Confusion over reaching GDP growth target

Shahiduzzaman Khan Finance Minister AMA Muhith has, of late, expressed his scepticism over whether the projected gross domestic product (GDP) growth rate at 7.0 per cent would not be achieved or not this fiscal due to what he called high import cost, spiralling inflation, less-than-expected investment and high amount of subsidies bill under public spending. The latest assessment by the Finance Minister is somewhat different from his earlier clear optimism about achieving it. However, the central bank governor, Dr Atiur Rahman, exuded his optimism afterwards, reiterating that the current fiscal year's targeted 7.0 per cent economic growth would be achieved as he finds the macroeconomic indicators positive. According to reports, the progress of the rural economy in particular made him optimistic over the achievement of the GDP growth target. Defending his contention, Dr Atiur said the key determinants of macro economy remained quite stable in the country even during the post-recession period. The country saw 47 per cent growth in readymade garments (RMG) export and 20 per cent growth in remittance inflow during the last three years of the present government. This will help achieve the projected growth rate, the BB governor added. There is no denying that Bangladesh has performed better than many other comparable countries in the recent past in coping with several adversities in the global economy -- the ongoing recession, food crises on a number of occasions and the increases in the prices of petroleum oil and raw materials. But now a number of key indices of the macro-economy -- depreciation in exchange rate, high rate of inflation, high lending rate, liquidity constraints being faced by a good number of banks, low level of capital market index and low level of foreign aid disbursement -- do otherwise indicate that the macro economy is heading towards some risks. The external sector is facing imbalance because of, among other factors, the low rate of export growth in a situation where import payments have been on the rise. Export growth rate has dropped most markedly in the recent time. If such risks are not properly managed, there might be a short-term crisis. The short-term outlook of the economy looks not promising at all, according to some experts. The government is now faced with multiple internal and external difficulties on the economic front. All such factors have resulted in the deterioration of its balance of payment (BoP) situation, large bank borrowings by the government and hefty subsidy bill. The country's external balance is under pressure largely due to slow rate of growth in inward remittances and high import bills. These, coupled with depreciation of the currency, are likely to put extra pressure on the rising inflation. A recent research report cautions against a possible shortfall in the government's remittance annual earning target this fiscal. This may eventually impact adversely economic growth rate and macroeconomic stability. There is, thus, no denying that the economy is facing major challenges on account of the rising inflation and the emerging pressure on the country's BoP. The country's overall BoP is in deficit, for the first time in a decade, leading to some depletion of foreign exchange reserves. The percentage of labour migration, in net terms (outflows minus returnees) has dropped in recent years, due to the economic recession, the political unrest in the Middle East and North Africa, and somewhat depressed demand in the overseas labour markets. Workers' remittances have become a cause of concern, particularly against the backdrop of an adverse situation relating to current account balance and the volatility of the exchange rate. The International Monetary Fund (IMF) projected that the inflation rate was likely to exceed 11 per cent in the current fiscal year (FY) against the government's prediction at 7.5 per cent. Depreciation of local currency against the dollar is one of the major reasons for this. Last week, inter-bank exchange rate crossed Tk 81 with a 15 per cent increase since last year. Imports of fuel and fertiliser are on the rise, while the overall growth of import of capital machinery, spares and industrial raw materials slowed down over the last four months. In fact, there is a shortage of foreign exchange in the country. Both state-owned and private commercial banks are now approaching the Bangladesh Bank for foreign currencies for import of fuel and fertiliser. The increasing demand for foreign currency, in turn, is putting pressure on foreign exchange reserve. The country received only $5.0 million in net foreign aid in the last five months compared to $250 million during the same period last fiscal. Analysts say declining industrial production is likely to slow down the GDP growth rate. The central bank statistics showed that opening of letters of credit (LCs) for capital machinery and raw materials fell by about 35 per cent in the last four months. The drop in opening of LCs possibly reflects the investors' absence of proper confidence, in view of uncertainties centring the crisis in Europe and its effect on the rest of the world, and also policy flip-flops. Among the policy options, the government is likely to go for issuing sovereign bond to the international markets in a bid to address the nagging problem about the availability of external fund. Two foreign banks have reportedly proposed recently to the ministry of finance (MoF) to issue the bond as a move to deal with the current economic challenges. The authorities concerned are examining the proposal of issuing the bond. The expert opinion from the Coordination Council meeting may be sought before taking a final decision on it. If challenges before the economy are not addressed properly, there will obviously be some unfavourable impact on investment and employment generation. In order to face such challenges, there should be coordinated efforts, instead of ad hoc arrangements that are unlikely to bring any good results. In the circumstances, the government needs to act quickly to curb the import of non-essential goods and put a brake on public spending in not so priority areas at this stage. The relevant authorities need to act promptly on prioritising its areas of actions accordingly. The implementation of an integrated plan of action to this effect brooks no delay. szkhan@dhaka.net