The government forecasts a 12
per cent growth of exports for the coming financial year. This
forecast is based on no analysis of the issues but a desperate belief that all will go well
Prospects for financial year 2015-16
Forrest Cookson
A recent first article reviewed what has happened to the Bangladesh economy in the Financial Year 2014/15. Now we examine what will happen in the next year. We claim the economy in the current year slowed down sharply probably below 5% growth. The Bangladesh economy is highly competitive and adjusts to shocks smoothly. Employment remains strong with limited unemployment. Inflation remains within the 6-7% range. There is a steady decline in poverty.
Of course the outcome for FY 2015/16 depends on the policy specifics. We can have a reasonable idea of fiscal policy from the Budget. Monetary and foreign exchange rate policy are partly defined in the Budget sufficient for one to assume that this is
what we can expect. Our approach here is to forecast what one might expect from these policies and then to see if there are some actions that would accelerate the growth of the economy.
The primary monetary policy instrument is growth of broad money (M2) at 16% per annum. Exchange rate policy is to maintain the nominal dollar peg of Taka 78/US dollar and to achieve this foreign exchange will be purchased or sold as necessary. Fiscal policy as defined in the budget is a deficit of 5% of GDP. The policy objectives in 2014/15 were the same. However monetary policy failed to achieve its goal and a more aggressive approach is needed in 2015/16. Also fiscal policy failed to achieve the expected deficit. Greater efforts to raise government expenditures are needed to reach the target. Exchange rate policy will be successfully managed. Keeping the GDP growth rate at 6% requires achieving success of the three policies.
But the stipulated policies are not consistent with 7% GDP growth. To achieve this growth rate monetary policy must be more expansionary and
the nominal exchange rate must depreciate by 6-8% to
accelerate export growth and protect against a wave of Indian exports as the IR depreciates.
GDP growth depends on three key areas: Performance of agriculture, exports, and private investment. Agriculture depends first on weather. Bangladesh has had rather good weather for agriculture in the past few years and there have been no major weather based natural catastrophes. The forecast for the Indian monsoon is for well below normal rainfall. However, for the Bay of Bengal area there is no expectation of below normal rain. We should be bullish about the prospects for crop production. The only question is price. While there is some talk about the impact of government on rice prices, in fact there is limited impact of the procurement program on market prices as the magnitude of the programs are very small compared to the volume of marketed rice.
Key factors in determining the rice price are Indian prices and the Taka/Rupee exchange rate. This past year a strong Taka with respect to the IR and lower food inflation in India contributed to lower prices in Bangladesh. The concerns expressed by farmers about the low rice price reflect these external forces; the low price may have some impact on the plantings in the coming year.
I think that there are two forcesthe risk of a poor crop in India due to the predicted weak monsoon and my expectation that the IR will be depreciated in the next year to aggressively support Indian exports. These factors obviously work in opposite directions. It is hard to tell on balance the impact on food prices in Bangladesh. Assuming Bangladeshs exchange rate policy does not change then prices are likely to remain low and planting of the boro crop may weaken. Other foods whose prices are linked to Indian will also be low. Altogether I believe agriculture will grow faster at 3-3.5% in the coming financial year.
Government really has no impact on agriculture in the short run, what matters is the long run programs to develop better seeds and technologies. Unfortunately there seems to be declining support for increasing the role of the private sector in agricultural inputs. Provision of credit needs improvement but with the government banks as the main delivery mechanism we cannot expect anything good until the messes at RAKUB and BKB are cleaned up. As there is no prospect of any change here the unsatisfactory credit position will continue. On the other hand use of GM seeds is increasing with positive results. The fertilizer situation remains unsatisfactory with low urea prices leading to unbalanced applications and sub-optimal results. But the reliance on the private sector for input and output markets works very well.
The second key area is exports. Export growth in 2014/15 was low and non-garment exports showed very little increase [11 months data]. No progress is being made in diversification, the risky situation of all eggs in the same basket continues to loom over the economy. The government forecasts a 12% growth of exports for the coming financial year. This forecast is based on no analysis of the issues but a desperate belief that all will go well.
1. Will the world economy grow more strongly? Unlikely virtually all forecasts are for continuing slow growth and there is little optimism at the IMF, World Bank, Federal Reserve, or the ECB. The recent Economist leader warns of difficulties in managing a slowdown of the world economy. Certainly we cannot expect exports to expand on the basis of strong increases in world demand for clothing.
2. Can Bangladesh improve its competitiveness and take a larger share of the world market? Yes, but there is no sign of government being willing to act. All apparent government actions undermine competitiveness! Key examples are the exchange rate policy that allows the Taka to appreciate with respect to competitors and increasing taxes on RMG exports. The authorities should be warned, India is going to make a big export drive based on a weaker IR and this is likely to hit Bangladeshs garment export markets. China is protecting its export position with internal measures allowing production at a loss to continue. Pakistan and Vietnam are increasing RMG capacity. It is a tough world out there.
3. There is no sign in the Budget of any interest in identifying problems facing the non-garment exports and trying to support industry in solving these. Exporters are on their own. Perhaps the forthcoming export policy will help.
4. Infrastructure support for exporters is limited. Gas supplies can be much better managed but exporters are not priority customers. Electricity remains a problem with annoying outages and poor quality again no priority attaches to the export sector. In transport the most important issue is the Chittagong-Dhaka link. Time taken on this trip by trucks is about twice what it should be. There are plenty of actions that can be taken to speed up this movements.
For the next financial year there is no real reason to believe that export growth will accelerate to 12% from 3%. The actions that are meant to promote exports concentrate on establishing Special Economic Zones but that is at least three years away from contributing to exports.
There will definitely be an increase in exports but it is more likely to be in the more modest 5-7% range. Better than FY 2014/15 but not good enough.
Private investment will begin to strengthen in the next financial year with falling interest rates and recovery of export growth. The data on private investment is so poor that it is difficult to say much more than there should be more rapid growth this coming financial year. In the way I am thinking about this the impact of investment is on aggregate demand. The impact of investment in increasing capacity to produce goods and services is not relevant here as the economy can increase output in real terms up to 20% without additional investment. In the short run it is aggregate demand that matters.
I estimate that more rapid growth of exports and more private investment [hence construction] will raise industrial growth to 7.5% from the 6% I estimated for FY 2014/15. Combined with agricultural growth of 3.25% this suggests a GDP growth rate of 5.8% [services are largely derived demands] just short of 6%. The target GDP growth rate of 7% cannot be reached unless there is a dramatic recovery of exports and the deficit measured using actual expenditures reaches target. Even if government shifted policies to support export growth it will take a year for there to be a significant impact.
What about the government deficit? Can we expect the deficit to get larger?
The revenue growth target is very ambitious and most observers believe this cannot be achieved. I believe the increase in income taxes is in sight. It will require an approach that tries to make things simple and extends the tax net without punitive actions. Expanding the net will work; scaring compliance will fail.
More complex is the VAT where the implementation is complicated and will face many difficulties. With a strong tax increase program it is essential that the government spend more money. The financial year just ending revealed a decline in the deficit implying a restrictive fiscal policy. This is not desirable. The deficit must increase in FY 2015/16. With the ambitious tax collection program this will be difficult.
The conclusion is that we should expect an improvement in the GDP growth rate over FY 2014/15, an improvement in exports and increase in the pace of private investment. But Budget estimates are too ambitious. The Bangladesh economy remains strong and resilient. But policy stance remains likely to be restrictive with monetary growth falling below 16% and the deficit will be below 5%.
The writer is an economist
