Qrbe presentation december 2017

SANEM’s

Quarterly Review of Bangladesh Economy December 23, 2017 Dr. Selim Raihan Executive Director, SANEM Professor of Economics, Dhaka University

Research assistance provided by • Iffat Anjum, Research Associate, SANEM • Mehzabeen Ahmad, Research Associate, SANEM • Zubayer Hossen, Research Associate, SANEM Administrative assistance provided by • Sk. Ashibur Rahman • Sheikh Sabbir

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How has the economy performed so far?

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A rising GDP growth rate since 2012-13

GDP growth rate crossed 7% mark in 2015-16

Data source: BBS

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Largely driven by factor accumulation and government expenditure!

Data source: BBS

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Share in total investment

But, sluggish private investment and rise in public investment!

Data source: BBS

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And a falling export growth rate!

Annual growth rate of exports of goods and services based on constant 2010 U.S. dollars.

Data source: World Bank

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Export update for FY 2017-18 Change in July-Nov 2017-18 over July-Nov 2016-17 Items % change

Million US$

July-Nov 2016-2017

July-Nov 2017-18

% change

13628.45

14562.91

6.86

RMG

7.46

Knitwear (Chapter 61)

10.86

Woven Garments (62)

3.99

Leather & Leather Products

-2.95

Jute & Jute goods

16.51

Frozen & Live Fish

10.78

Pharmaceuticals

23.33

Plastic Products

-34.99

Wood & Wood Products

-25.14

Data source: EPB

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And a falling remittance growth rate!

Annual growth rate of remittances in current U.S. dollars.

Data source: World Bank

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Remittance update for FY 2017-18

Million US$

July –Nov 2015-2016 6174.6

July-Nov 2016-2017 5208.1

July-Nov 2017-2018 5768.5 +10.8%

-6.6%

Data source: Bangladesh Bank

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And a falling import growth too until 2016!

Annual growth rate of imports of goods and services based on constant 2010 U.S. dollars.

Data source: World Bank

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Import update for FY 2017-18 Surge in import of rice •

Million US$

July-Oct 2016-2017

July-Oct 2017-18

% change

13319

17141

28.7

•

Data source: Bangladesh Bank

•

•

During July-September 2016-17, import of rice was only 35.7 crore taka.

During July-September 2017-18, import of rice increased to 2912.1 crore taka.

During 2016-17, import of rice was only 604 crore taka This means that in the first three months of 2017-18, import of rice has been around 5 times of the total import in the past financial year.

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Import update for FY 2017-18 Surge in import of rice •

Million US$

July-Oct 2016-2017

July-Oct 2017-18

% change

13319

17141

28.7

•

Data source: Bangladesh Bank

Also, rising import of capital machineries and raw materials need to be tallied with the current investment scenarios

•

•

During July-September 2016-17, import of rice was only 35.7 crore taka.

During July-September 2017-18, import of rice increased to 2912.1 crore taka.

During 2016-17, import of rice was only 604 crore taka This means that in the first three months of 2017-18, import of rice has been around 5 times of the total import in the past financial year.

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Inflation

Data source: BBS 14

Movement of non-food price indices Items

Weights

Clothing & Footwear

6.85

Gross rent, Fuel & Lighting

16.87

Furniture, Furnishing & Others

2.67

Medical care & Health Expenses

2.84

Transport & Communications Recreation, Entertainment, Education & Cultural Services Misc. Goods & Services

4.17

Total

41.16

4.13 3.63

Data source: BBS

Income effect: Rise in inflation leads to reduction in real income and people demand less of non-food items Substitution effect: As food prices have gone up, people reduce spending on non-food and spend more on food

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Rice prices are still high and on the rise despite imports!

Fine Medium Coarse Najir/Miniket (ordinary) Najir/Miniket (fine) Paijam (ordinary) Paijam (fine)

Taka per kg on 21-12-2017 58-68 48-56 44-46 58-62 64-68 48-52 52-56

% change from 21/11/2017 4.13 4.00 5.88 3.45 5.60 2.04 1.89

% change from 21/12/2016 26.00 22.35 23.29 30.43 26.92 21.95 24.14

Data source: TCB 16

Poverty impact of recent rice price rise • Using a computable general equilibrium (CGE) model, we simulated a shock of 35% increase in the price of rice in the Bangladesh economy

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Poverty impact of recent rice price rise • Using a computable general equilibrium (CGE) model, we simulated a shock of 30% increase in the price of rice in the Bangladesh economy

• Rise in head count poverty rate by 0.32 percentage points due to rice price rise in this year

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Poverty impact of recent rice price rise • Using a computable general equilibrium (CGE) model, we simulated a shock of 30% increase in the price of rice in the Bangladesh economy

• Rise in head count poverty rate by 0.32 percentage points due to rice price rise in this year • This means 5,20,000 people have fallen into poverty due to rice price rise in this year.

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Projection of production & Global rice price • FAO latest production projection: • Downward prospects for Bangladesh, India, Nepal and Sri Lanka • Improvements for China, Thailand, Cambodia, Lao PDR, Myanmar.

• USDA projection: Source: Raihan (2017) Data source: FAO

• Bangladesh: The 2017/18 crop is now forecast at the lowest level since 2010/11 20

What should be done?

• Increasing the supply of rice in the market.

• Import of rice from India, Cambodia, Myanmar

• Improvement in supply chain: Chittagong port and Benapole port and internal supply mechanism.

• Careful actions against ‘hoarding’ so that these actions don’t disrupt the supply chains.

• A ‘Rice Policy’ is needed with respect to production, import, supply management, and strategic agreements with the rice exporting countries.

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Growing BoP deficit • Current account balance: • Deficit in July-October, 2017-18: US$ 3311 million.

• The deficit was only US$ 44 million in July-October, 2016-17

• Balance of payment: • Deficit in July-October, 2017-18: US$ 225 million • It was a surplus of US$ 2037 million in July-October, 2016-17

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Pressure on the exchange rate

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But, we need to look at the real effective exchange rate to know Bangladesh’s competitiveness • A real effective exchange rate (REER) adjusts nominal exchange rate by the appropriate foreign price level and the home country price level.

• The rise in the value of the REER means appreciation and vice versa.

• Here, we calculated REER with respect to US$

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The real effective exchange rate is still highly appreciated compared to Bangladesh’s competitors!

During 2012 and 2016, REER of Bangladesh, with respect to US$ appreciated by 22.3%.

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What should be done?

• Further adjustment in the nominal exchange rate will be obvious given the scenario of high import demand and slowing down of export and remittance growth • However, mere devaluation of the nominal exchange rate will not be enough for getting the REER right.

• Necessary measures for export growth • Addressing the domestic competitiveness issues • Product and market diversification

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A fragile banking sector!

• Scams in the banking sector • High rise in the non-performing loans • Reflections of weak regulation, political patronage, and lack of vision.

• The recent scam of ‘Farmers Bank’ increased the fragility • The ‘Banking Companies (Amendment) Act-2017' which has allowed four family members on bank board of directors for nine consecutive years will increase this fragility further.

• Need for a political will, proper regulation, empowering Bangladesh Bank, and speedy trial of the financial crimes 27

Concerns over Rohingya issue • Pressure on the economy. Also, security and political issues • • • •

Impact on Chittagong and CHT areas Chittagong port, SEZs, deep sea ports Problem of Bangladesh’s integration with Southeast Asian countries Risk of rise in military expenditure in Bangladesh: Implications for the SDGs

• Spread of diseases in the refugee camps (e.g. recent Diphtheria outbreak)

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Poverty scenario 2000- 20052005 2010

20102016

Average annual reduction Overall poverty rate

-1.8

-1.7

-1.2

Extreme poverty rate

-1.8

-1.5

-0.8

Overall poverty

-0.32

-0.25

-0.16

Extreme poverty

-0.33

-0.22

-0.10

Poverty elasticity of growth

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Poverty scenario 2000- 20052005 2010

20102016

Average annual reduction Overall poverty rate

-1.8

-1.7

-1.2

Extreme poverty rate

-1.8

-1.5

-0.8

Overall poverty

-0.32

-0.25

-0.16

Extreme poverty

-0.33

-0.22

-0.10

Poverty elasticity of growth

• With the business-as-usual growth rate of GDP, Bangladesh will have an overall and extreme poverty rates of around 10% and 4% respectively by 2030. • Even with an accelerated average growth rate of GDP of 8%, overall and extreme 30 poverty rates, by 2030, will be around 6.5% and 2% respectively.

Despite accelerated economic growth in recent years, why has there been much slower progress in poverty reduction?

1. Slow employment generation: The annual average number of generation of employment declined from 1.7 million in 2000-2005 to 1.3 million in 2005-2010 and further to 0.9 million in 2010-2016.

2. Poor public spending on education: The annual average share of public expenditure on education in GDP remained frustratingly unchanged at around 2% throughout 2000-2016.

3. Poor public spending on health: The annual average share of public expenditure on health in GDP declined from around 1% in 2000-2005 to 0.9% in 2010-2016.

4. Growing inequality: While in 2000, the ‘gini’ coefficient, a measure of income inequality, was around 0.45, it increased to as high as 0.48 by 2016.

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FDI is on the rise, but is still very low.

High dominance of re-invested earning

Data source: Bangladesh Bank

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Bangladesh however avoided premature deindustrialization!

Source: Raihan (2017) 33

Bangladesh however avoided premature deindustrialization!

Source: Raihan (2017) 34

Bangladesh however avoided premature deindustrialization!

Source: Raihan (2017) 35

But employment share of manufacturing in total employment declined in recent years!

Source: World Bank, WDI

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What could be the possible explanation?

• International pressure and domestic working condition • Rising productivity in the manufacturing sector • Technological change: RMG

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What are the challenges for Bangladesh economy in 2018?

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The changing global scenarios • Slowing down of global trade • Growing standards and workplace compliance • Graduation from the LDC status • Effective integration with the GVC • SDGs • Collapse of WTO and Mega trading bloc • 4th industrial revolution 39

Five challenges for Bangladesh economy in 2018 1.

2.

3.

4.

5.

Political uncertainty looming over national election which can further affect private investment Rising food inflation Being on track with respect to SDGs Challenge of growth of exports and remittance Governance issues around the banking sector

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Slowing down of growth in private investment around the election years happens!

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Issues for private investment acceleration Infrastructure

Institutional efficiency

Political uncertainty

Issues for private investment acceleration!

Economic reforms Source: Raihan (2017) 42

Five challenges for Bangladesh economy in 2018 1.

2.

3.

4.

5.

Political uncertainty looming over national election which can further affect private investment Rising food inflation Being on track with respect to SDGs Challenge of growth of exports and remittance Governance issues around the banking sector

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Five challenges for Bangladesh economy in 2018 1.

2.

3.

4.

5.

Political uncertainty looming over national election which can further affect private investment Rising food inflation Being on track with respect to SDGs Challenge of growth of exports and remittance Governance issues around the banking sector

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Five challenges for Bangladesh economy in 2018 1.

2.

3.

4.

5.

Political uncertainty looming over national election which can further affect private investment Rising food inflation Being on track with respect to SDGs Challenge of growth of exports and remittance Governance issues around the banking sector

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Five challenges for Bangladesh economy in 2018 1.

2.

3.

4.

5.

Political uncertainty looming over national election which can further affect private investment Rising food inflation Being on track with respect to SDGs Challenge of growth of exports and remittance Governance issues around the banking sector

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Conclusion: Two main messages • Message 1: The business-as-usual scenario will not help • • • • •

In generating productive employment In making growth inclusive For an accelerated reduction in poverty rate Developing human capital In achieving the SDGs by 2030

• Message 2: There is a need for ‘getting the priorities right’ • Prioritize education, health and social sector investment • Speedy complementation of the infrastructure projects (including SEZs) within justified cost estimates • Undertake reform measures with respect to trade, industrial and macro polices and institutions 47

Conclusion: Two main messages • Message 1: The business-as-usual scenario will not help • • • • •

In generating productive employment In making growth inclusive For an accelerated reduction in poverty rate Developing human capital In achieving the SDGs by 2030

• Message 2: There is a need for ‘getting the priorities right’ • Prioritize education, health and social sector investment • Speedy complementation of the infrastructure projects (including SEZs) within justified cost estimates • Undertake reform measures with respect to trade, industrial and macro polices and institutions 48

Thank you!

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