WB forecast of GDP growth in Bangladesh in 2023

The World Bank released its ‘South Asia Economic Focus, Coping with Shocks: Migration and the Road to Resilience’ report last week from its headquarters in Washington. The report is a companion piece to the South Asia Economic Focus, bi-annual World Bank report that examines economic developments and prospects in the South Asia region and analyzes policy challenges faced by countries.

Bangladesh’s economy faces new challenges in the context of high global economic uncertainty, rising inflationary pressure, energy shortages, and revenue shortfalls. Accelerating trade and financial reform and implementation can help sustain growth, according to the World Bank’s bi-annual report. Accelerating the implementation of structural reforms, including trade reforms and export diversification can also help the growth. However, in FY24, growth is expected to pick up to 6.2 per cent, according to the Bangladesh Development Update April 2023 entitled Trade Reform.

For Bangladesh, a gradual reduction in extreme poverty is expected, from an estimated 10 per cent in 2023 to 9.5 per cent in 2024, using the international poverty line of US$2.15 in 2017 purchasing power parity. The report said, “To achieve the vision of attaining upper middle-income status by 2031, Bangladesh needs to create jobs and employment opportunities by creating a competitive business environment, diversifying exports, increasing human capital, building efficient infrastructure, deepening the financial sector, and establishing an enabling policy environment that attracts private investment.”

On the other hand, WB has cut down the GDP growth rate projection for Bangladesh for FY 2022-23 to 6.1 percent citing umpteen adversities inside and abroad. Bangladesh was third among the twenty countries which kept positive GDP growth during the Covid-19 pandemic. However, the January 2023 joint World Bank-IMF Debt Sustainability Analysis (DSA) assessed that Bangladesh remained at low risk of debt distress.

“The government responded to high global energy prices with blackouts and factory closures to reduce energy consumption, stopped purchasing vehicles, and made it harder to purchase luxury goods, among other measures to preserve international reserves,” it added. The rising cost of imports has doubled the trade deficit since 2019.

Higher inflation and rolling electricity blackouts dampen the post-COVID recovery in consumption and investment. “Russia’s invasion of Ukraine and global uncertainty have impacted countries around the globe. Bangladesh’s post-pandemic recovery has been disrupted by elevated commodity prices, rising interest rates, and slowing global growth,” said WB country director for Bangladesh and Bhutan.

Higher commodity prices have contributed to inflationary pressure. The balance-of-payments deficit reached $7.2 billion in the first half of FY23, up from $5.3 billion in FY22, creating considerable pressure on foreign exchange reserves. A multiple exchange rate system has contributed to the balance of payments pressure, disincentivizing export and remittance inflows.

Higher inflation is expected to dampen private consumption growth, following substantial energy-price increases. WB forecasts that export growth is expected to slow, as economic conditions in key export markets deteriorate, unresolved financial sector weakens. The rolling blackouts, gas rationing, and rising input costs weigh on manufacturing output. Rising inflation, tighter financial conditions, disruptive import restrictions, and global economic uncertainty are also obstructing economic development. The WB stands ready to support Bangladesh with reforms to accelerate growth and strengthen resilience.

The multiple exchange rates of currency are discouraging exports and reducing overseas income. A market-based single exchange rate would bring balance to foreign trade. Moving towards a single market-based exchange rate will help restore external balance.

Domestic banks faced challenges with tighter liquidity and increasing non-performing loans. The fiscal deficit widened in FY23, with higher financing from domestic banks.

The major driving forces of the global economy, the United States, the European Union and China, are facing various crises. Instead of going towards growth, there is a danger that the GDP size of many countries will decrease.

In June last year, the WB projected Bangladesh’s Gross Domestic Product (GDP) to grow by 6.7 per cent. It has forecasted GDP growth lower by 0.6 percent from the projection it made in June this year. The World Bank in its latest South Asia update release said the region will grow by 5.8 percent this year. This is 1 percentage point lower than the forecast made earlier. The growth rate for South Asia in 2021 was 7.8 percent when most countries were rebounding from the pandemic slump. Tight fiscal and monetary policies and lower growth of trading partners outside the region will weigh on income and spending, the WB says about a cardinal cause in its report.

The global development financier projects a slightly higher GDP growth at 6.2 per cent for the next FY2024. Moreover, reforms in trade, financial sector have the potential to accelerate growth, the World Bank says.

The update points out the uneven recovery in the growth rate of the South Asian countries. Inflation in South Asia, caused by elevated global food and energy prices and trade restrictions that worsened food insecurity in the region, is expected to rise to 9.2 percent this year before gradually subsiding. The resulting squeeze on real income is severe, particularly for the region’s poor who spend a large share of their income on food, says the report.

Referring to the pandemics, sudden swings in global liquidity and commodity prices, and extreme weather disasters, World Bank Vice President for South Asia, Martin Raiser said that countries need to build stronger fiscal and monetary buffers, and reorient scarce resources towards strengthening resilience to protect their people.

The report estimates that current climate trends will see rice, vegetables, and wheat yields decline by 5-6% by 2050 in Bangladesh compared to a no-climate change scenario. Extreme weather can also complicate the implementation of macroeconomic policies. At the same time, Bangladesh will need to implement coordinated policies and investments to address rising climate vulnerabilities.

The report also stated that the fiscal deficit is expected to widen in FY23 as subsidy expenditures rise, moderating over the medium term.

Improving trade competitiveness for export diversification will be critical to achieving Bangladesh’s aspiration of upper middle-income status by 2031. WB also suggested that diversifying exports and enhancing competitiveness will assist Bangladesh in reaching upper-middle income status by 2031.

“Diversifying exports and improving competitiveness will help Bangladesh achieve upper-middle income status by 2031. For this, it will be important for Bangladesh to reduce both tariff and non-tariff barriers. A comprehensive reform program can strengthen regional integration, particularly with South Asia and Southeast Asia.” At the primary stage, Bangladesh will need to remove both tariff and non-tariff barriers in the upcoming budget to achieve continuous growth of GDP and sustainable development.

The writer is Non-Government Adviser, Bangladesh Competition Commission. He can be contacted at mssiddiqui2035@gmail.com