Why not 8 percent growth in the new fiscal year?
The planning minister, during the signing ceremony of the Annual Performance Agreement (APA) for FY2018-19, expressed his hope that Bangladesh economy would be able to achieve 8 percent growth in 2019-20 and 10 percent growth by 2028-29. His expectation is in line with the ongoing 7th Five Year Plan as well as the long-term perspective plan for 2021-2041, which is currently being prepared by the Ministry of Planning. Indeed, the economy has been performing quite well over the last few years with consecutive 7-plus-percent growth of Gross Domestic Product (GDP) including that of the outgoing fiscal years. Macroeconomic indicators are responding impressively to political stability, tolerable inflation, with no major pressure in macroeconomic management, and a public sector-led investment regime. Despite the devastating floods and damage in food production, the economy grew at 7.65 percent as per provisional estimate. All these indicate that the economy is on a sustainable path.
The mega budget, if implemented properly, has all the potential to promote faster growth rate, which is targeted to be 7.8 percent for the new fiscal year. The aggregate government spending was merely 14.68 percent of GDP in 2017-18 due to significant underutilisation of the budget. Nevertheless, signing APA means the government agencies are binding themselves to “perform” and implement the budget, and not implementing its one-fifth on a regular basis should be considered an implicit offense as implied by the APA. A faster growth rate now would not be a mere dream given that 19.2 percent of GDP is spent domestically through public sector (if we exclude interest payment of the foreign loans) in which about 40 percent is investment having implications for considerable return in the medium to long run through physical infrastructure and connectivity. Therefore, it is a good opportunity for the economy to gain extra pace on top of its target.
The finance minister faced severe criticism for reducing corporate income tax rate by 2.5 percentage points after placing the budget for the new fiscal year. However, this benefit was aimed at increasing private investment and encouraging industrialisation through reducing the lending interest rate, which was not properly conceived by its critics. Recently, the banks were asked by the government to provide 6 percent interest rate on term deposit and charge the highest 9 percent interest rate on lending for businesses and industries. The business community would welcome this initiative as it was their long-standing demand and would significantly reduce the cost of doing business, although there are concerns about its likely adverse effects on the economy.
The first concern is related to a sharp decline in real interest rate. Currently, the general inflation rate is 5.8 percent. Therefore, the highest interest rate of the term deposit, which would be implemented from the very beginning of the new fiscal year, as per the directive of Bangladesh Bank, would be nearly equal to the current inflation. The interest rate on other types of deposit would be much less than that rate. If the inflation rate increases or even remains the same over the new fiscal year, real interest rate in the banking sector would be almost zero to negative. Since most of the households' formal savings are channelled through the banking sector, it would have a detrimental effect on the household welfare through reduced income streams from their savings. It would trigger consumption because of lower future preference and informal savings of the households, which would raise upward pressure on the aggregate demand side of the economy.
Another possible adverse effect of the reduced interest rate can be inferred. Both domestic and national savings ratios have been on the decline since 2016-17, and the investment ratio has been greater than the savings ratio. National savings ratio was 30.8 percent of GDP in 2015-16, which has gone down to 28.1 percent in 2017-18, while investment ratio has gone up from 29.7 to 31.5 percent by this time. This means that investment is financed through borrowing from foreign sources and the informal or unaccounted savings. The reduced interest rate would also have a negative effect on foreign borrowing, which would be beneficial for the economy. However, it would generally intensify liquidity crisis in the banks because people would find banks less beneficial even though many of them would still rely on the banks, considering the security of their money. The overall stress on the banks would, therefore, increase because of the presence of considerable default and classified loans.
There is another concern related to the performance of the capital market, which is unfortunately gloomy for quite some time. Since it is a de facto failure case of mobilising capital from the market, despite recent demutualisation, the private sector is unlikely to depend on this source for investment. Therefore, pressure on the banks for loan would continue to increase despite a possibly diminishing future savings ratio.
Despite these concerns, there are two important opportunities before the economy in the new fiscal year. One is that there is no possibility of major floods, which means there will be minor dislocation of public and private resources to replenish the higher depreciation of capital stock due to flood. Therefore, the resources would be available for their intended purposes which would generate positive returns to the economy. Food supply would not be disrupted, which would keep inflationary pressure within a reasonable limit and ease the macroeconomic management. Another opportunity is reduced cost of doing business through reduced interest rate despite the above adverse effects, as it would attract both domestic and foreign investment. Nevertheless, private investment may not increase sharply before the national election because of manifold uncertainties working in the psyche of the business community. The government investment should take a lead to provide a strong signal that Bangladesh is getting ready to become a magnificent place for investment. Thus, 8 percent growth of GDP should not be a mirage even before the year 2020.
Dr Mahfuz Kabir is Research Director at Bangladesh Institute of International and Strategic Studies (BIISS), Dhaka.