Unrest to hurt GDP

The World Bank has revised Bangladesh's growth forecast for fiscal 2012-13 down to 5.8 percent -- way below the government's target of 7.2 percent, due mainly to the precarious political situation.
A further escalation of the political tension, however, can take the GDP growth below the forecasted 5.8 percent, Zahid Hussain, WB's lead economist, said yesterday at a press conference called for the release of the report, Bangladesh Development Update.
The reason being the severe blows the hartals deal to the service sector, which contributes to around 50 percent of the GDP.
“The losses to the manufacturing sector caused by shutdowns can be recouped to some extent, but those to the service sector, unfortunately, cannot,” Hussain said, while highlighting the damages to the transport sector, termed the lifeline of the economy.
The WB in the report credited the weak exports and investments resulting from the impact of the Eurozone crisis, domestic supply constraints and intensified strikes and unrests, for the lower growth forecast.
A further deterioration of the political situation and weakening of the financial condition of state-owned commercial banks (SoCBs) pose the greatest risk for growth prospect and public finances, it added.
“While increasing violence and political rivalry is not uncommon in Bangladesh as elections near, the recent protests, mainly by youth demanding capital punishment for persons under trial for war crimes, has added a new dimension to pre-election dynamics.”
“The resistance from the opposition has resulted in intermittent violence together with increased frequency of hartals. Hartals create an unfriendly and unstable environment for investment by disrupting production and trading activities and increasing the cost of doing business.”
Meanwhile, the solvency of the SoCBs worsened considerably during 2012, with weak internal controls, poor corporate governance and slackening of credit standards, to blame.
The SoCBs classified more than Tk 40 billion as non-performing loans (NPL), thereby raising their NPLs to 17.7 percent by September 30, 2012, up from 12.1 percent in March, 2012, according to the report.
The series of loan scams in 2012 has left SoCBs in severe liquidity crisis, so much that they frequently fail to maintain the cash reserve requirement of Bangladesh Bank (BB).
Most of the state-owned banks, according to BB, are now meeting their daily expenses by borrowing from the call money market and from the liquidity support facility of the BB in the form of the special repurchase agreement.
“As a result of this liquidity crunch, the SCBs have virtually stopped sanctioning new loans.”
Should either of the two identified big risks materialize, policy adjustments will be necessary, primarily through exchange rates and fiscal channels, said the WB.
“Stronger economic governance will be needed along with fiscal and financial controls to maintain public debt sustainability”.
The WB also said the recovery in the US and the Eurozone will be critical for the country's economic growth, due to these regions serving as predominant export destinations for Bangladeshi products.
The possible backlash from the recent compliance and labour safety issues at garment factories have also been detected as a risk factor by the WB.