GDP growth rate: Target versus performance

The expected growth rate for fiscal year 2015-16 was declared at the beginning of June. According to government publications, the economy is projected to grow at around 7.1 per cent. This ambitious pace is underpinned by steady growth in agricultural, industrial and service activities and persisting political stability.
However, development partners forecast growth to be significantly more modest. The International Monetary Fund (IMF) projects GDP (gross domestic product) growth rate to be 6.5 per cent, the World Bank (WB) 6.3 per cent and the Asian Development Bank (ADB) 6.1 per cent.
The lower estimates put forward by development partners are attributed mainly to probable political unrest, slow growth of foreign investment and rise of 'bad loans' in the banking sector.  According to latest statistics, 10.47 per cent of loans in the country are not being repaid as originally agreed upon. However, it is unanimously agreed that even these modest figures are commendable, given the global economic scenario.
Growth estimates for other countries have undergone similar revisions. The IMF has cut its prediction for the world GDP growth from 3.9 per cent to 3.5 per cent while China's growth forecast was revised down from 7.1 per cent to 6.8 per cent. On the other hand, growth rate for India has been revised upward from 5.6 per cent to 7.4 per cent.
DISCREPANCY IN PROJECTED GROWTH RATES: The government claimed GDP growth rate for FY 2014-15 to be 6.5 per cent. This is inconsistent with the data estimated by development partners or other economic indicators. The Figure 2 shows the discrepancy between the government's reported growth rates and those of the Asian Development Bank (ADB).
Similar to the ADB, GDP growth rates calculated by development partners such as the IMF and the World Bank are usually lower than those of the government. The pronounced discrepancy in GDP growth rates, especially over the last two years, is a result of the government's decision to recalculate GDP growth rate using FY 2005-06 as base year, instead of FY 1995-96.
It is important to restore integrity of the government's published statistics since these data are used by investors, analysts and economists to make decisions that have significant bearing on the economy.
PROJECTION AND PERFORMANCE: FY 2014-15 was the last implementing year of the Sixth Five-Year Plan (SFYP). The plan had envisaged 7.0 per cent growth rate. However, GDP growth rate hovered around 6.0 per cent (ADB) for the duration of the SFYP. FY 2014-15 finished with growth rate being a little over 6.0 per cent. Although praiseworthy, this was considerably lower than the government target of 7.3 per cent. A similar trend is observed for fiscal years 2011-15.
Figure 2 shows that the government is prone to setting over-optimistic growth targets.
Targets set by the government remain unmet by the economy for the following reasons:
Restrictive fiscal policy: The government aimed to stimulate growth through an expansionary fiscal policy by raising expenditure and tax revenue generation. However, deficit declined from US$ 6.13 billion in FY 2013-14 to US$ 4.72 billion in FY 2014-15. This indicates a restrictive fiscal policy.
Restrictive monetary policy: In order to reach set targets, the government planned to lower interest rates through implementation of expansionary monetary policy. However, according to data published by the Bangladesh Bureau of Statistics, growth of nominal money supply fell from 16 per cent in FY 2013-14 to 11.2 per cent in FY 2014-15.
Inconsistent exchange rate policy: While most currencies have depreciated against the dollar, the dollar-taka ratio has remained stable. Hence, Bangladeshi products have become relatively less competitive in the international market. This poses an obstacle to growth, since the economy is heavily reliant on readymade garment (RMG) exports.
Political unrest: The country frequently faces political instability in the form of strikes and blockades. These are often accompanied by violence and vandalism, destruction of goods, restricted mobility and safety hazards. In recent years, political unrest has escalated and is likely to persist. This has discouraged both private investments and exports. It is estimated that in the third quarter of FY 2014-15, political unrest resulted in economic loss of US$ 2.2 billion.

Slow growth in agricultural sector: In FY 2014-15, due to disruptions in supply, distribution and marketing caused by strikes and blockades, the sector suffered production loss for perishable products. Its growth was revised down from 3.5 per cent to 3.3 per cent.  Previous years experienced slower growth due to bad weather, unexpected pest infestations, etc.
Infrastructural constraints: Inadequate power supply and unreliable road communication are the two main infrastructural constraints slowing economic growth. Factories and mills are unable to run at full capacity due to power shortage, or are forced to set up their own plants to ensure constant supply, driving up costs. Fluctuations in power supply also causes damage to expensive capital machinery.
Road communication is greatly hindered by heavy unregulated traffic and ongoing construction works. This slows down transport of goods and services, and increases lead time, reducing competitiveness of many exportable products.
ATTAINING TARGETED GROWTH: The Seventh Five-Year Plan seeks to push Bangladesh's GDP growth from the range of 6-7 per cent to 7-8 per cent. The goal is to incrementally reach 8 per cent growth rate by FY 2020-21. In order to have a realistic chance of reaching the target, the following issues must be addressed:
Increasing private investment: Agriculture, manufacturing and services sectors comprise about 90 per cent of the Bangladeshi economy. And these are heavily reliant on private investment. However, private investment has remained stuck at 22 per cent of GDP over the last 5 years. To reverse this trend, it is suggested the government implements the following measures (i) lower interest rates, (ii) ensure adequate and reliable supply of electricity and gas, (iii) lower profit tax rate, and (iv) establish specialised economic zones.
Increasing public sector investment: Inability to raise taxation to the projected level, low foreign aid utilisation and transfer payments to state-owned enterprises all contributed to low public investment rate. To attain the growth targets set in the Seventh Five Year Plan, investment needs to go up by 7.0 per cent of GDP. Investment may be increased through allocating resources to infrastructural projects.
Lowering interest rates: Expansionary monetary policy should be implemented to reduce interest rates and encourage borrowing. In order to reach the lowest possible interest rate, the government must lower the proportion of non-performing loans since they drive up costs. Currently the proportion of non-performing loans in government-owned banks is between 20 per cent and 25 per cent.
Improving social and capital infrastructure: To attain the growth rate envisioned by the national budget, social and capital infrastructure will need to be improved. With regard to capital infrastructure, the two most important issues are power and communication. The government must implement more power generation projects and ensure supply to all areas. In addition, finishing road works, enforcing traffic rules and ensuring road safety will facilitate better road communication.
It should be noted that in order to reach the high economic targets being set, human capital will need to be developed to ensure that the workforce is productive. For this to happen, adequate resources must be allocated for improvement of social infrastructure. This would include access to education, quality of education and access to healthcare. Currently, only about 0.8 per cent of GDP is allocated to health and 2.0 per cent of GDP is allocated to education. This compares poorly to those of other countries.
Encouraging exports: Growth in exports contributed greatly to economic growth experienced during the implementation of the Sixth Five Year Plan. It is likely play an even more significant role in the Seventh Plan. Even though exports have performed well in recent years, there has been very little export diversification. In FY 2014-15, over 81 per cent of exports of the country were RMG products. Changes in the trade policy, such as providing fiscal incentives similar to those provided to RMG products can help diversify the export basket. Additionally, implementation of special economic zones, reliable power supply and communication will also help in reaching this goal.
The budget for FY 2015-16 and the GDP growth estimated in it bear special significance since it is the first year of the implementation of the Seventh Five-Year Plan (Seventh FYP). Hence, it informs the general public of the government's most important economic policies and the direction the economy is headed to.
Evaluation of GDP growth figures of recent years shows satisfactory economic performance. However, the growth rates are well below target. To reconcile target with performance, the most important steps to be undertaken by the government are power sector development, export diversification, easing trade policy and encouraging private investment.
The writer graduated in Economics from the University of Essex and currently works as an associate at a consulting firm and analyses quarterly macroeconomic data to evaluate the status of the Bangladeshi economy. tahsin.mariha@gmail.com