Puzzles of macro-economic behaviour and policy in Bangladesh

The announcement of the budget for 2015/16 is an appropriate time to review how the economy is behaving.  This article sets forth three ideas:  The economy is growing more slowly than the provisional official estimates indicate; other evidence is simply inconsistent with such a rapid increase of the economy.  Second, monetary, fiscal and exchange rate policies have all been restrictive in the past year contributing directly to the slowing of the economy.  Third, the economy is poised for rapid growth but the policies being followed are not supporting the opportunities available.  In particular the Budget suggests a turn away from export led growth.  This article deals with the financial year now finishing.  A second article deals with the Budget economic forecasts and the policy implications of the macro-economic programme.
The recent provisional estimate of the Bangladesh Bureau of  Statistics reports the GDP in constant prices has expanded at 6.5%.  This pace of growth is inconsistent with most of the available data on the economy.  The available BBS estimates are from the production or supply side.  But we begin the analysis by examining the demand side.  The quality of expenditure estimates [private consumption, private investment, imports and exports] is weak and makes it difficult to determine what is really going on.  Export growth in dollar terms is less than 3% and
as export prices have risen slightly the real export production is probably negative.  
Private investment is difficult to assess and the data is ambiguous.  An important part is construction (70%).   Construction has hardly increased based on the imports of construction materials in real terms (increase is less than 2%) and verbal reports of the bankers with respect to projects.  However, the banks report a large increase in term loans (45%) but this data is difficult to interpret and does not necessarily link the loan to an investment project.  [The size of the disbursements is about $8 billion of the estimated $50 billion of private investment for 2014/15.]  
The ADP is estimated in the budget as 750 Taka billion but from the resource side it is hard to see how this will exceed 600 billion Taka a small increase in real terms over 2013/14.  No direct consumption data is estimated but the increases of consumption goods imports in current prices is of the order of 10%.  It is very difficult to see the source of the increased expenditures that would drive the current price GDP at a rate above 13%.  All observers seem puzzled as to how the economy grew so rapidly when the expenditure growth is so limited.  Most observers CPD, World Bank and ADB expected a lower rate of growth.
Turn around and examine the output side.  The claimed strong growth of the economy arises from the high growth rate of the industrial sector.  The BBS estimate is that this sector grew at 9.6% the highest it has reached in recent years.  Manufacturing the largest component increases at more than 10%.  How is this possible when the garment and the textile sector are not doing well?  These sectors are about 50% of manufacturing and this means other manufacturing must have increased at 20%.  This is impossible!
There are two important parts of the industrial sector —manufacturing and construction.  Construction is growing rather slowly according to the imports of inputs and the reports of the banking executives.  However, there is a large increase in disbursement of term loans many of which are linked to construction projects.  On balance it appears that growth in the construction sector is modest.  Manufacturing is the key sector here.  The inputs of industrial raw materials expanded slowly [5.4% in dollar terms, sharply lower than the previous year], exports of RMG products show little increase suggesting modest increase in manufacturing.  The large and medium scale industrial production index reports a 13% growth for the first half of the financial year.  Examining the components of this index one finds that there are two sub-sector reporting very large growth and account for most of the increase.  Pharmaceuticals are reported to account for 5.6% and food products 4.4% for a total of 10% of the 13% growth.  
The estimates for pharmaceuticals are wrong.  The sector probably expanded about 15% not 70% according to industry experts and the weight for the sector is no more than 3% against the 8% used in the index. The food processing sector is equally suspect reporting an increase of 43%.  Agriculture output increased only 3% so growth in food processing is certainly limited.  
The index for small scale manufacturing showed an increase of about 5% for the year.    Altogether the increase of manufacturing from the available data suggests growth of not more than 5% in contrast with the provisional 10%.  If we calculate the growth rate assuming a more reasonable estimate of 6-7% for industry we come to a growth rate of GDP of about 4.5-5%.  
 Policy issues:
The available data indicates that the deficit got smaller in 2014/15.  Using the data from Bangladesh Bank the following table compares that information [9 months actual forecast for the 12 months] with the Budget estimates.  

Budget Deficit
(billion Taka)
    12 months are author’s         estimates.
    9 months are actuals.
    Source:  BB Monthly         Indicators

These estimates are bizarre.  First if we look at 2013/14 we see a big difference in the deficit reported in the Budget and by Bangladesh Bank:  Taka 478 billion in the Budget against Taka 410 billion according to BB.  For 2014/15 Bangladesh Bank reports Taka258 billion for nine months and we estimate this implies Taka 368 billion for the financial year.  The Budget reports Taka 763 billion deficit.   
I really do not know the source of the difference.  One point may be the financing of Government owned banks to increase the capital of these institutions.  This would appear as part of the deficit for the Government but would not be an actual expenditure that influences the level of GDP.
The point is that the deficit has declined!  Fiscal policy has been restrictive not expansionary.  The Budget last year made a big point of trying to stimulate growth through higher Government expenditures and deficit; this objective failed.
Monetary policy also was more restrictive.  The nominal money supply grew in FY 2013/14 at an annual rate using 9 months seasonally adjusted data at 16%.  For FY 2014/15 the annualized rate for 9 months using seasonally adjusted data was 11.2%.  The sharp reduction in the growth rate of the money supply clearly signaled a more restrictive monetary policy.  This rate of increase is consistent with 6.5% inflation and real GDP growth of 4.5% or less.  Monetary policy is also meant to reduce the inflation rate.  It is not clear how well this is working.  The ten months data seasonally adjusted suggests that the CPI growth for the year will be 6.8% compared to 7.0% last year.  Food prices fell largely due to a slowdown of Indian food price inflation while non-food prices rose.  Improvements in inflation are limited and always dominated by changes in Indian food prices.  Inflation has certainly declined but it is not due to monetary policy.
Finally consider the exchange rate. The Dollar/Taka rate has been stable while other currencies have generally depreciated with respect to the dollar.  Certainly the Taka has appreciated with respect to the important EU market.  If we turn to the competitor countries the Taka has appreciated against many of these currencies. Thus competitiveness has been lost.  Bangladesh is still a strong competitor in the RMG but there is a steady loss of ground.
With restrictive monetary, fiscal and exchange rate policies it should come as no surprise that the economy has slowed down not accelerated.  Although evidence of slowing has been clear for months no actions were taken to deal with this.  Instead the Government’s own economic policies have made a major contribution to slowing of economic growth.  The horrible efforts to enforce a blockade certainly contributed to the slowdown but that was only a small part of what happened and most of those consequences do not enter into the national accounts estimates.
The economy is certainly poised for rapid economic growth.  But key policies are not being managed.  The most important issue is to increase exports and in particular to reduce the increasing concentration on the RMG sector.  FDI is not appearing.  There is a myth that improved
safety and greater labour rights will increase orders.  
This is an argument that has no empirical support.  Second key policy is to encourage foreign and domestic investment in consumer durables production where demand is rising rapidly and can be expected to be strong over the next five years.  Direct action to increase returns in the private sector are needed.

The writer is an economist

 

 

Puzzles of macro-economic behaviour and policy in Bangladesh

The announcement of the budget for 2015/16 is an appropriate time to review how the economy is behaving. This article sets forth three ideas: The economy is growing more slowly than the provisional official estimates indicate; other evidence is simply inconsistent with such a rapid increase of the economy. Second, monetary, fiscal and exchange rate policies have all been restrictive in the past year contributing directly to the slowing of the economy. Third, the economy is poised for rapid growth but the policies being followed are not supporting the opportunities available. In particular the Budget suggests a turn away from export led growth. This article deals with the financial year now finishing. A second article deals with the Budget economic forecasts and the policy implications of the macro-economic programme. The recent provisional estimate of the Bangladesh Bureau of Statistics reports the GDP in constant prices has expanded at 6.5%. This pace of growth is inconsistent with most of the available data on the economy. The available BBS estimates are from the production or supply side. But we begin the analysis by examining the demand side. The quality of expenditure estimates [private consumption, private investment, imports and exports] is weak and makes it difficult to determine what is really going on. Export growth in dollar terms is less than 3% and as export prices have risen slightly the real export production is probably negative. Private investment is difficult to assess and the data is ambiguous. An important part is construction (70%). Construction has hardly increased based on the imports of construction materials in real terms (increase is less than 2%) and verbal reports of the bankers with respect to projects. However, the banks report a large increase in term loans (45%) but this data is difficult to interpret and does not necessarily link the loan to an investment project. [The size of the disbursements is about $8 billion of the estimated $50 billion of private investment for 2014/15.] The ADP is estimated in the budget as 750 Taka billion but from the resource side it is hard to see how this will exceed 600 billion Taka a small increase in real terms over 2013/14. No direct consumption data is estimated but the increases of consumption goods imports in current prices is of the order of 10%. It is very difficult to see the source of the increased expenditures that would drive the current price GDP at a rate above 13%. All observers seem puzzled as to how the economy grew so rapidly when the expenditure growth is so limited. Most observers CPD, World Bank and ADB expected a lower rate of growth. Turn around and examine the output side. The claimed strong growth of the economy arises from the high growth rate of the industrial sector. The BBS estimate is that this sector grew at 9.6% the highest it has reached in recent years. Manufacturing the largest component increases at more than 10%. How is this possible when the garment and the textile sector are not doing well? These sectors are about 50% of manufacturing and this means other manufacturing must have increased at 20%. This is impossible! There are two important parts of the industrial sector manufacturing and construction. Construction is growing rather slowly according to the imports of inputs and the reports of the banking executives. However, there is a large increase in disbursement of term loans many of which are linked to construction projects. On balance it appears that growth in the construction sector is modest. Manufacturing is the key sector here. The inputs of industrial raw materials expanded slowly [5.4% in dollar terms, sharply lower than the previous year], exports of RMG products show little increase suggesting modest increase in manufacturing. The large and medium scale industrial production index reports a 13% growth for the first half of the financial year. Examining the components of this index one finds that there are two sub-sector reporting very large growth and account for most of the increase. Pharmaceuticals are reported to account for 5.6% and food products 4.4% for a total of 10% of the 13% growth. The estimates for pharmaceuticals are wrong. The sector probably expanded about 15% not 70% according to industry experts and the weight for the sector is no more than 3% against the 8% used in the index. The food processing sector is equally suspect reporting an increase of 43%. Agriculture output increased only 3% so growth in food processing is certainly limited. The index for small scale manufacturing showed an increase of about 5% for the year. Altogether the increase of manufacturing from the available data suggests growth of not more than 5% in contrast with the provisional 10%. If we calculate the growth rate assuming a more reasonable estimate of 6-7% for industry we come to a growth rate of GDP of about 4.5-5%. Policy issues: The available data indicates that the deficit got smaller in 2014/15. Using the data from Bangladesh Bank the following table compares that information [9 months actual forecast for the 12 months] with the Budget estimates. Budget Deficit (billion Taka) 12 months are authors estimates. 9 months are actuals. Source: BB Monthly Indicators These estimates are bizarre. First if we look at 2013/14 we see a big difference in the deficit reported in the Budget and by Bangladesh Bank: Taka 478 billion in the Budget against Taka 410 billion according to BB. For 2014/15 Bangladesh Bank reports Taka258 billion for nine months and we estimate this implies Taka 368 billion for the financial year. The Budget reports Taka 763 billion deficit. I really do not know the source of the difference. One point may be the financing of Government owned banks to increase the capital of these institutions. This would appear as part of the deficit for the Government but would not be an actual expenditure that influences the level of GDP. The point is that the deficit has declined! Fiscal policy has been restrictive not expansionary. The Budget last year made a big point of trying to stimulate growth through higher Government expenditures and deficit; this objective failed. Monetary policy also was more restrictive. The nominal money supply grew in FY 2013/14 at an annual rate using 9 months seasonally adjusted data at 16%. For FY 2014/15 the annualized rate for 9 months using seasonally adjusted data was 11.2%. The sharp reduction in the growth rate of the money supply clearly signaled a more restrictive monetary policy. This rate of increase is consistent with 6.5% inflation and real GDP growth of 4.5% or less. Monetary policy is also meant to reduce the inflation rate. It is not clear how well this is working. The ten months data seasonally adjusted suggests that the CPI growth for the year will be 6.8% compared to 7.0% last year. Food prices fell largely due to a slowdown of Indian food price inflation while non-food prices rose. Improvements in inflation are limited and always dominated by changes in Indian food prices. Inflation has certainly declined but it is not due to monetary policy. Finally consider the exchange rate. The Dollar/Taka rate has been stable while other currencies have generally depreciated with respect to the dollar. Certainly the Taka has appreciated with respect to the important EU market. If we turn to the competitor countries the Taka has appreciated against many of these currencies. Thus competitiveness has been lost. Bangladesh is still a strong competitor in the RMG but there is a steady loss of ground. With restrictive monetary, fiscal and exchange rate policies it should come as no surprise that the economy has slowed down not accelerated. Although evidence of slowing has been clear for months no actions were taken to deal with this. Instead the Governments own economic policies have made a major contribution to slowing of economic growth. The horrible efforts to enforce a blockade certainly contributed to the slowdown but that was only a small part of what happened and most of those consequences do not enter into the national accounts estimates. The economy is certainly poised for rapid economic growth. But key policies are not being managed. The most important issue is to increase exports and in particular to reduce the increasing concentration on the RMG sector. FDI is not appearing. There is a myth that improved safety and greater labour rights will increase orders. This is an argument that has no empirical support. Second key policy is to encourage foreign and domestic investment in consumer durables production where demand is rising rapidly and can be expected to be strong over the next five years. Direct action to increase returns in the private sector are needed. The writer is an economist