Investment and the lesser-known ratio
WITH the political strife out of the way, the investment climate can finally provide the much needed sustenance for businesses to bloom. As the country has surpassed half of the fiscal year, speculations regarding the economic growth rate are rife in an array of institutions; most of the forecasts puts the growth rate to hover somewhere close to 6%, which of course is much lower than the target of 7.2%.
An argument had been made in the past, and has come up again after the announcement of the current monetary policy statement, that one of the main reasons for slower economic growth and low investment is the 'contractionary' monetary policy. However, this concept has been nullified after the incidents of fiscal 10 and 11 which proved that quantitative easing in the face of limited infrastructure and energy would lead to asset bubbles.
As we have seen, political instability, along with inadequate infrastructure and energy, will also pull investment downwards. The rate at which private sector takes loans had been 17.4% in November 2012 and tumbled to 11.1% in November 2013, depicting the toll political turmoil can take on investment.
But how much investment would be required to generate a growth rate of 7% or 8%? This is where the Incremental Capital-Output Ratio (ICOR) comes in. The lower the ICOR of a country, the higher is the productivity of capital, and vice-versa. For Bangladesh, the ICOR is around 4, which simply depicts that to increase growth rate by 1 percentage point, rise in investment rate by 4 percentage points is required. For a country which has an ICOR of 3 implies greater productivity as an additional percentage point of growth rate can be achieved by increasing the investment rate by only 3 percentage points.
The ICOR can also help to give us an insight on how much investment needs to be in order to achieve a desired growth rate. For instance, if Bangladesh wants to achieve a growth rate of 8%, with an ICOR of 4, the investment rate needs to be 32%. This, however, doesn't necessarily mean that it can happen in the short-term. A leap in investment needs to be absorbed properly by the country and cannot happen overnight. For proper absorption, investment level needs to be ramped up gradually in the next few years. This starts primarily by ensuring political stability and getting rid of energy and infrastructure bottlenecks.
The writer is the head of research at The Daily Star and can be reached at [email protected]
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