Why focus should be more on consumption and welfare than growth

In a rare instance, possibly the first in Bangladesh's history, the budgetary growth projection has officially been revised downward halfway through a fiscal year. Though not yet formally announced, an internal coordination meeting chaired by the finance minister on Tuesday (20 December) proposed that the gross domestic product growth target set at 7.5% in the 2022-23 fiscal year's budget, should be lowered by a full 1 percentage point to 6.5%. This is the number that leading global financial agencies had predicted back in October. The World Bank, the International Monetary Fund and the Asian Development Bank had downgraded their previous upbeat forecast to the 6%-6.6% range for Bangladesh as they did for most other countries around the globe.

In its forecast made in October for South Asia, the World Bank said the spillovers from the Russia-Ukraine war and global monetary policy tightening would slash India's GDP growth in the fiscal 2022-23. It also had predicted that economic growth in East Asia and the Pacific would weaken sharply due to China's slowdown.

In its latest outlook, the World Bank cut its China growth forecast for this year and next, citing the impact of the abrupt loosening of strict Covid-19 containment measures and persistent property sector weakness.

Bangladesh had so far resisted those downward revisions as well as warnings of local economists that growth targets might not be achieved due to a series of shocks from Covid and Russia-Ukraine war. But finally, the finance ministry's coordination meeting on the Fiscal, Monetary and Exchange Rate issues acknowledged the reality on the ground.

Does it mean that Bangladesh, like many advanced economies, is giving up on economic growth and going to focus on some long overdue issues such as reform? It hardly seems so because the same meeting projected a 7.5% GDP growth for the next fiscal year with a large increase in expenditure outlay for the election year.

This sanguine outlook stands in contrast with what is going on in other parts of the world.  As recession fear looms, the rich world faces even greater difficulties over growth. Their long run of growth has tapered off alarmingly. Even then, their election manifestos are less focused on growth than before. An analysis by The Economist finds that anti-growth sentiment in political manifestos of rich countries has surged by about 60% since the 1980s.  Welfare states are focusing more on pensions for the elderly and health care for people rather than investing in growth-boosting infrastructures and reforms.

But the reality is different here. Bangladesh needs to achieve more growth, invest more in growth-enhancing infrastructures, discipline its financial sector and reform revenue administration to mobilise more local resources to bankroll its expansionary outlay. The country needs to make businesses easy for the private sector to help it create more jobs for working age people who make up two-thirds of its population.

Reforms are needed not only to avail of the IMF's budget support, but to improve public services to make sure that whatever limited welfare initiatives the country can afford, reach the targeted people and shield them from the brutal price inflation.

Reforms are needed to build an effective and integrated supply chain from farms or mills or ports to market, so that growers can get fair prices and the benefit of customs duty waivers does not elude consumers.

Reforms are stressed and pledged historically with little visible progress. Need for reforms is vital in western countries too, but for different reasons. They are burdened with elderly citizens and have a higher rate of retirement than job entries. They need liberal reforms to make up for demographic decline. They need reforms to embrace free trade, loosen immigration regimes and make tax systems friendly to business investment to boost per-person growth which has been stalled for years.

For all these reasons, the need for reforms is more pressing for Bangladesh. Still, reforms remain ignored in policy focus. Officials present at the finance ministry's coordination meeting reinforced the official position that the economic turmoil that prompted downward revision of growth target was all from the global front, there was no domestic reason behind it.

As global fuel and fertiliser prices surged, the subsidy amount went up, creating pressure on budget management. Import bills have ballooned and inflation rose because of global commodity price hikes. Foreign currency reserves fell and taka lost its value massively because of the worldwide dollar crisis fuelled by US interest rate hike. Export slowed as demand slumped in major markets where inflation surged.

All these external factors led to the lowering of growth projection as pointed out by a senior planning official reached by The Business Standard.

This sort of official position to revise or set growth targets undermines the need for drastic reforms and actions to check money laundering through trade, loan default and tax evasion as well as ensure quality use of external debt which is mounting both in public and private sectors.

With these chronic domestic issues remaining unaddressed and putting all blames on external factors, it will be difficult to achieve even the slashed target of growth, economists have warned, though they appreciated the lowering of the target points as the formal acknowledgment of the crisis in the economy.

Of course, an economist like Dr Zahid Hussain has asked where the growth will come from and how production will continue if industrial inputs cannot be imported sufficiently amid the dollar crisis.

To reduce pressure on the forex reserves and the balance of payment, the government took a series of measures to restrict imports. Surging global prices caused a sudden demand for dollars and the central bank tried to meet the demand from its vault. The exchange market turned volatile and taka saw a free fall against the greenback, forcing the central bank to end its fixed rate regime that kept the local currency artificially overvalued for years. As a result of all these factors combined, imported products saw an inflationary pressure on the local market although imports marked a decline.

Indonesia's central bank also raised policy rates following the playbook of US Fed and other central banks, but it helped in easing price pressures giving policymakers more room to turn their focus to the economy in 2023. Its measures helped its local currency rupiah stabilise and control imported inflation, which did not happen in Bangladesh's central bank's interventions.

Though the central bank raised its policy rates, it did not withdraw the lending caps.

Even then private sector investment did not accelerate, while public expenditure is also being cut as evidenced in the slow rate of annual development programme implementation. Consumption, a key driver of growth, remains low because of surging prices that leave people with no or little money to save in banks.

Economist Dr Fahmida Khatun thinks the economic growth might be around 6% in the end given the low private and public investment, and steps like energy rationing to industries. To her, this economic growth, at whatever rate it may be, is immaterial at a time when the people are under economic pressure.

"The main issue is whether people's welfare, consumption, and food consumption patterns can be met up under the pressure of inflation," she says.

When senior financial sector analyst of the World Bank AKM Abdullah stated at a programme in Dhaka on Thursday that policymakers here seemed to be anti-FDI (foreign direct investment), Foreign Minister AK Abdul Momen endorsed, saying permissions from 43 agencies are needed for making investments. While cent percent investment proposals are realised in the US, only three out of 100 such proposals come true in Bangladesh, he pointed out.

Such acknowledgement needs to be addressed to help investments take place and create jobs for people so that they can earn and spend, which will in turn help the government achieve its growth target.