WB casts doubt on govt’s economic growth estimate

The World Bank said it is difficult to reconcile the government’s 7.05 percent economic growth estimate for the current fiscal year with the growth-related indicators, in which Bangladesh is mostly lagging.

Ten of the 12 indicators related to growth declined between July 2015 and February 2016 from a year earlier, said the Washington-based multilateral lender in the latest edition of its Bangladesh Development Update, which was released yesterday.

“With the sole exception of exports, every other indicator grew significantly less in fiscal 2015-16 than in the corresponding period of fiscal 2014-15.”

Last fiscal year, economic growth accelerated 6.55 percent. Other than exports, private sector credit growth crept up in fiscal 2015-16 compared to fiscal 2014-15.

The report, however, did not say how much Bangladesh’s economy will grow in the current fiscal year, but the lender had earlier projected that the economy will grow by 6.3 percent.

While it acknowledged that the large wage increase in the public sector will have both direct and indirect impacts on growth, the pay rise was not fully rolled out until the end of January due to administrative delays.

“It would take an implausible degree of financial sophistication on the part of both consumers and lenders for the future expected wage increase to translate fully into actual consumption.”

Zahid Hussain, a lead economist of the WB and author of the report, said the multilateral lender normally makes projections before the announcement of official estimates.

“An intelligent person can readily take a hint,” he said, when pressed on a GDP growth estimate for the current fiscal year.  

However, WB Country Director Qimiao Fan said: “Six-plus percent growth is a significant achievement.”

Bangladesh is among the top 12 developing countries in the world that achieved 6 plus percent growth in 2016, he said.

“By any standards, the Bangladesh economy has done well,” he said, adding that the country should not be fixated on numbers. Rather, the focus should be on how the country can have quality and sustainable growth.

Fan also said the economy has demonstrated resilience to internal and external headwinds time and again. The country will not be able to sustain the current growth momentum if productivity does not go up, the WB report said.

The other challenges to the economy include a decline in agricultural growth, appreciation in real effective exchange rates, and the slow pace and quality of development spending.

For the upcoming fiscal year, the WB forecasts GDP growth of 6.8 percent. 

Progress in export product and market diversification remains slow, said the WB, adding that there is also excessive dependence on the Gulf Cooperation of Council for remittance inflows.

Revenue collection target in fiscal 2015-16 may fall short, causing the budget deficit to rise. But public expenditure will be lower than that planned in the budget. However, the deficit is likely to remain within sustainable limits.

The WB said while the government has already approved a few important legal amendments pertaining to special economic zones such as export processing zone labour rights and bus rapid transit, implementation needs to be reinforced.

Income growth prospects in Bangladesh's main export markets are uneven, but sustained low oil prices bode well for external and internal balance.

It said financial and political shocks can cloud the outlook.

There are a few factors continue to hinder growth. They include infrastructure bottlenecks, power and primary energy shortage, credit shocks in the banking system, difficulties of doing business and lack of reform continuity.

The report said Bangladesh needs strong structural reforms and effective public investment efforts to be on a higher and faster growth path.

“Further, weakness in the financial sector also disrupts investment and growth.”

Poor lending decisions are a major concern in the state banks and some private banks, said the WB.

The weak bank balance sheets and governance in the state-owned banks limit lending capacity, divert credit away from productive investment and impose large fiscal recapitalisation costs.

The high levels of non-performing loans and the high rates on national savings certificates increase banks' operating and funding costs, keeping interest rates high despite large excess liquidity.

The report said for energy sector, energy price reform is needed to attract investments in primary energy.

Reforms in government regulations pertaining to mediating civil and commercial cases, companies act, customs act and property registration are needed to strengthen competitiveness and the ease of doing business.

A careful selection of industrial zones will increase private sector efficiency.

“We have to increase the returns to investment to attract private investors,” said Hussain.

The report said a protracted slowdown in the European Union, Bangladesh's main export destination, could hurt exports.

The implementation of the Trans-Pacific Partnership, of which Bangladesh is not a member, could also erode the competitiveness of exports to TPP member countries.

The impact though is likely to be moderated by Bangladesh's significant cost and scale advantages, said the WB.

Fan also said with right kind of policies and investment, there is no reason why Bangladesh would not be able to become a middle-income country.

He said Bangladesh will have to increase investment in infrastructure, particularly in the transport sector, to continue the private sector-led growth and help the private sector to create more and better jobs.