Bangladesh’s growth story took a further hit yesterday as the World Bank expected the economy to grow at 5.6% this fiscal year, down from 6.2% projected after the first quarter.
Political turbulence caused substantial financial losses in three months (January-March) valued US$2.2bn, which is 1% of GDP (gross domestic product), and dampened the economic growth projection, it said.
The bank’s latest growth forecast is much lower than the government’s downward revision of 6.8% from 7.2% and Asian Development Bank’s 6.1% from 6.4% due to the continued political impasse that began early January.
In response to the WB’s projection, Finance Minister AMA Muhith has categorically rejected the bank’s estimate saying, “I do not care about the multilateral agencies’ growth projection, but I think our growth estimate would be right.”
He said the growth rate projected by the Asian Development Bank is a little bit similar to the country’s current fiscal projection.
The minister gave his reaction to a query of reporters after a meeting with the US Ambassador, Marcia Stephens Bloom Bernicat, at his secretariat office.
“Political instability holds back the economic growth of Bangladesh,” said Zahid Hussain, WB’s lead economist at Dhaka office while briefing on Bangladesh Development Update at its office yesterday. Without political turmoil, the growth could have been 6.6% in the current fiscal year, he said.
Economic losses in January, February and March are likely to be more severe because of timing, duration, and the depth of uncertainty surrounding how the turmoil will be resolved, the report said.
It said the unrest this time came soon after the beginning of dry winter season, when the largest and highly input-intensive rice crop (boro) was being planted, tourism was supposed to peak, inter-district transport was usually in full swing, and construction activates reached their peak.
“The unrest occurred during the part of the year when the country’s within-year business cycle, hitting the production hard,” said Husain.
Based on the assumptions about the benchmark growth rate, number of days effectively lost due to strikes, blockades and violence, duration of turmoil and the proportion of losses, the economy appears to have incurred a value added loss of about $2.2bn.
About the growth forecast gap between the WB and the government, the lead economist said: “The official growth estimate is unlikely to capture the production losses in construction, wholesale and retail trades, transport, storage and communication, and public administration, education, health, community and social services due to the political turmoil.”
He said the proxies and methods used by the Bangladesh Bureau of Statistics to estimate production and expenditures work well in a normal year, but fail to capture the impact of disruptions in an abnormal year. “So the forecast gap is not surprising.”
Bangladesh experienced a similar political turmoil in the last half of 2013. Yet, the preliminary estimate of GDP growth for fiscal year 2014 was higher than the final estimate of growth for fiscal year 2013.
Private consumption and private investments account for nearly 93% of GDP, but despite declining these two components, the growth was higher. “This raised a lot of eyebrows,” said Hussain.
On inflation, the WB report said the 12-month monthly moving average inflation decelerated to 6.8% in February 2015, compared with 7.6% in the same month a year ago. “The annual moving average inflation rate appears on track to reach the monetary policy target of 6.5% by the end of June.”
About interest rate, the report said when one out of every ten taka in loans go bad, it is not possible to have single digit interest rate without hurting the solvency of the banking industry, it said. “Expansionary monetary policy is also needed for reducing interest rate.”
For accelerated, inclusive, and sustainable growth, the multi-lateral development partner said the biggest challenge is to ensure durable political stability.
Other challenges include preserving fiscal space, ensuring exchange rate flexibility, improving financial sector accountability, boosting private investments, improving connectivity and easing barriers to women’s participation in organised sector for economic growth.
About the impact of falling oil price in the global market, the WB said since the government is not showing any intention to adjust retail prices downward in the near term in order to recover some portion of Bangladesh Petroleum Corporation’s cumulative losses, there would be no visible impact on inflation and growth and the entire benefit will accrue to the government through reduction in subsidy.
“Lower oil price brings opportunity for Bangladesh to adjust energy import policy to pass the benefit to the consumers,” said Johannes Zutt, WB bank country director for Bangladesh.
The WB noted that Buoyant imports and weak exports pushed the external current account into deficit but foreign exchange reserves are still rising. “Undershooting of development expenditures and reduced subsidies due to lower oil prices have kept the fiscal defect in check despite a significant revenue shortfall.”
