A tumultuous year for the economy
History repeats itself, though not fully, but history is the best educator. As we approach 2018, we can take lessons from the economic successes and failures of 2017.
A record growth of 7.23 percent was the biggest achievement for the economy in FY2017. Although global agencies like the IMF, World Bank, and ADB may cast doubt on the figure, it can be ascertained that Bangladesh has entered the zone of seven-plus growth after escaping from an imaginary trap of six-percent growth.
Another success was maintaining moderate inflation at around 5.5 percent. The global low oil and commodity prices played a crucial role behind the moderate inflation. Domestic food production has been praiseworthy despite floods and rainfall.
Social benefits, however, were not commendable. Income inequality has definitely increased. The employment situation is no better than before. Okun's Law (named after economist Arthur Okun) claims that an increase in growth causes a decrease in the unemployment rate by around 50 percent of the change in growth. For example, if growth rises from five percent to seven percent, the unemployment rate is most likely to fall from, say, eight percent to seven percent. A two-percentage point change in growth will deliver its 50 percent result on unemployment inversely: a one-percentage point decrease in the unemployment rate.
The Okun mechanism did not work given the reluctance of the private sector to recruit. The employers have started giving excuses of the election a year before the actual event. This is a bad sign. The government should have focused more on development targets instead of paying excessive attention to the election arguments. This is disturbing for investors and entrepreneurs.
Bangladesh's unemployment rate at around 4.5 percent (apparently similar to that of the US) is defective and misleading. Either the ILO has to revise its unemployment definition or Bangladesh should come up with its own definition following the standards of global practices. The turmoil in the banking sector has also prevented a healthy pace of recruitment in 2017.
Investment rose marginally from 29 percent of GDP to slightly over 30 percent in 2017. However, the contribution mainly goes to the public sector that occupies almost seven percent of the 30 percent, making the private sector's contribution slightly over 23 percent.
Private credit has exceeded all expectations in 2017 by hitting a growth rate of almost 19 percent from 15 percent. But that credit growth did not improve the share of private investment in GDP. "Where did the money go?" is a question particularly rife before the election which encourages the stashing away of money, money laundering, or injecting money into the black economy. Part of this excessive credit growth might have fuelled the stock market, but that doesn't tell the full story. The stock price index rose by 25 percent in both Dhaka and Chittagong—a hyper growth in capital gain that requires caution for the economy so the ghost of 2010 does not reappear.
2017 was a year of wins for the syndicated business lobbies on all counts. They were successful in blocking the much-vaunted VAT law which should have been implemented at least five years ago. Though fiscal revenue showed a commendable 20-percent growth, the government still remained weak in building fiscal capacity through reforms such as VAT and direct income taxes. The tax to GDP ratio is still hovering at 10 percent—lowest among the comparable peers. Sanchayapatra made it possible for the government to not borrow from banks.
The loss from not implementing VAT was over-compensated by the ballooning inflow of Sanchayapatra income whose interest burden will be disastrous for future fiscal budgeting. 2017 saw government sale of Sanchayapatra amounting to no less than Tk 70,000 crore—an ever-growing figure which the government celebrated as a sign of the nation's healthier saving habit. It however is a sign of desperate borrowing by the government and is detrimental to the investment spree. The closing year thus gained more fat through savings without burning it through investment.
The remittance growth in 2017 was no less than negative 10 percent, although the unofficial channels have remained strong since the incentives through the formal channels were dull and inadequate. Export growth in 2017 posted about five percent growth, but import growth would be four times larger—hinting at money laundering through improper invoicing. The growth of imports, particularly those of capital machinery, remained surprisingly buoyant. The fall in remittances has added salt to injury of the current account balance that has turned into a negative figure of USD 3 billion from a positive figure of USD 4 billion in 2016.
The capital and financial accounts, being positive, cushioned against the collapse in the current account to ultimately make the overall balance of payment positive. But the amount has dropped taking a toll on the growth of foreign currency reserves that remained at about USD 33 billion—almost the same as one year ago. As a result, the value of taka fell, but that fall was not enough to stimulate exports and remittances so that the current account would come back to a manageable negative number—from one to two billion dollars given the size of the economy.
Multiple wrongdoings in the banking sector sadly surfaced in 2017. Major decisions such as grant of licenses to new banks and extended family-based directorship were imposed on the central bank which ended up looking helpless and confused. The central bank however took numerous actions against some irregularities never seen in 2016. Default loans rose steadily reflecting poor governance in the financial sector that will surely impinge on economic growth in 2018.
Biru Paksha Paul is associate professor of economics at SUNY Cortland.