Bangladesh has already entered the territory of 'low growth and high inflation'. Even so, the condition is yet to be called stagflation because the country's unemployment level is still below 4 per cent. During the third quarter of the current fiscal year (FY24) and the first quarter of the current calendar year, the unemployment rate is estimated at 3.51 per cent. The quarterly update of the country's Labour Force Survey (LFS) also showed that some 2.59 million of the labour force are jobless now. The lower unemployment rate provides a comfort zone for the country's policymakers.
What is not comfortable for them and the whole nation is the period of 'low growth, high inflation'. Notably, the current situation is a reversal of the course of 'high growth, low inflation' attained for around a decade.
Due to the negative impact of the Covid-19 pandemic, the country witnessed a sharp decline in economic growth to 3.45 per cent in the FY20 when the annual average inflation rate stood at 5.65 per cent. In the next fiscal year, GDP growth rebounded significantly and jumped to 6.94 per cent, while the annual inflation rate stayed at 5.56 per cent. It was a matter of comfort, although questions also remained whether the inflation figure was underreported.
The national statistical agency has updated the inflation calculation method with a new base year of 2015-16 to get a better and more reliable picture of inflation. After the update, the inflation rate increased, reflecting the consumer market's excessive volatility. Thus, the annual average inflation recorded at 9.02 per cent in FY23 which was 6.15 per cent in FY22. GDP growth rate registered at 7.10 per cent in FY22, showing higher growth than inflation. However, the trend reversed in FY23 when the economy grew by 5.78 per cent.
Now, for the current fiscal year (FY24), Bangladesh Bureau of Statistics (BBS) primarily estimated the GDP growth rate at 5.82 per cent. Annual average inflation, however, in April this year stood at 9.73 per cent. So, it is clear that the current fiscal year will be the second consecutive year of 'low growth, high inflation.'
It is also not easy to determine whether the rise in inflation leads to lower economic growth or the opposite. Economists and analysts are divided in their opinion on this issue. Some economists who hold the view of classical 'neutrality of money' argue that inflation has little effect on real GDP. It is because, according to them, inflation increases both prices and wages similarly and adjusts the units of measurement. Another group of economists think that rising inflation is not the cause of subdued economic growth but rather simply a symptom of underlying economic problems that weaken growth. The problems include supply-side disruptions and fiscal imbalances. Some macroeconomic theories, like New Keynesian theories, assume that a surge in inflation can increase real GDP in the short run and under certain conditions.
Putting the theoretical debates aside, it may be said that lower growth was not unpredictable. After releasing the GDP growth data for the first two quarters of the current fiscal year, it became clear that the annual growth would not cross the 6-per cent mark. Several international financial institutions and agencies also predicted that the country would witness a slowdown in overall economic activities, which will be reflected in the GDP growth. For instance, the International Monetary Fund (IMF), in the third week of April this year, projected that the GDP growth and inflation rates would be 5.70 per cent and 9.30 per cent, respectively, in the current fiscal year.
High inflation has eroded people's real income, which means that their level of consumption too has declined. It is also reflected in the current fiscal year's provisional GDP statistics, which showed that private consumption in terms of GDP came down to 66.78 per cent in the current fiscal year from 68.58 per cent in FY23. Private investment also reduced to 23.51 per cent in the current fiscal year, which was 24.18 per cent in the past year.
High inflation coupled with low growth also indicates that various efforts, mainly using monetary tools, to contain inflation worked to a limited extent. Instead, the tight monetary policy contributed to reducing the pace of industrial activities by slower credit flow. According to the central bank statistics, bank credit to medium and small enterprises (SMEs) increased by around 4.65 per cent in the first half of the current fiscal year. Provisional national account statistics showed that overall industrial growth came down to 6.70 per cent in FY24 from 8.37 per cent in FY23. Growth of the SME sector declined to 6.84 per cent from 9.15 per cent during the period under review.
The lower GDP growth also indicates that the economy's resilience has eroded, making it more difficult for Bangladesh to absorb the global geo-economic shocks. So, the trend of 'low growth, high inflation' is likely to continue for some more time. The national budget for the next fiscal year, set to be tabled in the national parliament on Thursday, will likely focus on curbing inflation with moderate growth. It will be challenging when the country is already going through the 'low growth, high inflation' epoch.
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