Growth without investment
Tuesday, 15 June 2010
Syed Jamaluddin
THE national budget, placed in parliament on June 10, did not touch on the falling trend of investment in Bangladesh. The Finance Minister simply said that the government would emphasise reducing the cost of doing business by ensuring administrative reforms and making utility services easily available.
It was perhaps necessary to elaborate on the investment situation in the budget.
Foreign investment is declining in the country. According to Bangladesh Bank, foreign investment has gone down by 63 per cent in the current year in nine months. Foreign investment is not flowing to Bangladesh because of power shortage. Inviting foreign investors to Bangladesh is futile when existing factories are facing closure for shortage of energy. Meeting the energy shortage is the biggest challenge for the government at the moment. Most of the businessmen think that the energy crunch is the biggest setback to investment.
The stagnation in investment during the caretaker government still continues. Because investment is not picking up to the desired level in the industrial sector, new industries are not being set up. As a result, employment is not increasing. Many industrial units are being shut down for want of gas and electricity. Businessmen appear to have lost interest in investment. If the present situation does not improve, stagnation is likely in the long run.
Public investment has been in decline during the last five years as the government could not fully implement the annual development programme. Researchers feel that a faster rate of investment is crucial to driving economic growth and creating jobs. A low level of investment has been a major barrier to stimulating economic growth in the recent years.
According to a report by Implementation, Monitoring and Evaluation Division (IMED of the Planning Ministry, in the first ten months of the current fiscal year, only 59 per cent of the revised ADP could be implemented. If the government wants to implement the full revised ADP, it will have to achieve 41 per cent in two months which is nearly impossible, said IMED officials.
To create an investment-friendly environment, the government allocated TK 2.5 billion (2,500 crore) for implementing the projects under public-private partnership (PPP) programmes in this year's budget. But the money could not be spent because of a failure to formulate a policy that will set the dimension of investment under PPP programmes. The allocation for PPP projects has been increased to TK 30 billion (3,000 crore) in the proposed new budget. It will be a big challenge for the government to use this money fruitfully.
Private investment remained subdued because of weak public sector response with regard to investment in power and infrastructure. The CPD report said low levels of private investment were mainly due to an absence of a congenial investment environment rather than availability of funds.
Foreign direct investment was dismally low. In July-March, it fell by 50.9 per cent, according to Bangladesh Bank. However, in the quarterly report presented in Parliament a few days ago, the Finance Minister said stagnancy in the field of investment has started improving. The minister hoped investment would increase in future. It will be interesting to watch how this is going to happen.
The World Bank has projected (19.5.2010) low economic growth for Bangladesh in the next fiscal year, taking into account the fallout from the continuing energy crisis. The WB said GDP could be between 5.5 per cent and 6.1 per cent against the government projection of 6.7 per cent. The shortage of energy poses the biggest threat to Bangladesh's growth recovery. The country's economy would grow by 5.5 per cent in fiscal 09/10 against the government estimate of 6.0 per cent. In fiscal 08/09, Bangladesh recorded 5,9 per cent GDP growth, despite the adverse impact of global recession. The growth outlook for fiscal 2010-11 will depend on domestic supply constraints, particularly energy. Energy shortages will continue to stifle Bangladesh's recovery and growth.
According to World Bank, the estimated demand-supply gap of electricity is currently a third of demand (2,000mw) at peak hours. Shortage of gas accounts for nearly half of this gap. Maintaining growth at its recent 6 per cent average over the medium term will thus be a challenge to Bangladesh, given the current infrastructure and energy deficit. Power and gas crunch remains a major constraint to businesses in Bangladesh. Even factories within the export processing zones experienced power cuts. Many large ready-made garment factories have their own power plants, but have had operations disrupted because of gas shortages. According to World Bank, industrial production in apparels, ceramics, fabrics, steel and particles is particularly hard hit. Many factories in the industrial areas in Dhaka and Chittagong are unable to use more than 50 per cent of their capacity, while small industries, which can not afford diesel generators, are on the brink of closure.
Farm subsidy has increased and contributed to higher agricultural production. Boro and Aman harvest was good. Production of potato has hit a record. The overall situation in agriculture looks good this year. This has made a positive contribution to growth rate.
Economists think that the proposed budget for the next year has set ambitious growth and investment targets. The Executive Director of CPD has said that gross domestic product growth at 6.7 per cent through higher public investment will be tough.
The country's GDP growth has been estimated at just 5.5 per cent by World Bank which is the lowest in seven years. The Bangladesh Bureau of Statistics produced an estimate of only 5.54 per cent growth for the current fiscal. The government is not, however, accepting this estimate. The projected growth rate for next the next fiscal year is achievable provided programmes designed in the budget can be implemented. The main hindrance to growth is the supply shortfall of power and energy. The RMG sector has a lot of orders, but they cannot produce to meet the orders due to power shortage.
Bangladesh is experiencing an interesting situation. The economy is growing, although at a lower rate, while investment remains static. This is growth without any remarkable rise in investment. This trend may not be sustainable in the long run. To reverse this trend, load shedding must go. The budget does not say anything specifically about load shedding.
...............................................
The writer is an economist and columnist. He can be reached at e-mail: syedjamaluddin22@yahoo.com
THE national budget, placed in parliament on June 10, did not touch on the falling trend of investment in Bangladesh. The Finance Minister simply said that the government would emphasise reducing the cost of doing business by ensuring administrative reforms and making utility services easily available.
It was perhaps necessary to elaborate on the investment situation in the budget.
Foreign investment is declining in the country. According to Bangladesh Bank, foreign investment has gone down by 63 per cent in the current year in nine months. Foreign investment is not flowing to Bangladesh because of power shortage. Inviting foreign investors to Bangladesh is futile when existing factories are facing closure for shortage of energy. Meeting the energy shortage is the biggest challenge for the government at the moment. Most of the businessmen think that the energy crunch is the biggest setback to investment.
The stagnation in investment during the caretaker government still continues. Because investment is not picking up to the desired level in the industrial sector, new industries are not being set up. As a result, employment is not increasing. Many industrial units are being shut down for want of gas and electricity. Businessmen appear to have lost interest in investment. If the present situation does not improve, stagnation is likely in the long run.
Public investment has been in decline during the last five years as the government could not fully implement the annual development programme. Researchers feel that a faster rate of investment is crucial to driving economic growth and creating jobs. A low level of investment has been a major barrier to stimulating economic growth in the recent years.
According to a report by Implementation, Monitoring and Evaluation Division (IMED of the Planning Ministry, in the first ten months of the current fiscal year, only 59 per cent of the revised ADP could be implemented. If the government wants to implement the full revised ADP, it will have to achieve 41 per cent in two months which is nearly impossible, said IMED officials.
To create an investment-friendly environment, the government allocated TK 2.5 billion (2,500 crore) for implementing the projects under public-private partnership (PPP) programmes in this year's budget. But the money could not be spent because of a failure to formulate a policy that will set the dimension of investment under PPP programmes. The allocation for PPP projects has been increased to TK 30 billion (3,000 crore) in the proposed new budget. It will be a big challenge for the government to use this money fruitfully.
Private investment remained subdued because of weak public sector response with regard to investment in power and infrastructure. The CPD report said low levels of private investment were mainly due to an absence of a congenial investment environment rather than availability of funds.
Foreign direct investment was dismally low. In July-March, it fell by 50.9 per cent, according to Bangladesh Bank. However, in the quarterly report presented in Parliament a few days ago, the Finance Minister said stagnancy in the field of investment has started improving. The minister hoped investment would increase in future. It will be interesting to watch how this is going to happen.
The World Bank has projected (19.5.2010) low economic growth for Bangladesh in the next fiscal year, taking into account the fallout from the continuing energy crisis. The WB said GDP could be between 5.5 per cent and 6.1 per cent against the government projection of 6.7 per cent. The shortage of energy poses the biggest threat to Bangladesh's growth recovery. The country's economy would grow by 5.5 per cent in fiscal 09/10 against the government estimate of 6.0 per cent. In fiscal 08/09, Bangladesh recorded 5,9 per cent GDP growth, despite the adverse impact of global recession. The growth outlook for fiscal 2010-11 will depend on domestic supply constraints, particularly energy. Energy shortages will continue to stifle Bangladesh's recovery and growth.
According to World Bank, the estimated demand-supply gap of electricity is currently a third of demand (2,000mw) at peak hours. Shortage of gas accounts for nearly half of this gap. Maintaining growth at its recent 6 per cent average over the medium term will thus be a challenge to Bangladesh, given the current infrastructure and energy deficit. Power and gas crunch remains a major constraint to businesses in Bangladesh. Even factories within the export processing zones experienced power cuts. Many large ready-made garment factories have their own power plants, but have had operations disrupted because of gas shortages. According to World Bank, industrial production in apparels, ceramics, fabrics, steel and particles is particularly hard hit. Many factories in the industrial areas in Dhaka and Chittagong are unable to use more than 50 per cent of their capacity, while small industries, which can not afford diesel generators, are on the brink of closure.
Farm subsidy has increased and contributed to higher agricultural production. Boro and Aman harvest was good. Production of potato has hit a record. The overall situation in agriculture looks good this year. This has made a positive contribution to growth rate.
Economists think that the proposed budget for the next year has set ambitious growth and investment targets. The Executive Director of CPD has said that gross domestic product growth at 6.7 per cent through higher public investment will be tough.
The country's GDP growth has been estimated at just 5.5 per cent by World Bank which is the lowest in seven years. The Bangladesh Bureau of Statistics produced an estimate of only 5.54 per cent growth for the current fiscal. The government is not, however, accepting this estimate. The projected growth rate for next the next fiscal year is achievable provided programmes designed in the budget can be implemented. The main hindrance to growth is the supply shortfall of power and energy. The RMG sector has a lot of orders, but they cannot produce to meet the orders due to power shortage.
Bangladesh is experiencing an interesting situation. The economy is growing, although at a lower rate, while investment remains static. This is growth without any remarkable rise in investment. This trend may not be sustainable in the long run. To reverse this trend, load shedding must go. The budget does not say anything specifically about load shedding.
...............................................
The writer is an economist and columnist. He can be reached at e-mail: syedjamaluddin22@yahoo.com