The IMF’s new economic forecasts for Bangladesh

Having  recently forecast growth at 9.5% for 2021, the IMF cuts this to 5.7% because of the “significant impact” of the pandemic. It is vital not to be swayed by the self-fulfilling idea that this makes a strong quick recovery impossible. 
The government has done well to acquire IMF financing of $732 million which will be used to support the budget (Bangladesh Country Report 20/187; IMF; June 2020).  But why did the IMF change its mind about a V-shaped recovery?And how to understand the World Bank’sSouth Asia Report’s low-growth forecast of about 2% per annumfor the economy,extending to 2022–which stillcontrasts with the new IMF forecasts of 3.8%, 5.7% and 8.0% for the years 2020 – 2022?(The WB has further reduced its forecasts after this column was submitted).The Bank of England’s recent Monetary Policy Committee Report helps to clarify the broader issues.

The BoE has forecast a staggering contraction of -14% in the UK economy in 2020, followed by a mighty V-shaped recovery in which GDP grows at 15% in 2021. The key issue, which applies to all countries including Bangladesh, is how quickly the economy reverts back to its trend growth path.  For the UK, since the economy is expected to contract initially, there is the additional question of when GDP gets back to its previous level.

The BoE’s illustrative scenario envisages a strong recovery that leads to the level of GDP reverting to its previous level in 2021, and a return to its pre-crisis growth path  around 2023. For Bangladesh,while the IMF and WB still expect it to grow in 2020, although at sharply diminished rates, they do not address the  key issue of when – and if – they expect it to return to its trend growth path.

The BoE emphasizes, as do the MDBs,that lockdown and containment measures introduced across the world in response to Covid-19 has had a sharp impact on both demand and supply, withconsumer spending and expenditures by firms both contracting.  However, BoE assumes that this will be temporary,although the duration may be extended if the initial contraction is amplified by other factors,  such as prolonged uncertainty, and byfurther disruptions to international trade or impairment of the financial sector. 

In this,BoE draws on its review of the economics literature: “Many of the papers which estimate the impact of hypothetical pandemics predict that they are largely temporary, with GDP growth recovering sharply in the quarters following the outbreak and returning close to its pre-pandemic level by the end of two years.”

The vital question for the medium term economic outlook is whether there is “scarring” from a longer term fall in confidence that leads to lower investment  - hence to lower productivity and economic growth -   as well as lower private consumption expenditures, and  difficulties in getting the unemployed back to work. BoEexpects that stimulus measures underway will mitigate the potential for “scarring”, and the UK economy should be able to get back to a strong recovery relatively quickly.  
The view that a rapid recovery is likely in principle is reiterated by Oxford University’s Simon Wren-Lewis, an early modeler of the economic impacts of pandemics, writing recently on “V-shaped recoveries”.

Conversely, the strongest evidence of “scarring” or “persistence” in adverse economic impacts is following a recession after a financial crisis.  It is not clear that the current crisis will have the same impact.   Clearly, however, the economies hit by the Asian Financial Crisis in 1997, and the Atlantic-economies at the epicenter of the Global Financial Crisis in 2008, suffered a permanent fall in their growth rates of output and productivity as a result of a permanent decline in the investment to GDP ratio.
Thus, Malaysia’spre-AFC investment to GDP ratio of 40% fell to about 20% after the crisis, and it suffered a long-lasting fall in its  productivity growth and its economic growth rate. The same qualitative effects have been noted by recent OECD reports for Europe after the GFC.

The World Bank’s low-growth forecasts for Bangladesh seem to point to this possibility, in terms of the  impact of the pandemic  with potentially  persistent medium and long term consequences.  That would imply that Bangladesh will experience the adverse long term consequences that typically occur following a full scale financial sector crisis, without having first gone through the economic contraction that typically follows such crises.

Impossible?  No -  butunlikely unless global lockdowns are extended, and if stimulus measures are inadequate.But the stakes are high – and despite the IMF’s  more favorable forecast,  strong pre-emptive measures are needed in our self-interest to ensure that the economy rapidly reverts to its trend growth.

Avisual picture of what is at stake is presented  onBangladesh’s country page on the IMF’s website,  in the graph there which features two variables: real GDP growth and the inflation rate from 1985 to the present.

Strikingly, the graph shows that Bangladesh has had uninterrupted positive growth since 1985, with the lowest rate being 2.4% achieved in 1988.  An even more striking aspect of the graph is its depiction of Bangladesh’s economic performance during 2010 - 2019. Thus, while the growth rate rises to 6.8% in 2006 this was not sustainable and it then declined in successive years to a low of 3% in 2009.

However, from about 2010 onwards growth not only rises, but the Bangladesh economy  shiftsvisibly to a higher growth pathof above 7% per annum that has been sustained going into 2019, when the IMF estimates a growth rate of 7.9%.

It has been a long and arduous path to achieve sustained high economic growth.  Strong private consumption has been a keyfactor,supported by robust exports, high gross fixed investment along with sizeablegovernment consumption.

Against this, theIMF’s revisedforecasts stress the fall in garments exports which are reliant on the USA, Spain and Italy, which the IMF expects to have amongst the worst economic contractions amongst Advanced Economies in 2020.  The unprecedented drop in oil prices and the contraction in Gulf economies forecast in 2020 suggests a significantdecline in remittances, and therefore an additional shock to Bangladesh’s economy.

Remittances during the first four months of 2020 came in at $5.4 billion, compared to $5.8 billion in the same period in 2019(Bangladesh Bank data). Followinginflows of $1 billion in April,a significant decline, May inflows rose strongly to $1.5 billion, and while thiswas 14% down from May 2019 – it boosted remittances to an all time high for a fiscal year. 
The bottom line is thatBangladesh’s overseas workers can be counted on to do whatever they can to support their families at home. They are heroes, and no one should underestimate them.

More broadly,the IMF has downgraded its 2021 growth forecasts despiteits more positive outlook for key economies on which Bangladesh relies. Thus  in its recent World Economic Outlook IMF expects that the US and Europe will achieve about 4.7%growth in 2021 (and China will grow at 9.2%). This would have reasonably suggesteda strong resurgence in garments exports, including to Italy and Spain which are projected to grow at about 4.8% and 4.3%, respectively.

For this to happen Bangladeshmust, of course, overcome thebroad vulnerability to supply chain disruptions that it shares with other countries.  This is uncharted territory and where risks are concentrated.  Thus, at the international level there is evidence that once a supplier is affected and ceases production,even  after it resumesoperations there is a lengthy delay before previous contractual relations are reestablished.

This is a key risk domestically for all supply relationships, and even more so for our international garments industry which should seek every avenue now to safely reduce the duration of their work disruption.  Government support for investment in implementing physical distancing in the garments sector, and in remote work in other sectors such as finance, can be an important input.

The IMF has stressed the loss of USD 3 billion of contracts in garments, the sharp decline in exports, and an expected 7% contraction in remittances in 2021 as key factors for the pressure on the Bangladesh economy.  Against this, a notable aspect of our garments sector  - indeed, its defining characteristic - is its resilience.   The point is not that the IMF is wrong in stressing the factors that it expects to  “severely” damage the economy.  Rather, it is to emphasize that it is vital not to be swayed by the idea that this makes a strong, quick recovery impossible. As ProfessorSimon Wren-Lewis observed recently – “The problem with the belief that the economic recovery will be neither quick or complete is that it can be self-fulfilling.”

Equally, it is important not to be distracted by the World Bank’s message – that the 500 experts in its South Asia Economic Network believe the outlook has turned “very grim”.  While this is echoed in a flurry of speculative articles across Asia on impending catastrophe for Bangladesh – this only confirms that for some, Bangladesh’s prospects will always appear grim. 
The relevant issue is that we face a massive crisis that is global in which recovery dependsnot on our stars, or even on national “pre-existing conditions”, but on the policies we adopt - both to contain the pandemic and to provide the stimulus and support measures in the scale and scope needed to get a complete recovery.

The scale of the policy response  in advanced economies is noteworthy, as is the mix of financing.  Two examples: Germany, where the fiscal effort is about 34% of its pre-crisis GDP of which only 4% is on-budget, i.e. backed by future primary surpluses; and the UK, where 4% of the 20% of GDP effort is on-budget while the rest is in terms of contingent-liabilities.  (Data from UK’s Resolution Foundation; excludes central bank measures).

In comparison, the Bangladesh government’s commendable mix of liquidity and other stimulus measures have placed limited pressure on its fiscal outlays.  Despite the whole package amounting to Taka1 trillion – or 3.6% of GDP – much of this, as the IMF notes, is in the form of bank loans using bank’s own capital resulting in much smaller fiscal costs of Taka 275 billion. 
Of this, transfer payments to the vulnerable amount to about Taka 30billion. The World Economic Forum has suggested an additional 4% of GDP-effort for an unconditional cash transfer program to sustain consumption amongst the needy. While that may be too large a figure,it addresses a vital issue: shoring up private consumption is critical to making the lockdown tolerable, to ensuring equity, and to reignitinghigh growth.

There will be concerns about “leakages” from stimulus measures and pressure on the fiscal deficit. Yet a gigantic effort is underway across the world to counter the pandemic-induced global economic contraction and safeguard lives and livelihoods. Bangladesh cannot do less. Indeed, in these extraordinary times an excessive caution is counter-productive.   Rather, prudence dictates the need for a clear sighted boldness,  and  a willingness, to do “whatever it takes” to protect lives and ensure rapid economic recovery.

Finally,among the government’s most notable achievements during the last decade isits stewardship of the highest, sustained period of growth in the nation’s history. In addition, it has acted prudentlyto contain debt and to build up foreign exchange reserves, thereby acquiring buffers that will allow it to scale up its stimulus measures as needed without imperiling debt sustainability. True,itstill faces constraints over the medium term in the form of revenue capabilities and vulnerabilities in the banking sector.  But successfully harvesting the boro crop recently has provided additional breathing space for national policy and strengthened domestic confidence.

Having acquired additional external financing, the government can take further satisfaction in having narrowed its financing gaps. It now has a choice – to work within the IMF’s new – but still reasonable forecasts – or to go all out to accelerate recovery and ensure that the economy returns to its trend growth ASAP. 

The author is a former Secretary General of the IFSB. Prior to that, at the ADB he supervised macroeconomic stabilization, governance, and financial sector reform programs in Southeast Asia.

The IMFs new economic forecasts for Bangladesh

Having recently forecast growth at 9.5% for 2021, the IMF cuts this to 5.7% because of the significant impact of the pandemic. It is vital not to be swayed by the self-fulfilling idea that this makes a strong quick recovery impossible. The government has done well to acquire IMF financing of $732 million which will be used to support the budget (Bangladesh Country Report 20/187; IMF; June 2020). But why did the IMF change its mind about a V-shaped recovery?And how to understand the World BanksSouth Asia Reports low-growth forecast of about 2% per annumfor the economy,extending to 2022which stillcontrasts with the new IMF forecasts of 3.8%, 5.7% and 8.0% for the years 2020 2022?(The WB has further reduced its forecasts after this column was submitted).The Bank of Englands recent Monetary Policy Committee Report helps to clarify the broader issues. The BoE has forecast a staggering contraction of -14% in the UK economy in 2020, followed by a mighty V-shaped recovery in which GDP grows at 15% in 2021. The key issue, which applies to all countries including Bangladesh, is how quickly the economy reverts back to its trend growth path. For the UK, since the economy is expected to contract initially, there is the additional question of when GDP gets back to its previous level. The BoEs illustrative scenario envisages a strong recovery that leads to the level of GDP reverting to its previous level in 2021, and a return to its pre-crisis growth path around 2023. For Bangladesh,while the IMF and WB still expect it to grow in 2020, although at sharply diminished rates, they do not address the key issue of when and if they expect it to return to its trend growth path. The BoE emphasizes, as do the MDBs,that lockdown and containment measures introduced across the world in response to Covid-19 has had a sharp impact on both demand and supply, withconsumer spending and expenditures by firms both contracting. However, BoE assumes that this will be temporary,although the duration may be extended if the initial contraction is amplified by other factors, such as prolonged uncertainty, and byfurther disruptions to international trade or impairment of the financial sector. In this,BoE draws on its review of the economics literature: Many of the papers which estimate the impact of hypothetical pandemics predict that they are largely temporary, with GDP growth recovering sharply in the quarters following the outbreak and returning close to its pre-pandemic level by the end of two years. The vital question for the medium term economic outlook is whether there is scarring from a longer term fall in confidence that leads to lower investment - hence to lower productivity and economic growth - as well as lower private consumption expenditures, and difficulties in getting the unemployed back to work. BoEexpects that stimulus measures underway will mitigate the potential for scarring, and the UK economy should be able to get back to a strong recovery relatively quickly. The view that a rapid recovery is likely in principle is reiterated by Oxford Universitys Simon Wren-Lewis, an early modeler of the economic impacts of pandemics, writing recently on V-shaped recoveries. Conversely, the strongest evidence of scarring or persistence in adverse economic impacts is following a recession after a financial crisis. It is not clear that the current crisis will have the same impact. Clearly, however, the economies hit by the Asian Financial Crisis in 1997, and the Atlantic-economies at the epicenter of the Global Financial Crisis in 2008, suffered a permanent fall in their growth rates of output and productivity as a result of a permanent decline in the investment to GDP ratio. Thus, Malaysiaspre-AFC investment to GDP ratio of 40% fell to about 20% after the crisis, and it suffered a long-lasting fall in its productivity growth and its economic growth rate. The same qualitative effects have been noted by recent OECD reports for Europe after the GFC. The World Banks low-growth forecasts for Bangladesh seem to point to this possibility, in terms of the impact of the pandemic with potentially persistent medium and long term consequences. That would imply that Bangladesh will experience the adverse long term consequences that typically occur following a full scale financial sector crisis, without having first gone through the economic contraction that typically follows such crises. Impossible? No - butunlikely unless global lockdowns are extended, and if stimulus measures are inadequate.But the stakes are high and despite the IMFs more favorable forecast, strong pre-emptive measures are needed in our self-interest to ensure that the economy rapidly reverts to its trend growth. Avisual picture of what is at stake is presented onBangladeshs country page on the IMFs website, in the graph there which features two variables: real GDP growth and the inflation rate from 1985 to the present. Strikingly, the graph shows that Bangladesh has had uninterrupted positive growth since 1985, with the lowest rate being 2.4% achieved in 1988. An even more striking aspect of the graph is its depiction of Bangladeshs economic performance during 2010 - 2019. Thus, while the growth rate rises to 6.8% in 2006 this was not sustainable and it then declined in successive years to a low of 3% in 2009. However, from about 2010 onwards growth not only rises, but the Bangladesh economy shiftsvisibly to a higher growth pathof above 7% per annum that has been sustained going into 2019, when the IMF estimates a growth rate of 7.9%. It has been a long and arduous path to achieve sustained high economic growth. Strong private consumption has been a keyfactor,supported by robust exports, high gross fixed investment along with sizeablegovernment consumption. Against this, theIMFs revisedforecasts stress the fall in garments exports which are reliant on the USA, Spain and Italy, which the IMF expects to have amongst the worst economic contractions amongst Advanced Economies in 2020. The unprecedented drop in oil prices and the contraction in Gulf economies forecast in 2020 suggests a significantdecline in remittances, and therefore an additional shock to Bangladeshs economy. Remittances during the first four months of 2020 came in at $5.4 billion, compared to $5.8 billion in the same period in 2019(Bangladesh Bank data). Followinginflows of $1 billion in April,a significant decline, May inflows rose strongly to $1.5 billion, and while thiswas 14% down from May 2019 it boosted remittances to an all time high for a fiscal year. The bottom line is thatBangladeshs overseas workers can be counted on to do whatever they can to support their families at home. They are heroes, and no one should underestimate them. More broadly,the IMF has downgraded its 2021 growth forecasts despiteits more positive outlook for key economies on which Bangladesh relies. Thus in its recent World Economic Outlook IMF expects that the US and Europe will achieve about 4.7%growth in 2021 (and China will grow at 9.2%). This would have reasonably suggesteda strong resurgence in garments exports, including to Italy and Spain which are projected to grow at about 4.8% and 4.3%, respectively. For this to happen Bangladeshmust, of course, overcome thebroad vulnerability to supply chain disruptions that it shares with other countries. This is uncharted territory and where risks are concentrated. Thus, at the international level there is evidence that once a supplier is affected and ceases production,even after it resumesoperations there is a lengthy delay before previous contractual relations are reestablished. This is a key risk domestically for all supply relationships, and even more so for our international garments industry which should seek every avenue now to safely reduce the duration of their work disruption. Government support for investment in implementing physical distancing in the garments sector, and in remote work in other sectors such as finance, can be an important input. The IMF has stressed the loss of USD 3 billion of contracts in garments, the sharp decline in exports, and an expected 7% contraction in remittances in 2021 as key factors for the pressure on the Bangladesh economy. Against this, a notable aspect of our garments sector - indeed, its defining characteristic - is its resilience. The point is not that the IMF is wrong in stressing the factors that it expects to severely damage the economy. Rather, it is to emphasize that it is vital not to be swayed by the idea that this makes a strong, quick recovery impossible. As ProfessorSimon Wren-Lewis observed recently The problem with the belief that the economic recovery will be neither quick or complete is that it can be self-fulfilling. Equally, it is important not to be distracted by the World Banks message that the 500 experts in its South Asia Economic Network believe the outlook has turned very grim. While this is echoed in a flurry of speculative articles across Asia on impending catastrophe for Bangladesh this only confirms that for some, Bangladeshs prospects will always appear grim. The relevant issue is that we face a massive crisis that is global in which recovery dependsnot on our stars, or even on national pre-existing conditions, but on the policies we adopt - both to contain the pandemic and to provide the stimulus and support measures in the scale and scope needed to get a complete recovery. The scale of the policy response in advanced economies is noteworthy, as is the mix of financing. Two examples: Germany, where the fiscal effort is about 34% of its pre-crisis GDP of which only 4% is on-budget, i.e. backed by future primary surpluses; and the UK, where 4% of the 20% of GDP effort is on-budget while the rest is in terms of contingent-liabilities. (Data from UKs Resolution Foundation; excludes central bank measures). In comparison, the Bangladesh governments commendable mix of liquidity and other stimulus measures have placed limited pressure on its fiscal outlays. Despite the whole package amounting to Taka1 trillion or 3.6% of GDP much of this, as the IMF notes, is in the form of bank loans using banks own capital resulting in much smaller fiscal costs of Taka 275 billion. Of this, transfer payments to the vulnerable amount to about Taka 30billion. The World Economic Forum has suggested an additional 4% of GDP-effort for an unconditional cash transfer program to sustain consumption amongst the needy. While that may be too large a figure,it addresses a vital issue: shoring up private consumption is critical to making the lockdown tolerable, to ensuring equity, and to reignitinghigh growth. There will be concerns about leakages from stimulus measures and pressure on the fiscal deficit. Yet a gigantic effort is underway across the world to counter the pandemic-induced global economic contraction and safeguard lives and livelihoods. Bangladesh cannot do less. Indeed, in these extraordinary times an excessive caution is counter-productive. Rather, prudence dictates the need for a clear sighted boldness, and a willingness, to do whatever it takes to protect lives and ensure rapid economic recovery. Finally,among the governments most notable achievements during the last decade isits stewardship of the highest, sustained period of growth in the nations history. In addition, it has acted prudentlyto contain debt and to build up foreign exchange reserves, thereby acquiring buffers that will allow it to scale up its stimulus measures as needed without imperiling debt sustainability. True,itstill faces constraints over the medium term in the form of revenue capabilities and vulnerabilities in the banking sector. But successfully harvesting the boro crop recently has provided additional breathing space for national policy and strengthened domestic confidence. Having acquired additional external financing, the government can take further satisfaction in having narrowed its financing gaps. It now has a choice to work within the IMFs new but still reasonable forecasts or to go all out to accelerate recovery and ensure that the economy returns to its trend growth ASAP. The author is a former Secretary General of the IFSB. Prior to that, at the ADB he supervised macroeconomic stabilization, governance, and financial sector reform programs in Southeast Asia.