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Dhaka Tribune

Political turmoil eats up 1% of GDP

Update : 09 Apr 2014, 08:51 PM

The country’s economic growth story took a further hit as the World Bank yesterday forecast that the GDP for the current fiscal year would grow by 5.4%, the lowest among all the forecasts for the current financial year.

The development partner revised down by 0.3 percentage point from its projection of 5.7% in January. 

The Asian Development Bank last week cut the growth for Bangladesh by 0.2 percentage point and projected the growth rate of 5.6% as against 5.8% in its October forecast.

The World Bank in its South Asia Economic Focus said the economic activities recovered in the second half of FY14 in Bangladesh, driven by resilient exports and domestic demand, suffered in the first half due to political turmoil.

It said a recovery in export growth and an increase in public expenditure are likely to help achieve 5.4% GDP growth in FY14, lower than last year’s 6%.

The growth projection is also lower than the government’s revised target of 6.5%, Bangladesh Bank’s revised projection of around 6% and International Monetary Fund’s below 6% and Bloomberg’s 6.3%.

“Costs of political turmoil, stagnating private investment and declining remittances have forced the bank to lower its growth forecast further for Bangladesh,” said Zahid Hussain, lead economist of the bank, while presenting Bangladesh Development Update April 2014.

The World Bank report said political turmoil in the last quarter of 2013 inflicted a value added loss of about $1.4bn, around 1% of the country’s GDP as estimated for the current fiscal year.

Of the losses, about 86% was in services, 11% in industry and the remaining 3% in agriculture.

Hussain said growth in Bangladesh, which is currently below potential, may rise to potential capacity within a couple of years if stability prevails.

“Deep and pervasive political unrest throughout the country took a heavy toll on the domestic activity, causing large and partially irreversible output, employment and asset losses.”

He said with frequent non-stop general strikes and blockades to cut off Dhaka from the rest of Bangladesh, production and distribution chains suffered prolonged disruptions.

The report, however, said Bangladesh has a great potential to bounce back, but the key challenges for accelerating growth are maintaining stability and resolving the remaining political uncertainties while boosting investment in power and roads, managing well the transition in the readymade garment industry and stemming the decline in remittances.

The World Bank report also said the opposition parties enforced 85 days of nationwide general strikes and blockades since January 2013, of which 45 days were in July-January, FY14. Unlike in the past, this time the political agitations were not only limited to Dhaka and a few major cities.

“The disruptions lasted long enough to make it impossible for firms and workers to make up all the losses suffered. Although many businesses worked weekends and nights to make up the loss of working days, but there were just too many days lost to be fully made up.” 

Considering a huge damage to the economy due to political unrest, the World Bank estimated that the industrial sector’s growth is projected at 7.9% compared with last year’s 9%.

It said service sector that accounts for more than 54% of GDP suffered most due to the nationwide strikes and blockades with an enormous loss of income for a couple of months.

Against this backdrop, the sector which was expected to surpass last year’s performance by a significant margin is projected to grow at 5.3% in FY14, the report said.

Inflation

The World Bank report said average headline inflation may rise to 7.5% this year.

“Cost push from supply disruptions and demand pull from expected wage increases are likely to have driven up the non-food prices,” said Hussain.

External balance

About the external balances, the report said the external balances have remained comfortable due to strong and weak imports which more than offset the decline in the level of workers’ remittances.

“But Bangladesh’s external balance may erode from the current comfortable level, but stability is likely to continue,” said the lead economist.

Remittances are expected to remain weak while imports are likely to pick up, leading to narrowing the current account surplus, these could lead to slower accumulation of foreign reserves during the rest of FY14, he said.

Fiscal deficit

About fiscal deficit, the report said even if the government cuts the ADP by Tk140-160bn, there still would be a need for some cuts in current outlays to keep the deficit within the original budget target.

“Absent such adjustments, the deficit could rise to 5.1% and domestic financing to 3.8% of GDP compared with the budget target of 4.6% and 2.9% respectively.” 

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