the case of Bangladesh, due to alleged administrative intervention in the process.
For example, the finance minister in his budget speech for FY2021 projected the GDP growth in FY 2019-20 to be at 5.2 percent. The budget documents portrayed an estimated overall drop in investment to 12.5 percent of GDP in projecting this GDP growth. However, private investment-GDP ratio, as shown in Bangladesh Economic Review 2020 was astonishingly high, in comparison to the last year (23.6 percent vis-à-vis 23.5 percent in FY2019).
How did the two official sources portray opposite data regarding private investment while keeping the GDP growth rate at the same level? Astonishingly, the Covid-19 pandemic, which affected the second half of the fiscal year of 2020 (January-June, 2020) and severely during the last quarter (April-June, 2020) did not have any impact in growth in private investment (9.58 percent in FY20 vs. 9.62 percent in FY19). Such inconsistencies and discrepancies in public data have severely damaged the reliability of data of the national accounts and other important economic indicators.
Such inconsistencies in data collection and estimation, may encourage concerned parties to seek alternate sources (e.g., World Bank, IMF, ADB etc.) for a reliable estimation of growth rate. It is worth mentioning that these sources generally depend on historical data of public accounts in order to make projections on economic performance.
To accommodate a prompt analysis of the economy, they rely on projection models based on available data. The methodology adopted in these projections and subsequent estimations is widely regarded as broadly acceptable, among the international community. Based on this estimation, pertinent stakeholders like investors, development organisations, academia, think tanks etc. do their analysis on the national economy, draw their conclusions and adapt their strategies and plan accordingly.
These models generally incorporate crucial assumptions based on which the projections are estimated. These assumptions often vary from one organisation to another, resulting in marginally divergent projected GDP growth rate. These projections are, therefore, considered indicative, instead of an accurate assessment of the economy, as expected from the government.
However, there are times when there is considerable deviancy in the projections of different organisations like ADB, World Bank, etc. This may happen during times of uncertainty or shock, when it is difficult to manage assumptions during such periods, and organisations may adopt drastically differing assumptions in evaluating the state of an economy.
Irrespective of the differences, all of these organisations applauded Bangladesh for its exemplary performance during the Covid-19 pandemic, especially in comparison to fellow South Asian countries.
Why Bangladesh had a better recovery compared to other South Asian countries
Structurally, there are some fundamental characteristic differences between the economy of Bangladesh, India and Pakistan. These divergent, context-specific circumstances interact in different manners, especially during times of uncertainty and affect economies in different ways.
A moderate level of stability in macroeconomic condition during the time of crisis is a major supporting factor to quickly address the challenges. In the context of Covid-like crisis, the economy is structurally more balanced compared to other South Asian economies where distribution of employment is still biased to agriculture.
For instance, Bangladesh’s economy is dependent on the agriculture, manufacturing and services sector differently, on different accounts. More specifically, the success of Bangladesh economy is regarded as the contribution of ‘3Rs’ which include ‘Rice’, ‘RMG’ and ‘Remittance’. In terms of employment, the agricultural sector plays a vital role in the economy. On the other hand, the economy of India and Pakistan are heavily dependent on the agricultural and the service sector.
However, industries (even the service sector) in Bangladesh are labour intensive, whereas in India, they are more capital intensive and skill-oriented. Thus the scope of employment in India’s formal service sector is relatively less. Since the service sector (formal or informal) took a massive hit during the pandemic, it has resulted in economic stagnancy and increasing unemployment.
Furthermore, economists were talking about the “jobless growth” in India even before the pandemic hit. That is, the rapid growth in India was not being accompanied by a proportionate growth in employment opportunities. The situation only got worse when the lockdown was introduced during the pandemic.
In comparison, manufacturing, as well as the agricultural sector in Bangladesh, absorbed the pandemic-induced shock quite well. Apart from a few floods, the agricultural sector performed well, which cushioned any major job losses in large industries.
Furthermore, a sizable fraction of the service sector is informal and does not fall under any institutional infrastructure. When the government took the risk of loosening the lockdown measures, people gradually went back to work and the wheels of the economy began rolling. Fortunately, Covid-19 did not hit Bangladesh as hard as its South Asian counterparts. Consequently, the initiation of the recovery phase for Bangladesh has been comparatively smoother, although complete recovery will require at least another 12 months.
In the case of Pakistan, the pre-existing huge debt burden has worsened during the time of crisis and hit hard the country’s macroeconomic management. Although the country’s agriculture remained resilient, the manufacturing industry could not accommodate the employment challenges. The export-oriented industries in Pakistan are not as labour intensive as that of Bangladesh. Overall macroeconomic instability has become costly for Pakistan during the recovery period.
In general, macroeconomic stability is another important aspect of the recovery phase. Bangladesh had huge foreign reserves as well as stable remittance inflow which provided some form of cushion for the economy. Consequently, development partners could keep their faith in the economy and extended necessary credit support, something Pakistan could not achieve.
Evaluating the recovery phase for Bangladesh and what more should be done
The UNDESA report suggested that while government stimulus packages may function as a bailout in the short term, it has limited level of impact on the long-term. It has also been said that trade-dependent nations like Bangladesh should prioritise trade in their recovery. To achieve that, trading partners in Europe and the US must resume international trade and economic activities.
Unfortunately, the recovery process in these countries have been quite stagnant and it may take considerably longer than expected to return to normalcy- something concerning the export-oriented industries in Bangladesh.
Other emerging economies like India, China, and South Korea are also the destination of billions of dollar worth Bangladeshi exports. These economies are also experiencing similar stagnancy. Under such circumstances, the pace of recovery for Bangladesh will be considerably slower and may require longer time than anticipated.
It is to be noted that about 3 lakh expatriates have returned home because of Covid-19. An additional 6 lakh to 7 lakh migrants are expected to emigrate to the Middle East and other host countries. The GOB must ensure a smooth migration process for these migrants. Despite all of these efforts, the economic conditions in the Middle Eastern countries as well as other popular destinations for migrants- as determined by oil prices and other relevant indicators- will play a vital role in determining the smoothness of migration for Bangladeshi migrants.
Government intervention may also be crucial for the recovery period. Most of the initial stimulus packages were aimed at short-term recovery to curb the immediate crisis. When it comes to long-term recovery, stimulus packages should be addressed at smallholder farmers as well as small business holders instead of major industries, especially those that did not receive these earlier. In this context, recently announced stimulus packages targeting SMEs and micro-enterprises are pertinent and using non-bank sources (e.g. MFIs) for providing this subsidised credit is an appropriate measure.
On top of that, the government should partake in employment generation activities like increasing the budget on development projects that could create employment opportunities for thousands of people. The national budget for FY 2020-21 included such projects that would constitute jobs worth 1.12 crore of working hours.
The GOB recently introduced two such projects with a combined budget of Tk8300 crore. Instead of relying on the private sector, the government should invest on projects like “Amar Gram, Amar Shohor” that focuses on infrastructural development in rural and sub-national areas and employs migrants that either returned from urban areas or abroad as well as unemployed youth.
Finally, such projects should not be confined to a particular region or type of region (e.g., rural, urban, city corporation etc.) but should rather be introduced throughout the country. Different ministries should develop project proposals for such employment generation activities which could be approved in the next national budget (FY2022).
Dr Khondaker Golam Moazzem is a Research Director, Centre for Policy Dialogue (CPD)