PRI Working Paper Series No. 3 State of the Economy 2013...2 PRI Working Paper Series No. 3 State of...

PRI Working Paper Series No. 3 State of the Economy 2013

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Contents

ABSTRACT ........................................................................................................................................... iv

Economy under siege .............................................................................................................................. 1

2013 economy in perspective ........................................................................................................ 2

Global trends in 2013 and outlook for 2014 ................................................................................... 2

Economic Growth a casualty of perverse political environment ...................................................... 3

Investment-Growth Nexus ............................................................................................................. 4

Macroeconomic stability in turbulent times ................................................................................... 4

Fiscal developments are still promising ......................................................................................... 5

Stubborn inflation as monetary management seeks growth ............................................................. 6

Import-export growth diverge in 2013 ........................................................................................... 8

RMG sector faces opportunities and challenges ............................................................................. 8

Status Quo in Trade Policy ............................................................................................................ 9

Rock bottom Equity Prices .......................................................................................................... 11

Concluding thoughts ................................................................................................................... 12

List of Tables

Table 1: Poor but impressive Bangladesh performance ......................................................................... 1

Table 2: Global Economic Outlook (October 2013) ............................................................................... 3

Table 3: Sectoral Growth Rate and Share of GDP (%) ......................................................................... 3

Table 4: Savings-investment and Investment-growth nexus .................................................................. 4

Table 5: NBR Revenue Growth (%) ....................................................................................................... 5

Table 6: Trend in ADP allocations ......................................................................................................... 6

Table 7: Recent Tariff Trends .............................................................................................................. 10

List of Figures

Figure1: GDP growth and investment .................................................................................................... 4

Figure 2: Fiscal Deficits and Debt Sustainability ................................................................................... 5

Figure 3: Shifting trend in tax reliance................................................................................................... 5

Figure 4: Trend in budget balance and financing .................................................................................. 6

Figure 5: Bangladesh: ADP Utilization rate (%) .................................................................................... 6

Figure 6: Point-to-point inflation ............................................................................................................ 7

Figure 7: Inflation (12 month moving average) ...................................................................................... 7

Figure 8: Nominal Exchange Rate & REER Trend ............................................................................... 7

Figure 9: Private Sector Credit Growth ................................................................................................. 7

Figure 10: Export- Import Growth ........................................................................................................ 8

Figure11: Foreign Exchange Reserves (Billion $) .................................................................................. 8

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Figure12: Remittances flows & Growth ................................................................................................. 8

Figure13: Migrant workers going abroad .............................................................................................. 8

Figure 14: Average Tariff on Import Categories ................................................................................. 11

Figure 15: Share Price Index and Market Capitalization .................................................................... 12

iv


ABSTRACT

This paper seeks to capture the dysfunctional political environment and the consequent economic situation in 2013, drawing attention to the fact that although the overall macroeconomic scenario has been expectedly impacted by the political violence in the country, the government managed to keep a cool head, prudently handling the financials of the country, and consequently minimizing the potential impact of ongoing political turbulence.

By the end of 2013, country-wide chaos fueled by mass political unrest led to a slowdown of economic activities with high human and financial costs, as political tensions mounted with fading hopes of peaceful, credible and inclusive elections. According to one PRI tally, the number of blockades and hartals added up to 70 days during the calendar year 2013. Accounting of losses to production from work stoppages and damage to assets and property could easily run upwards of US$10 billion, or nearly 8% of GDP. 7-8% GDP growth, once considered eminently plausible, now look like a fading dream.

Besides the political crisis the one major economic event was the Rana Plaza tragedy that killed some 1100 RMG workers and raised significant concerns among European and North American buyers about the poor state of compliance in Bangladeshi garment factories. The positive outcome of this tragedy was the coming together of leading buyers of Bangladeshi garments in Europe and North America, international agencies like the ILO and UNCTAD, Bangladeshi garment manufacturers, government policymakers, and worker representatives. For the first time, there is a common understanding about the urgency of the need to ensure compliance in Bangladesh’s 5000 garment factories and improve worker pay and working conditions. After much turmoil mainly centered on workers’ demand for a hike in wages, the minimum wage board set Tk 5300 in November 2013 for entry-level workers, a 76.6% rise over the existing consolidated wage of Tk 3000. A related event that rattled the economy and could have dire consequences in the future was the suspension of GSP privileges for Bangladeshi exporters in the US market.

This report is the fourth in a series of annual assessment of the state of the economy. 2013 saw the economy’s macroeconomic management pretty much on track with most macro indicators related to internal and external balance conforming to developments related to the economic slowdown. Though revenue growth was modest in FY13, fiscal deficit was contained within the prudent limit of 4.4% of GDP with bank financing capped under 3%. However, all indications show that the economy was on a downward slide. The violent shape that politics has taken has curbed freedom of movement of ordinary people as well as severely disrupted supply chains hurting rural farms and transportation networks. Though the economy is not spending beyond its means, it appears to be sliding into a low level equilibrium without much aggregate demand pressure from consumption or investment. Although the hartal and disruptions of 2013 have shaved off some value from agricultural production, it was manufacturing and trade that were the most seriously affected activities, contributing to significant downward adjustments to FY14 GDP estimates.


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Economy under siege

State of the Economy 2013

The state of the Bangladesh economy in 2013 is singularly defined by the state of the country’s dysfunctional politics which, by all accounts, has reached a point of no return – and perhaps worse. As of this writing, there is yet no sign that a political solution to the present crisis is imminent, something the whole nation has been waiting for with bated breath the whole year round. As aborodh and hartal have become part of daily life, economic activities and the pursuit of a minimum livelihood for the poor become victims of Bangladesh’s version of Armageddon. It is as if the political leadership has declared war against its own citizens, symptomatic of a “scorched economy” syndrome, a lose-lose scenario for one and all in the country. The depth of the crisis and its disastrous impact on the economy has not yet moved our leadership to the point that they can or will say ‘enough is enough’. The question in people’s mind is what will it take, how much more human and financial cost must be incurred, before that point is reached? Ordinary folks are aghast at the foot-dragging and seemingly inconsequential parleys that have yet to produce the result that the vast majority of the people want – a peaceful, credible, inclusive election.

It takes little to realize that, under these extraordinary circumstances, the economy would be on a rapid downward slide, and the risks to long-term growth prospects would be heightened by the day. According to one PRI tally, the number of aborodh and hartal days has already crossed 70 days (and counting) during the calendar year 2013. Accounting of losses to production and from damage to assets and property (not to mention lives lost) could easily run upwards of US$10 billion, or nearly 8% of GDP. 7-8% GDP growth, once considered eminently plausible, now look like a fading dream. What the country gained from a whole decade of remarkable economic and social progress is being sacrificed at the altar of endless rounds of political bickering with no end in sight. Meanwhile, thousands of poor people who had graduated out of poverty are slipping back into the poverty trap, as yet not enumerated by statisticians, but a situation that takes little imagination to surmise.

Just when Bangladesh had shorn its image as a “basket case” and was well on its way to becoming a success story in its pursuit of poverty reduction and inclusive development, the economy is saddled with a parasitic political regime that

seems driven to devour whatever achievements were made in the past. It is such an irony that all this happens when our economic potential as a manufacturing powerhouse has been widely acknowledged, and there is more opportunity at every step. Global investment houses like Goldman Sachs and JP Morgan had gone bullish on Bangladesh, as the “frontier five” and “next-11” investment destinations after BRICS, and McKinsey LLC is convinced that Bangladesh was going to be the preferred sourcing choice for leading garment houses of the world for the coming decade. Should we simply throw away the economic opportunities that beckon us? Because our economic locomotive appears to be on a collision course with destiny that defies logic.

Bangladesh’s success story is not just limited to its evolving RMG manufacturing prowess. British magazine, The Economist, echoed in its December 03, 2013 publication, “Bangladesh has dysfunctional politics and a stunted private sector. Yet it has been surprisingly good at improving the lives of its poor”. Nobel Laureate economist Amartya Sen agrees and, in the past year, has gone to great lengths to examine the progress in human development in South Asia, arguing, with much exuberance, that Bangladesh with some unique but striking features in its human development strategy stands out well ahead of India in many indicators of human development. Table 1 below, reproduced from The Economist magazine of November 03, 2012, points to some of the indicators he was referring to. These are remarkable accomplishments, termed “Bangladesh paradox” by some experts, particularly in the eld of health and social transformation, also echoed by the highly respected British medical journal, Lancet – all achievements to be hailed but cannot be taken for granted. Our reckless handling of the current political impasse is bound to turn these gains backward in no time. What a colossal waste of opportunities that would be! And what an injustice to the impoverished millions in our country.

Table 1: Poor but impressive Bangladesh performance Indicators Year Bangladesh India Pakistan Income per person, $PPP*

1990 540 874 1200 2011 1909 3633 2786

Life expectancy at birth, years

1990 59 58 61 2010 69 65 65

Infant (age<1) deaths per 1000 live births

1990 97 81 95 2011 37 47 59

Child (age<5) deaths per 1000 live births

1990 139 114 122 2011 46 61 72

, Maternal deaths 1990 800 600 490

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Indicators Year Bangladesh India Pakistan per 100,000 live births

2010 194 200 260

Infant immunization rate, %

1990 64 59 48 2008 94 66 80

Female (age 15-24) literacy rate, %

1991 38 49 Na 2009 77 74 61

Underweight children, % total

1990 62 60 39 2007 36 44 31

(*) Purchasing Power parity Sources: World Bank, UNICEF, WHO, BBS

2013 economy in perspective

As the curtain falls on 2013, economists, businessmen, and industrialists would all agree on how bad this past year has been for the economy as a whole. Just about everyone knew that a serious political crisis was looming, one that would be disastrous for the economy. Yet, economic agents appeared helpless in the face of oncoming political storm which eventually determined economic outcome. Besides the political crisis the one major economic event was the Rana Plaza tragedy that killed some 1100 RMG workers and raised significant concerns among European and North American buyers about the poor state of compliance in Bangladeshi garment factories. The positive outcome of this tragedy was the coming together of leading buyers of Bangladeshi garments in Europe and North America, international agencies like the ILO and UNCTAD, Bangladeshi garment manufacturers, government policymakers, and worker representatives. For the first time, there is a common understanding about the urgency of the need to ensure compliance in Bangladesh’s 5000 garment factories and improve worker pay and working conditions. To give teeth to this initiative, resources have been mobilized and more is forthcoming, to make sure that the problem is addressed and a crisis of the Rana Plaza type does not get repeated.

A related event that rattled the economy and could have dire consequences in the future was the suspension of GSP privileges for Bangladeshi exporters in the US market. The Rana Plaza episode was arguably the trigger that prompted the US decision, but protectionist undercurrents spearheaded by the AFL-CIO (American Federation of Labor and Congress of Industrial Organizations) were no less responsible for this measure which, though not immediately consequential for our garment exports to the US (as these were not covered by GSP facility), could have important ramifications for our exports to the European Union

(importer of 60% of all our RMG exports) which could consider suspension of its own Everything But Arms (EBA) facility that is so critical to our exports. Thankfully, that has not happened yet, and it appears that EU and European buyers have taken – for the time being at least -- a more constructive approach to address the crisis of compliance in Bangladesh’s RMG sector. Fortunately, there are good indications that the Rana Plaza episode coupled with the GSP suspension has been taken by all stakeholders as a wake up call for Bangladesh’s garment sector to become compliant by international standards.

Finally, 2013 saw the economy’s macroeconomic management pretty much on track with most macro indicators related to internal and external balance conforming to developments related to the economic slowdown. Though revenue growth was modest (9.4%) in FY13, fiscal deficit was contained within the prudent limit of 4.4% of GDP with bank financing capped under 3%. Likewise, slower import growth alongside strong export and remittance growth with favorable trend in aid disbursements kept the balance of payments in positive territory resulting in accumulation of foreign exchange reserves. Thus the macroeconomic scenario in 2013 remained stable and sustainable though in the context of subdued overall economic performance.

Global trends in 2013 and outlook for 2014

The global economy is still on an arduous climb out of the Great Recession of 2008-09. While the US economy shows stronger signs of recovery, with growth and employment picking up buoyed by strong private demand, EU countries are still mired in stagnancy with countries such as Italy, Spain, Portugal and Greece, still in the grip of high and stubborn unemployment. Germany remains the only high performer with low unemployment and strong exports. Consequently, the euro area is crawling out of recession, but activity is forecast to stay moderate.

2013 also saw a growing number of emerging market economies, including China and India, coming off cyclical peaks. In 2014, their growth rates are projected to remain below the elevated levels seen in recent years, for both cyclical and structural reasons. Japan’s economy is having a strong rebound but is expected to lose steam in 2014 as fiscal policy tightens.

The latest IMF World Economic Outlook (WEO) update of October 2013 (Table 2), suggest that these scenario will result in a rebound in the world economy compared to the minor setback in 2013, with global growth at 3.6 percent in 2014 compared to 2.9 percent in 2013. And trade growth is

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expected to be 4.9% in 2014, whereas it was 2.9% in 2013. This augurs well for the Bangladesh economy which is increasingly relying on export expansion for job creation and income growth.

Table 2: Global Economic Outlook (October 2013)

2010 2011 2012 2013 2014 (p)

World Output Growth 5.1 3.9 3.2 2.9 3.6

World Trade Growth

12.6 6.1 2.7 2.9 4.9

Source: IMF, World Economic Outlook ,October 2013

Two recent developments will likely shape the path of the global economy in the coming year. First, markets are increasingly convinced that U.S. monetary policy is reaching a turning point with quantitative easing set to taper off in coming months. Second, China is likely to grow more slowly over the medium term than in the recent past. The core economies of Europe (e.g. UK, Germany, France) are expected to show some signs of recovery due to higher spending by consumers and firms. But the Southern periphery countries of Italy, Spain, Portugal and Greece, are expected to remain subdued.

Emerging market economies are slowing down and the trend will remain unchanged in 2014. If the reasons for this slowdown are structural, emerging market economies might face exchange rate and financial market disruptions with some balance of payments problems as well.

So the summary global outlook is that advanced economies are gradually recovering while growth in emerging market economies has slowed. This convergence is leading to tensions, with emerging market economies facing the dual challenges of slowing growth and tighter global financial conditions. IMF’s WEO argues, “The appropriate policy mix and the pace of adjustment will differ across economies, in view of the differences in output gaps, inflation pressure, central bank authority, room for fiscal policy scheme, and the nature of vulnerabilities”.

Economic Growth a casualty of perverse political environment

With the economy in doldrums for much of 2013, GDP growth remained subdued at 6% for fiscal year FY13, by BBS provisional estimates, but projections for fiscal year FY14 growth will have to be far less optimistic. It is understandable why policymakers would like to put a good face on a bad situation and set a 72% ambitions target for GDP growth in FY14. Partly, that is because economic performance is slipping well behind the goal of the Sixth Five Year Plan to reach 8% annual growth by FY15, with an

average GDP growth of 7.3% for the five-year period. But the SFYP could hardly predict the political turn of events that we see now. That is hardly the case with authorities that prepared the budget for FY14, who, by setting an implausible GDP and growth target ignoring dire political circumstances, have also upset most of the fiscal, monetary, and trade indicators that are typically set against the targeted GDP for the economy.

Table 3: Sectoral Growth Rate and Share of GDP (%)

FY 13(E) FY 14(pr) High Scenario

FY 14(pr) Low Scenario

Share Growth Share Growth Share Growth

Agriculture 18.70 2.17 18.31 3.51 18.4 3.24

Industry 31.99 8.99 32.54 7.54 32.30 6.04

Of which Manufacturing 19.54 9.34 19.86 7.46 19.70 5.87

Services 49.35 5.73 49.15 5.42 49.31 5.03

GDP Growth 6.0 5.6 5.0

Source: BBS; PRI staff estimates

Be that as it may, it takes little imagination to surmise that the economy is and will take a major hit in fiscal year 2014 in terms of growth, income and jobs. As of this writing, 70 days of potential production activity has been lost through hartals and aborodhs, and more is expected over the next six months, as there is no end in sight to the political standoff. Since we don’t have the most accurate crystal ball to predict the outcome of political negotiations that are ongoing, we have chosen to present two scenarios of growth prospects in Table 3: a high scenario, if elections are held and recognized by all as credible; and a low scenario, if that does not happen and political confrontations continue and turn even more disruptive of economic activities. In that scheme of things, we project GDP growth in the range of 5% to 5.6%. These projections are based on our judgment of the potential damage and loss of output generation in the 15 (fifteen) sub-sectoral components of GDP, in keeping with the formulation of BBS.

To add some clarification to the projections, we expect that, among the three broad sectors of the economy – agriculture, industry, and services – agriculture is the least affected by the disruptions. Though crops are not necessarily damaged by hartals, the failure to market agricultural products due to transport disruptions do shave off some value from agricultural production. Manufacturing and trade are the most seriously affected activities, resulting in significant downward adjustments to FY14 GDP estimates. Though still accounting for about 19% of GDP, export and its related activities are becoming an increasing part of GDP. Though exports have held up decently so far,

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there is high risk that continued political disruptions might drive away buyers to other sourcing countries, faster than what Rana Plaza collapse or Tazreen fire might have done.

Investment-Growth Nexus

Can the economy be shrinking as a result of the destructive politics of the country? No, is the straight answer. As a low income country, the economy is not driven by mass consumption of the type one sees in developed economies. It is driven by investment and capital accumulation. Violent political disruptions of this kind – if it occurred – would have caused an advanced economy to immediately slide into a recession. Not so for the Bangladesh economy that does not go through cyclical phases of recession and expansion. An inherent momentum of capital accumulation and value creation keeps our economy on positive growth trajectory, though this growth could decline if economic activities and investment are both constrained – as is the case in most of 2013.

Bangladesh GDP growth, for the most part, continues to be determined by factor accumulation (labor and capital) rather than rise in their productivity. In theory and practice, investment is a binding constraint on growth. Under these circumstances, sustained higher growth can only be had from an increase in Gross Domestic Investment (GDI), which, as a percentage of GDP, has been stagnant for too long (Fig.1). Breaking this investment gridlock is essential for moving the economy to a higher growth trajectory. Without that happening, even a 7% growth rate would not be sustainable, let alone 8% growth which requires 30%+ investment rate, given an estimated Incremental Capital Output Ratio (ICOR) averaging at 4.1 during FY11-13. Evidence shows that the break from a decadal average of 4.8% growth in the 1990s, to 5.8% average growth in the last decade was prompted by a rise in the investment rate from 17% in FY95 to 23% in FY2000. That rate has been quite stagnant around 24% of GDP until FY10 when it started showing signs of a modest upward trend, reaching 26.8% in FY13. Table 4 reveals that this modest uptick in investment is largely coming from higher public investment at a time when private investment is on the decline for reasons well known.

Figure1: GDP growth and investment

Table 4: Savings-investment and Investment-growth nexus

(In percent of GDP) FY11 FY12 FY13(p) Gross Domestic Investment 25.2 25.5 26.8 of which: Public Investment 5.6 6.5 7.8 Private Investment 19.5 20.0 18.9 Incremental capital output ratio (ICOR) 3.7 4.2 4.4

Gross National Savings 28.7 29.1 29.5 Savings-investment gap 3.6 3.9 2.7 Current account balance 0.8 1.4 1.9 Source: BBS, PRI staff estimates

Macroeconomic stability in turbulent times

It has been the view of most analysts that Bangladesh economy is poised for moving up to a higher growth trajectory underpinned by sound macroeconomic management for an extended period which has yielded (a) higher average growth every decade, (b) low volatility of growth rate, (c) sustainable fiscal deficits through prudent expenditure management in the face of low revenue yields, (d) low internal and external public debt (Fig.2), and (e) stable balance of payments and exchange rates leading to accumulation of comfortable foreign exchange reserves, to name a few. On the downside, there is the threat of stubbornly high inflation in excess of 7%, major problems in financial intermediation stemming from deep-rooted ailments in the banking sector – scams and non-performing loans – with a very shallow equity market that has been only marginally helpful in mobilizing investible resources for a fast-growing manufacturing and service sector.

24.5 24.2 24.4 24.425.2 25.5

26.8

22.0023.0024.0025.0026.0027.0028.00

5

5.5

6

6.5

7

FY 07FY 08FY 09FY 10FY 11FY 12FY 13

GD

I as

% o

g G

DP

GDP

Gro

wth

%

GDP Growth Investment(GDI)

5


Figure 2: Fiscal Deficits and Debt Sustainability

Then there are some emerging risks to the macroeconomy that cannot be ignored. Failure to reach a political compromise could send the economy on a downward spiral that could be hard to contain. Sustained supply shocks (production shortages, wage and cost push) could send prices spiraling beyond control; heighted political risks could send RMG buyers scurrying to other shores turning a comfortable BOP and reserve position into a tailspin in no time; and migrant workers could look for other safe haven for their hard earned wages. Hence, there is no scope for hubris among policymakers, particularly in the light of highly destructive politics that seems to emerge with unfailing regularity about every five years at the time of transfer of power. The kind of battering the economy is subjected to could have caused any healthy economy to slide into a deep recession. The cost of this political upheaval is already running into billions of dollars! Who is to be held accountable for these mounting losses is anybody’s guess?

Fiscal developments are still promising

Despite the challenges to macroeconomic stability, the fiscal management of the government has been prudent with many positive aspects. Though, in terms of revenue performance (see Table 5), the trend of overshooting the target of the last two years has been reversed with collection being lower in FY13, there was growth in overall NBR revenue of 9.4% in FY13 which is almost 10% lower than the growth recorded in the previous fiscal year. The shortfall in revenue has been exacerbated by the import-based revenue which declined due to the predictable slowdown in imports. On the contrary, domestic based taxes were the saving grace with income tax and domestic VAT salvaging the revenue performance. Both components experienced a minor decline in growth but still managed to

remain robust. Stellar performance in income tax collection was brought about by increased withholding taxes along with the introduction of the wealth tax that rose to 2.5% in FY13. Domestic VAT has continued to perform well although having reported a slowdown in growth in FY13 to 16.8% from 19.6% in the previous year. This decline is attributable to the slowdown in domestic demand which impacted consumption expenditure. The tax performance is broadly still in line with the targets set in the Sixth-Five Year Plan and hence is not yet a cause for concern. Notably, the government has clearly given the NBR a vote of confidence for having set targets in FY14 which are higher than those set for FY13 albeit not met.

Table 5: NBR Revenue Growth (%)

A key indicator of progress in NBR’s approach to revenue mobilization with minimum distortion in economic incentives has been the continuing shift away from relying on import-based taxes to domestic-based taxes (Fig. 3). With economic growth on a low volatile trajectory, this is expected to bring more stability to revenue collection while making it easier for policymakers to engage in trade policy reforms that involve more trade openness through tariff liberalization.

Figure 3: Shifting trend in tax reliance

Source: NBR

1.0%

2.3%2.9%

2.5% 2.3%

40% 41% 43%

31% 31%

0%5%10%15%20%25%30%35%40%45%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

FY10 FY11 FY12 FY13RB FY14B

Deb

t as

% o

f GD

P

Def

icit

as %

of G

DP

Fiscal Balance/GDP Primary Balance/GDP

Revenue Components: FY09 FY10 FY11 FY12 FY13 FY05-09 FY09-13NBR tax 10.6 13.9 32.4 19.4 9.4 15.1 17.1Custom duty -2.7 9.2 9.7 18.7 -4.9 3.7 6.0VAT Import 8.2 6.9 26.0 8.5 10.3 18.3 12.0Supplementary Import 33.4 45.3 17.6 3.7 1.4 14.6 20.3Import- based Revenue 5.1 12.2 17.7 11.9 2.5 10.1 9.9Income tax 18.0 16.8 40.2 24.4 21.8 24 24.2VAT Domestic 19.0 15.1 41.6 23.7 19.6 16.8 23.8Domestic Supplementary 2.7 11.0 41.8 23.8 -0.2 11.3 15.8Others tax -0.3 8.3 30.9 -33.7 -4.5 11.9 0.1Domestic-based Revenue 14.6 14.9 40.8 23.0 16.5 18 22.0

Table 4: NBR Revenue Growth (%)

Source: NBR

0

10

20

30

40

50

60

70

80

FY01 FY09 FY10 FY11 FY12 FY13

As %

of T

otal

NBR

Rev

enue

Import-based revenue (%) Domestic-based revenue (%)

6


The fiscal deficit has been managed very prudently in light of the risk of revenue shortfall exacerbating the planned deficit target. The deficit was contained at 4.4% of GDP, well below the usual target of 5% of GDP made possible by proportional adjustments in government expenditure in line with revenue collection. There was also a reversal of past trends in deficit financing which was criticized as being overly dependent on domestic sources, particularly bank financing, which had the effect of crowding out private credit flows adversely affecting investment. However, owing to healthy foreign aid disbursement in FY13, the banking sector was spared the additional pressure and the remaining balance was covered by non-bank borrowing which picked up from the dismal performance in the previous year (Fig.4).

Figure 4: Trend in budget balance and financing

Source: Ministry of Finance

The Annual Development Program (ADP) has been in focus in the current year, with extensive debate on the Padma Bridge financing which many believe may divert funds from sectors which need much greater attention, such as power and energy. ADP utilization in FY13 has been the strongest in recent times with the government managing to utilize 96% of the total allocation

Figure 5: Bangladesh: ADP Utilization rate (%)

Source: Ministry of Finance

which was 92% in FY11 and FY12 (Fig.5). The ADP sectoral expenditure (Table 6) shows a definite shift from investing in social infrastructure to physical infrastructure with the highest allocations going to electricity and transportation sector, while health expenditures declined and education increased slightly. In FY14, the highest allocation has been provided to the transportation sector which included the Bridges Division and it remains to be seen how the escalating political disruptions in this election year impact progress in implementation.

Table 6: Trend in ADP allocations

ADP Allocation by major sectors

(% of Total ADP) FY09 FY10 FY11 FY12 FY13 FY14B

Total ADP 100% 100% 100% 100% 100% 100% Agriculture 5% 6% 6% 6% 4% 4% Electricity 10% 9% 16% 16% 14% 14% Energy and Mineral 1% 4% 3% 2% 3% 3% Transportation 10% 12% 14% 14% 15% 23% Education 13% 15% 13% 10% 14% 13% Health 11% 10% 8% 7% 7% 6% Social Welfare 1% 1% 1% 1% 1% 1%

Source: IMED

The fiscal management in FY13 has been marginally impacted in the context of the potential damage that could have been rendered due to the political factors in play. In light of this, the government managed to keep its expenditure in check, clock in a 9.4% growth in revenue and keep the deficit contained below target. Additionally, the ADP performance and the increased foreign aid disbursement to address financing of the fiscal deficit have been commendable. Although the overall macroeconomic scenario has been expectedly impacted by the political violence in the country, the government has managed to keep a cool head, prudently handling the financials of the country, and consequently minimizing the potential impact of ongoing political turbulence.

Stubborn inflation as monetary management seeks growth

Overall, monetary management in 2013, under the watchful eyes of the Bangladesh Bank, addressed most of the emerging challenges with reasonable success. At least three developments were the primary target of monetary policy in 2013: (a) inflation, (b) exchange rate, and (c) domestic credit growth. By addressing all three challenges, the goal of the central bank was to keep the economy on even keel while fueling investment and growth. In this strategy, BB appears to have leaned heavily in favor of growth even at the cost of some inflation. The question is, with inflation persisting at 7.5%, is there room for the central bank to go for growth? I have argued, in keeping with leading monetary experts, that

2.2%

-0.3%

3.2%

3.0%

2.75%

2.19%

-4.0%

-3.6%

-4.4%

-4.0%

-4.8%

-4.6%

-6.0% -4.0% -2.0% 0.0% 2.0% 4.0%

FY09

FY10

FY11

FY12

FY13RB

FY14

As % of GDP

Budget Deficit Bank Financing

85.2

81.5

81.9

85.5

89.9

91.8

92.2

96

70 75 80 85 90 95 100

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

ADP Utilization Rates

7


monetary policy is far more effective in controlling inflation than in stimulating investment or growth. Past record of monetary management by Bangladesh Bank does not change this view.

Inflation: Although point-to-point inflation has come down from the previous heights of 11% in February 2012, to 7.5% in July 2013 – an easy target for monetary policy -- it has remained stubbornly resistant to any further decline. In consequence, the poor and the fixed income earners are burdened with an inflation tax they cannot afford. This decline has been due both to lower food and non-food price inflation with point to point non-food inflation declining from a peak of 13.9% in March 2012 to 8% in July 2013 (Fig.6-7). A measure of core inflation defined as non-food and non-fuel inflation also reflects these downward trends during the first half of FY13 but has been on a rising trend since April 2013 reflecting cost push and supply shocks.

Figure 6: Point-to-point inflation

Figure 7: Inflation (12 month moving average)

Exchange rate management: The slowdown in imports coupled with strong exports and remittances led to accumulation of foreign exchange reserves and surge in net foreign assets (NFA) creating strong pressures for appreciation of the exchange rate in 2013. This required BB

to engage heavily in sterilizing the monetary impacts of reserve accumulation in order to prevent a significant appreciation of the nominal exchange rate as well as to keep the real effective exchange rate (REER) from appreciating and undermining export competitiveness. This strategy worked as is revealed in Fig.8, showing REER index depreciating in FY13 despite some appreciation of NER.

Figure 8: Nominal Exchange Rate & REER Trend

Source: Bangladesh Bank; Note: Rise indicates depreciation

Domestic credit growth: With a view to keep inflation under control, BB has been tightening its monetary policy stance in part by restraining growth of private credit, the larger component of domestic credit. In 2013, this was accomplished without much effort as private credit growth began to slide throughout the year (Fig.9), reaching 11% at end of FY13, in the absence of any appetite of the business sector for borrowing to finance new investments. Consequently, banks are flush with excess liquidity and a major component of broad money is in deep contraction. That should have a favorable impact on inflation without the need for any monetary tightening.

Figure 9: Private Sector Credit Growth

Source: Bangladesh Bank

11.97

6.50

7.785.578.53

13.96

02468

10121416

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-11

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-12

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General Food Non-FoodSource: BBS

10.9610.36

7.569.87

7.53

11.57

8.02

0

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10

15

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-11

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(%)

General Food Non-FoodSource: BBS

57.90

69.67

69.45

81.88

77.7592.27

83.86 86.02

97.58

89.42

99.70

75.00

80.00

85.00

90.00

95.00

100.00

105.00

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(REER)

Exchange Rate (Taka/USD) REER (FY01=100)

24.36

19.68

11.0710.00

12.00

14.00

16.00

18.00

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22.00

24.00

Private Sector Credit

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Import-export growth diverge in 2013

Bangladesh’s merchandise exports plus imports as a share of GDP – a measure of trade openness – has crossed 55% in FY12 against 20% in 1990. Import and export growth are strongly correlated because much of Bangladesh’s exports rely on imported inputs; but the two indicators diverged in FY13, which ended with another strong year for export growth (11%) in spite of all the talk of RMG buyers taking flight to other shores but imports continued their slide to close the year with growth of barely 1% (Fig.10). Sluggish imports have continued until November with little sign of change in this trend as business and investment climate show no sign of improving under the present political climate.

Figure 10: Export- Import Growth

Source: BB and EPB

Trade deficit has shrunk and the foreign currency reserves have hit a new high of $17.32 billion which would provide comfortable cover for over 5 months of projected imports (Fig.11). The balance of payments showed a large surplus of $7 billion in FY13, thanks also to favorable aid inflows.

Figure11: Foreign Exchange Reserves (Billion $)


Reserve accumulation is likely to continue given the current export-import and remittance trend. Remittances came in strong at the close of FY13, at $14 billion. However, there are impending risks stemming from a potential decline in

remittances as departure of migrant workers peter out. Remittances declined by around 8 percent in the first quarter of the current fiscal year compared to the same period a year ago (Fig.12). Manpower exports also dropped by about 39 percent during the period when 100,249 people went abroad for jobs against 139,647 in the same period last year (Fig.13). Declining manpower exports signify potential future decline in remittance levels as well as growth.

Figure12: Remittances flows & Growth

Figure13: Migrant workers going abroad

RMG sector faces opportunities and challenges

Tremendous opportunities as well as challenges lie before this leading sector of Bangladesh. The potentials in the RMG sector can be realized only if the challenges in some areas like infrastructure, compliance, workforce quality, technological upgradation, rapid customs clearance, and political stability are tackled. The Bangladesh textile industry can be brought on top winning track if government and other individuals take serious actions in removing or normalizing the above mentioned hurdles.

Following the disastrous accidents in this sector within the past year, RMG buyers around the world have put the

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FY 00 FY 01 FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 FY 13

Perc

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Import Growth Export Growth

10.612.3 13.1

14.8 15.517.3

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Reserves (Bill $) Months of Import

1.20

1.451.33

1.19 1.23

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17.5

39.8

9.1 10.2

3.1

-13.4-20

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0.000.200.400.600.801.001.201.401.60

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Bill USD GrowthSource: Bangladesh Bank

68.068.9 67.9

34.1

-6.7

-44.1

-42.2 -46.6

-28.2

-60.0-40.0

-20.0

0.020.0

40.0

60.080.0

020000400006000080000

100000120000140000160000180000200000

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

FY 12 FY 13 FY 14

No. of Persons going abroad GrowthSource: Bangladesh Bank

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spotlight on Bangladesh expressing deep concern with regard to compliance standards and labor relations. The Tazreen fire incident in a garment factory in Ashulia in late 2012 should have been a wake-up call for the entire industry to shape up to international standards of compliance and safety standards in the workplace. Yet, mobilization of the country's existing labor laws and courts to provide adequate protection to workers' rights still remained sluggish. The next and more devastating accident, which occurred in quick succession in early 2013, was the collapse of the Rana Plaza (RP) building which housed several garments factories, killing well over a thousand factory workers. Since then, there has been much exchange of views on how best to address the challenges emerging in the RMG export industry from the recent RP episode that could potentially put a dent on the rising exports of RMG from Bangladesh. The RP incident has been highlighted as the final straw. Some international buyers have already expressed their reservations about continuing breach in the sector’s compliance issues. USA has already suspended GSP facility for Bangladesh and EU, according to some reports, might follow suit. Possible cancellation of GSP by EU may have devastating impact on Bangladesh.

That said, the Germans and EU appear to have taken a constructive approach following the RP tragedy. Rather than penalising the country and industry, which will hurt the Bangladeshi workers more than help, they are making concerted efforts to address the challenge in cooperation with all concerned parties -- European buyers, ILO, Bangladesh government, RMG entrepreneurs. There is a tacit recognition that there is a long and arduous road ahead and the problem is not one that can be resolved through any quick fixes. The Bangladesh industry will have to take credible and serious steps to avert disasters of the RP and Tazreen kind. It is worth noting that, as a single trading bloc, EU27 (the 27 member countries of EU) is the largest trading partner of Bangladesh, with trade of Euro 9.4 billion accounting for 19% of Bangladesh's global trade in calendar year 2012, followed by China, India, and USA. EU was also the top importer from Bangladesh (mainly clothing) with Euro.7.8 billion which was 42% of Bangladesh's total exports. Bangladesh RMG exports still remain healthy with a growth of 12.7% in FY13 which is nearly a double of the FY12 growth of 6.6%. RMG exports have also seen a 1 percentage point increase in their share of total exports to 79.6% stating that a significant share of Bangladesh’s export revenue comes from RMG exports and this figure is still rising amid serious controversies in this industry.

However, that does not mean Bangladesh RMG is completely out of the woods yet. There is a clear message that European consumers want to buy clothes that have been produced under ethical working conditions -- i.e. workers receive living wage, factories meet fire safety and other compliance standards. If European consumers start moving away from Bangladeshi clothes because of regular media reports on compliance failures, it could be tough to regain their confidence.

The good news is that some 40% of the EU clothing market is now made up of low-priced garments in which Bangladesh products reign supreme. European consumers who have gotten used to buying €2-3 T-shirts will have difficulty finding such bargains by sourcing elsewhere. Second, textile is a dying industry in Germany and elsewhere in EU, so there is no textile lobby clamouring for tariff protection, as in USA, which abates fears of a potential EU GSP suspension. But the bad news is that Turkey is emerging as a close competitor of Bangladesh in the EU market having exported US11 billion of clothing in 2011. Though not yet a member of EU, Turkey is part of the EU Customs Union that entitles it to export clothing duty-free to all EU members, at par with Bangladesh. Bangladesh's labour cost advantage could be trounced by Turkey's transport cost advantage. That competition should be taken seriously as well.

As a way forward, therefore, the Bangladesh RMG Sector should look towards product diversification and product innovation by learning from success stories such as the Sri Lankan RMG industry. Bangladesh has historically operated at the lowest rung of the RMG product line. Low value-high volume buyers have chiefly sourced from Bangladesh due to significant cost competitiveness. The RMG sector should undertake a long term strategy for product innovation which should allow them to cater to higher value buyers. It is evident that Bangladesh has begun taking steps to abate international fears of the integrity and reliability of the Bangladesh RMG sector as a provider of high-quality and cost-effective products while fulfilling all the necessary standards and workers’ requirements. There is no room for complacency for Bangladesh but to get serious in being a compliant RMG supplier to retain the loyalty of global consumers.

Status Quo in Trade Policy

It is time to recognize that Bangladesh is among the major beneficiaries of the multilateral trading system under the auspices of WTO. The Agreement on Trade Facilitation as an

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essential part of the Bali package coming out of the 9th WTO Ministerial in Bali is another feather in the WTO cap. When implemented by all WTO members, this global scheme is expected to add one trillion dollars to global GDP with significant gains for low income countries. Bangladesh, which supported the Bali package, should be in the forefront of countries far along in the implementation of TFA. This entails not only investments in trade related infrastructure but also a new orientation in trade policy. Only a combination of the two will allow Bangladesh to reap full benefits of the new global regime.

But Bangladesh trade policy seems mired in a mercantilist approach to trade. There is hardly any perceptible change in trade policy orientation from FY13 budget to FY14 budget. The current FY 14 budget, although pared down Custom Duty (CD) rate for two tariff slabs, largely perpetuates the previous tariff stance. The prevailing policy regime characterizes a protectionist environment for domestic import substituting industries constraining the scope for export diversification beyond RMG. Relative incentive for domestic and export production reveals that production for domestic sales has a significant advantage over exports. What is disconcerting is that, in a regime of non-uniform tariffs, incentive from protection is non-uniform without any rationale why some sub-sectors receive higher effective protection than others. In light of Bangladesh’s goal of attaining higher growth and reaching middle-income status by 2021, and in the context of the TFA, it is important to mainstream trade policy for development. For that,it is imperative to review the course of trade policy along the lines of the nation’s objectives as well as the export basket’s strengths in terms of product and geographical diversification in withstanding the shocks from an ever globalizing world economy.

Of the three pillars of trade policy – tariffs, QRs, and exchange rates – Bangladesh has wiped its slate clean of QRs, and has managed exchange rate flexibility with reasonable success. Tariffs on imports remain the main instrument of trade policy. The current budget amended the 3% CD on capital goods and 12% on intermediate inputs to 2% and 10% respectively for the four non-zero tariff slabs. But the top CD rate of 25% on final consumer goods (FCG) has been stubbornly resistant to any reduction since FY 05. Although the average CD has declined over the past 13 years to 13.2%, its share in NPR still remains high at 47% (Table 7). Average NPR has shown mixed trends. It initially declined from FY01 and FY09 and then started rising again over FY10-FY13. The minimal decrease in average NPR from last year is inconsequential as nominal protection is

unchanged from its position in FY01. Two important features have emerged from the tariff structure and its trend: (a) the proliferation of para-tariffs and (b) perceptible divergence between the top NPR rate (which moved up since FY01) and the average NPR, and a growing wedge between input and output tariffs.

Table 7: Recent Tariff Trends

Tariff (%) FY01 FY 09 FY 11 FY 12 FY 13 FY 14

Avg. CD (Un- weighted) 21.1 13.8 13.6 13.6 13.9 13.2 Avg. para-tariffs 7.4 6.3 10.2 12.9 15.1 14.9 Avg. Nominal Protection 28.5 20.1 23.8 26.5 28.9 28.1 Top CD rate 37.5 25.0 25.0 25.0 25.0 25.0 Share in NPR: CD 74.7 68.8 57.1 50.3 47.9 47.0 Share in NPR: Para Tariff 25.6 31.2 43.0 49.7 52.1 53.0 Coefficient of Variation 74.0 102.7 114.2 119.7 114.9 116.0 Source: NBR & PRI staff estimates

Para-tariffs are an ad hoc trade instrument which affects the relative incentive between production for export and domestic sales. Such import taxes and levies have emerged as dominant set of trade taxes over the past decade, its share in average NPR first exceeding that of CD in FY13 and currently at 53%. Regulatory duty (RD) and supplementary duty (SD) serves as the standard means for raising revenue or affording protection to domestic import substituting industries. The current budget extends the uniform application of 5% RD on all products subject to the top rate of 25% in addition to applying RD on a few items with the CD rate of 10% for the interest of the domestic industry. Introduced under the VAT Act of 1991, SD was meant to be a trade-neutral tax, i.e. applied equally on both imports as well as domestic sales. However, through its differential application, (higher rates in imports; lower to zero rates applied to import substitutes or domestic production) SD has assumed the role of a predominately protective tariff. Furthermore, SD is imposed on duty paid value adding complexity to the computation and creating the scope for malfeasance and non-transparency, which serves as a trade inhibiting factor. Imposition of SD in protective manner was a major driver of NPR for much of the past decade. At present, UNCTAD’s COMTRADE database on cross country tariff comparison does not tabulate information on para-tariffs, allowing the rampant use of para-tariffs to escape the attention of WTO Trade Policy Review. However, information on para-tariffs are being compiled and could soon become an irritant in multilateral trade discussions.

Protection analysis in the past was conducted on the basis of nominal protection which is measured by means of prevailing tariffs and para-tariffs on imports. The focus now is on effective protection. Producers are aware that

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profitability is a function of relative protection on outputs and inputs such that higher tariff protection on inputs undercut protection on outputs. Decline in average NPR (which has been climbing since FY01) was primarily due to the reduction in tariffs on basic raw materials, intermediate goods and capital goods (Figure 14). This trend is symptomatic of the priority demand for higher revenue. The consequence of this trend is the rise in the dispersion of tariffs among the import categories, measured by the coefficient of variation (from 74% in FY01 to 116% in FY14; see Table 1). The increase in the coefficient of variation signals a rise in effective rate of protection to domestic producers over the past decade. These current trends of greater significance of para-tariffs and the wedge between input and output tariffs warrants a closer examination of the incentives created at the industry level.

Figure 14: Average Tariff on Import Categories

NBR Asycuda database; PRI staff estimates

PRI conducted a survey of 100 manufacturing industries covering 12 selected sectors in 2012 to make an assessment of their levels of effective tariff protection. Effective Rates of Protection (ERP) is a measure of effective incentives to a firm producing a traded product – increases with higher tariffs on output or lower tariffs on inputs, and decreases with lower tariffs on outputs or higher tariffs on inputs. ERP computations across products and firms reveal that effective protection rates far exceed NPRs by wide margins because average input tariffs are well below output NPRs, ranging from over 100% for agro-based products like fruit juice, to over 300% for such products as bicycles and plastic chairs. Majority of manufacturing in Bangladesh is concentrated on consumer goods production, all of which have output NPR rates between 50-100% (200% for biscuits!). The fact is that all of these sectors have high potential for export expansion, a primary goal of trade and industrial policy. If that be the objective, the incentive system on the ground appears perverse.

The protection situation is quite the reverse in the case of production for export, even for firms that produce both for the domestic market and exports. Since producers have no output protection in export markets, export ERPs are typically zero when imported inputs are duty exempt via mechanisms such as SBW or duty drawback. These support policies for export are not enough to match the augmented profitability resulting from the wedge between input and output tariffs. Overall, the ERP estimates confirm the existence of significant anti-export bias of the tariff and incentive regime for firms that engage in production for exports and domestic sales. It stands to reason, that export enterprises still operate despite higher profitability in the domestic market due to positive processing margin still existing in export markets and the opportunity to benefit from future scale economies. Thus the current protective regime skews the incentives for export production and inhibits export promotion and product diversification.

The focus of the industrial policy to pick winners by selecting and promoting ‘thrust’ sectors through incentives does not reflect the path of emergence of the RMG sector as the leading export item, nor for that matter was the ship building industry prior to its recent success recognized and promoted through the thrust sector incentives.

Globally, Bangladesh still performs poorly on indicators measuring the enabling environment for trade, coming in 109th among 132 countries in 2012 as per the Enabling Trade Index (ETI) of World Economic Forum. By signing on to the TFA, Bangladesh has committed to moving up the ETI ranking in a short span of time. Higher growth in the economy will have to be export driven, particularly in manufactures, stemming from more products in the export basket by addressing the anti-export bias for non-RMG exports prevailing from under the current policy constraints. The way forward in terms trade policy requires policy action, by phases, of cutting the output tariffs which protect them (especially the para-tariffs) combined with increasing the very low input tariffs. This has the advantage of protecting against revenue losses alongside encouraging emerging and potential exports.

Rock bottom Equity Prices

Three years have passed since the equity market peaked in December 2010, after leading most global stock indices for almost three years. Market capitalization crossed 50% of GDP from 27% at the beginning of the 2010 (Fig.15). As the situation was unsustainable, a massive correction started in January 2011, with the DGEN index tumbling by over 40% in

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a month. Thereafter, the market has remained volatile without any clear direction until 2013 when it showed a modest gain of 5.7% as of end November, with the DGEN index hovering around 4300.

Figure 15: Share Price Index and Market Capitalization


After about two years of “irrational exuberance” in the capital market, euphoria gave way to all round pessimism which has persisted till date. The DGEN, now more than 50% off its Dec 2010 peak, had prompted aggressive regulatory intervention from the government, largely futile. History of equity markets has shown that when stock prices are driven up more by speculative behavior of investors than by market fundamentals, bursting of the “bubble” was an inevitability. So it was for the country’s stock market – almost a repeat of the 1996 episode. It showed that the stock market had not reached a level of maturity at which it could play a significant role in channeling substantial resources into productive investment. In FY12, the amount of industrial term loans disbursed by banks and non-bank financial institutions (NBFIs) was Tk. 352.78 billion (of which the amount disbursed by NBFIs was Tk. 38.0 billion) compared with only Tk. 42.0 billion raised from new capital issues through private placements, public offerings, and right offerings in the capital market. We all agree that a vibrant equity market can serve as an important conduit for mobilizing scarce capital and channeling them into industrial investment and fueling growth. But this cannot happen when the capital market succumbs to speculative behavior of investors showing all the traits of a casino driven predominantly by hot money and speculation. Hopefully, all stakeholders in the capital market have learnt their lessons by now.

Nevertheless, for investors with a long-term outlook on the Bangladesh economy, seasoned market analysts project an upswing once the political turmoil is behind us. In that light, equity prices are at attractive levels now, having reached

rock bottom over the past two years, far removed from the heady peaks of 2010. During 2013, the Bangladesh stock market appears to have largely proved resilient to the political turmoil. Is now a good time to buy? According to Asian Tiger Capital (ATC), one of Bangladesh’s leading capital market analysts, “….depends on one’s time horizon and tolerance for volatility”. ATC analysts remain highly confident that on a 9-12 month outlook, the DSEX will be significantly higher than currently, and most likely above 5000. But in the interim 3-6 months, assuming the BNP boycotts the Jan 5 elections, the violence will get progressively worse and we will go through an extended period of policy uncertainty and economic disruption. This will likely yield more attractive levels to build exposure to the Bangladesh market.

On the governance front, a significant development has been the demutualization of both the Dhaka and Chittagong stock exchanges, with a view to minimizing conflicts of interest by separating ownership and management of these bourses and placing a majority of independent qualified directors on the two boards. Demutualization separates trading and ownership rights diversifying the exchange’s shareholder base. This major development brings the Bangladesh stock market in tune with most bourses in South and East Asia, as well as some of the leading exchanges in the world, such as the New York, NASDAQ, London, Tokyo, Deutsche Borse, Singapore, and Hong Kong stock exchanges. This path breaking step might put an end to allegations of insider trading and stock price manipulations that have been so common in the past.

Concluding thoughts

All indications are that the economy is on a downward slide. Production and supply for domestic or export markets are under endless threat of blockades. Supply chains have been disrupted hurting rural farms and transportation networks the most. Containers are piling up at Chittagong port, the lifeline for the economy. Exports and import volumes are being squeezed. Acute form of uncertainty has gripped movement of goods and people. The violent shape that politics has taken has curbed freedom of movement of ordinary people. Not only that, event planning has become next to impossible. Risks to life and property are enormous at every street corner.

For the time being at least, the economy is held hostage to dysfunctional politics and no end is in sight even if we look six months down the road. All economic agents and drivers of growth have opted for a holding position and a ‘wait and

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see’ approach. The political crisis has most certainly taken the wind out of the growth momentum. But the good news is that prevalence of sound macroeconomic fundamentals has precluded the onset of a fiscal crisis or a balance of payments crisis as evidenced by the recent disbursement of IMF’s latest tranche of $1 billion Extended Credit Facility (ECF). Though the economy is not spending beyond its means, it appears to be sliding into a low level equilibrium without much aggregate demand pressure from consumption or investment – signaled by rising current account surplus which reached 2% of GDP in FY13. Make no mistake, protracted political instability poses a threat of potential downgrading of the economy’s credit rating by the likes of Standard & Poor or Moody’s. The real bad news is that in the meantime many thousands will have slipped below the poverty line and more effort will need to be made to lift them out of poverty again.

Once the political clouds clear, we expect the inherent dynamic but latent forces to be unleashed again to restore the growth momentum the economy has witnessed in the recent past. I conclude with an optimistic chant from Bangladesh Bank Chief Economist, Dr. Hassan Zaman, who blogged thus: “But if history is any guide then it is likely that the country will continue to pursue its mix of orthodox macro and unorthodox micro policies and come up with ways to overcome its odds, make the most of its current demographic dividend, diversify its economy, further reduce poverty and strengthen social outcomes”. I concur with a degree of cautious optimism.

Dr. Sattar is Chairman, Policy Research Institute. Competent research support was provided by PRI research economists:

Rumana, Mahjabeen, Tahera, Mehrin, Naureen, and Yousuf

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