Forecasting economic growth
The economy transcended from an unstable 3% growth regime of the 70s and 80s to 4.5% growth during the tenure of the first elected government. The growth rate accelerated to 5% plus during the tenure of the second elected government, and nearly 6% during the third. There were high expectations that the country would grow over 7% during the second half of the millennium decade, but this has not materialised so far.
Two things dampened the growth potential of the country. The first was the excessive caution against inflation that was running at about 6% in 2005. The economy was buoyant with a spurt in investment activities.
For all latest news, follow The Daily Star's Google News channel. Bangladesh Bank (advised by IMF) feared a blow-out in demand despite indications of cost-push influences on prices. It put a monetary squeeze on the economy. This succeeded in restraining inflation, but also reduced growth. Bangladesh Bank still maintains a "cautious" monetary policy.
The other factor that had a worse effect on growth is the political turmoil that began during the second half of last year and continued into this year. Moral bankruptcy of our politicians had pushed the country toward a violent situation in which a cataclysmic civil war looked a real possibility.
The country was saved from such an eventuality by the dissolution of the previous caretaker government and the installation of Dr. Fakhruddin's government. However, uncertainties remain, business confidence is low, and arbitrariness is still a problem. These could have an adverse effect on economic performance during the remaining part of the fiscal year, taking away some of the gloss of the government.
Surprisingly, Bangladesh Bank forecasts a 6.5 - 6.8% growth. BBS also predicts 6.5%
growth. The donor agencies are also equally optimistic about the growth prospect of the economy. They are predicting 6.5% growth for the current fiscal.
Despite almost identical forecasts of these agencies, it is difficult to understand how the economy would grow so robustly when it has been buffeted by so many adverse events, and a robust turn-around is not yet visible.
A severe problem in forecasting exercises is the non-availability of recent data. Bangladesh Bureau of Statistics is responsible for collecting, collating and disseminating data on macro- variables. But numerous management and technical problems hamstring its efficiency.
It publishes data with a very substantial lag. (For example, its Monthly Statistical Bulletin is published with almost a year's lag, and it contains data which are another year old.) The quality of its data is sometimes questionable. Ridding BBS of political interference and improving efficiency should rank high in the agenda of the Ministry of Finance.
BBS presumably provides more recent data to government institutions, but these are not made publicly available, preventing informed public debate on current policy issues. Much of the data are on a yearly basis and, hence, are not very useful for short term forecasting.
As a result, forecasting often has to be done using some rules of thumb, informed guesstimates, and extrapolation based on presumed association between growth and some variables on which recent data are available. Forecasting is a difficult business even in developed countries; it is more so in a data-deficient poor country.
Crop output during the last half of 2006 was probably not much affected by the political unrest. However, supply shortages of diesel, electricity and fertilisers that plagued the country this fiscal could have reduced the yield of the principal crop, boro.
The avian flu has taken its toll on poultry. Agricultural output cannot possibly maintain the robust growth achieved last year. A reduction in agricultural growth will shave a few points off the aggregate growth rate.
The industrial sector is dominated by manufacturing that comprises both large and small-scale manufacturing. Manufacturing growth rate has not picked up during July-December 2006; it was 2% below that of the corresponding period last year.
It has been adversely affected by electricity outages and rising fuel prices. Indications are that manufacturing, particularly small scale manufacturing, will not perform well during Jan-June 2007.
If this happens, manufacturing growth for the entire fiscal 2006-07 will be less than that achieved during 2005-06. This seems all the more likely since manufacturing growth last fiscal was exceptionally high.
The other branches of industry viz. mining, electricity, gas and water and construction, are unlikely to have done much better. Mining, gas and water contribute only marginally to GDP; modest variations in their growth rates will not impact much on GDP growth.
There has been no new addition to electricity generation capacity during the last several months. However, if system loss is substantially reduced by the recent drives, electricity value addition will be shown to be higher without there being any real increase.
The construction sub-sector is in doldrums -- anti-corruption drives have driven away its customers, causing a decline in both prices and volume. Construction being a large sub-sector, a significant downturn will reduce the industrial growth rate.
Putting all these pieces together, and taking into account the impact of low business confidence, the industry sector seems unlikely to maintain the robust performance of 2005-06. Since industry has a large contribution to GDP (29 per cent), even a small reduction in its growth rate will have a fairly large negative impact on GDP growth.
It is difficult to say how the service sector is performing. This is the largest sector of the economy, accounting for about half of GDP. There is scant recent data on the service sector, but anecdotal evidence suggests that some of its sub-sectors have suffered much. Vendors, eateries and shops, were adversely affected by the political unrest that shut them down frequently.
They were also badly hit by the present government's eviction drive and restrictions on shopping hours. A large number of street vendors lost their livelihood, while shop owners complain of fall in business activities.
Output loss of the street vendors may not show up in national statistics as much of their business probably belongs to the underground economy. Even if other sub-sectors do well, it may not be enough to maintain the past growth of service output.
Thus, the performances of all three sectors of the economy are likely to be lower than that during the last fiscal year. Since GDP growth is the sum total of the weighted growth of these sectors, it does not look like the economy will be able to maintain last year's growth performance.
A growth rate in the neighbourhood of 6% seems to be the more likely outcome. This would be a setback for the poverty reduction strategy of the country that is predicated on a 7% growth during this year.
If the objective of the government is to shock the economy with a "cold turkey" treatment to rid it of undesirable practices, the economy must suffer from low growth for a while. If, on the other hand, it wants to accelerate growth, the most urgent task must be the restoration of business confidence.
If confidence remains shaky long-term investment will suffer, with consequent negative impact on growth. Available information seems to suggest a downturn in investment activities. This should be the more serious concern of the policy makers.