The never-ending debate over GDP growth

The debate over Bangladesh's GDP growth forecasts is back again. There is wide variation in the projections made by the multilateral development agencies for the current fiscal year amid deep uncertainties about the near-term trajectory of the global economy as the pandemic is still raging.

Last week, the International Monetary Fund (IMF) lowered its economic growth forecast for Bangladesh to 4.4 per cent for FY21 from 5.7 per cent earlier.

The World Bank said the economy would grow by 1.6 per cent. The Asian Development Bank (ADB) painted a more optimistic scenario among the three as it predicted 6.8 per cent GDP growth.

The government is, however, bullish about pulling off 8.2 per cent GDP growth and has said the WB forecast is not reflective of the ongoing economic recovery.

The modelling exercises to reach the GDP figures are carried out based on a number of assumptions.

This would include the performance of the global economy and whether there would be a second wave of the coronavirus, the service sector would make a comeback and how long it would take for the transport system to return to its pre-pandemic level, said Mustafizur Rahman, distinguished fellow of the Centre for Policy Dialogue. 

"It appears that the World Bank's assumptions in these areas are more conservative, the IMF's forecast is modest and the ADB is more optimistic." 

Zahid Hussain, a former lead economist of the WB's Dhaka office, said the pandemic struck the economy on both demand and supply sides by reducing mobility and assembly.

The consequent decline in income and employment combined with the persisting spread of the virus reduced confidence in goods, labour, and financial markets, thus deepening the economic contraction. All agencies have, therefore, backcasted significantly lower growth in FY20 relative to FY19, he said.

"We can live with differences in the magnitude of the estimated growth contraction between different agencies in times of deep uncertainties brought on by the pandemic."

Monzur Hossain, research director of the Bangladesh Institute of Development Studies, said two factors are important when it comes to carrying out modelling.

"First, you can't be too mechanical and can't just insert data in the model. Second, one has to understand the dynamics of the local economy. Otherwise, models would not come up with better results," he said.

Usually, four areas are taken into account to make an assumption: macroeconomic, fiscal, monetary and external blocks. But there is not 100 per cent reliable data of the four sectors. Maybe the data on the financial and external sectors are alright, Monzur said. 

For instance, the revenue collection does not paint the real situation. "We may have weakness in tax coverage. Weaknesses might be there because of corruption and there might be a weakness in the system."

"If these anomalies are not assessed and one relies on the model alone, definitely there will not be a good result," Monzur said.

The IMF's growth estimate seems more reasonable, he said. The growth might even be higher if the current pace of economic activities continues and there is no further disruption, he said.

Ragnar Gudmundsson, the resident representative of the IMF office in Dhaka, said the IMF's growth projection for FY21 is more conservative as it reflects the fact that the Covid-19 pandemic has already had an impact on the first two quarters of the current fiscal year.

Moreover, there is still considerable uncertainty regarding the speed of recovery at the global level, which will have an impact on garment exports, remittances, and domestic consumption.

"Compared to FY20, we are still expecting a moderate improvement in economic conditions."

In order to enhance the quality and transparency of GDP estimates and projections, the IMF would strongly recommend moving towards the production of quarterly GDP numbers.

"This would also be consistent with Bangladesh's commendable aspiration to move towards middle-income and higher middle-income status," said Gudmundsson.

Mercy Tembon, country director of the WB Bangladesh, said all forecasts on growth are derived on the basis of available data, observed trends, and the global risk factors. Some predictions are more conservative than others.

"So, it is natural that the numbers will differ. With a significant level of uncertainties created by the Covid-19 pandemic, such differences are even more likely."

The WB's projection also reflects the slowdown of growth it observed in the country during the first half of the fiscal year 2019-20 due to a decline in exports by 5.8 per cent year-on-year, as well as projected recessions in its export markets, the US and Europe.

"Rather than focusing on the precise percentage points on predictions, it is more valuable to focus on policies that will help the economy bounce back. For a resilient recovery, the government needs to continue to pursue policy reforms that will ensure macro-financial stability."

Manmohan Parkash, country director of the ADB, said the key assumptions are that prudent macroeconomic management will continue along with the speedy implementation of the government's stimulus measures.

"Managing the coronavirus disease pandemic in Bangladesh and its major export market countries, and the gradual economic recovery in the Eurozone and the US are important assumptions that have been considered to forecast faster economic recovery and growth in Bangladesh."

Parkash said the ADB prepared its GDP growth rate forecast for Bangladesh for FY2021 in early September 2020 using the available economic data and trend. Since the resumption of economic activities in June, economic indicators such as export earnings and remittances have shown positive signs though these were severely impacted during the March-May period.

The export earnings in July to August were $6,878 million, which was 246 per cent higher than $1,985 million in April to May period and higher than $6,732 million recorded in July to August period of 2019.

More than 90 per cent orders that were cancelled in the garment sector have been reinstated. Consumption is increasing, and trade is returning to normalcy and jobs have also rebounded.

Similarly, remittance inflow rose 76 per cent to $4,562 million in July-August from $2,598 million in April-May and 50 per cent from $3,042 million in July-August in 2019.

The positive trends in exports and remittances, the main contributors to growth, continued in September: overseas shipment stood at $3,018 million, up 3.53 per cent year-on-year. Migrant workers sent $1,477 million in the month, up 46 per cent compared to a year ago.

"The exports and remittance increase in July-August of 2020 were healthy and these positive trends have been considered while forecasting growth numbers. The ADB predicts that the economic recovery in the first two quarters of FY21 is expected to be gradually followed by a rapid recovery in third and fourth quarters," Parkash said.

CPD's Rahman said the economy is opening up but it has not reached its full capacity. The service sector, which is 52 per cent of the economy, is running at 80 to 90 per cent of the capacity. 

Compared to other countries, Bangladesh's GDP is more dependent on domestic demand. "About 85 per cent of the GDP relies on domestic demand. This is a strength of the country."

He said the GDP growth would depend on how far local demand picks up and the global recession deepens.

"Another factor would be the implementation of the stimulus packages, the recovery of the loans being given out and whether the packages would be recycled," he said. 

Zahid Hussain said a critical factor in recovery is the state of mobility. The Google Mobility Report shows mobility has returned to the pre-pandemic state with the sole exception of retail and recreation, where it was still down by 9 per cent in early October.  

Production is up but not running at full capacity yet. The first-quarter data on exports, imports, tax revenue collections, and electricity generation suggest recovery overall, but the magnitude varies by indicators. 

Remittance has been a pleasant exception with a 48 per cent spike in the first quarter. The economies, where most remittances to Bangladesh originate from, are still not showing robust recovery.

"The sustainability of such high growth in the rest of the year can't, therefore, be taken for granted," Zahid Hussain said.

Both the IMF and the WB are projecting subdued consumption growth, the biggest driver of demand growth, in FY21. In addition, private investment is likely to remain depressed because of uncertainties relating to the dynamics of the pandemic locally and globally.

The policy response will be most critical because the risks predominantly are on the downside, he said. 

"It is delusional to think that the pandemic is behind us in Bangladesh. Economic activity may return to normal levels despite the high positivity rate, but growth will falter with disruptions in supply chain and weak global demand for goods and labour." 

"Policy support to keep enterprises at risk afloat and protect the incomes of the poor and the vulnerable will need to complement a ramped-up response on the public health front to flatten the curve of the virus," he said.