Govt eyes higher productivity despite low investment

The government hopes to increase the GDP growth next year by boosting production of goods and services – with relatively lower investments, but experts doubt the goal can be achieved during the pandemic.

As the FY22 budget projected the investments, the incremental capital output ratio (Icor) – that refers to the amount of investment required to add a product worth Tk1 to the economy – has been reduced to 4.6 from this year's 5.3.

A lower Icor means increased capital productivity.

Economists said they were not sure about how Bangladesh would ramp up the productivity of capital and investment while Covid-19 continues the roundups with no signs of ending.

Dr Fahmida Khatun, executive director at the Centre for Policy Dialogue (CPD), said the reduced Icor target does not go with the reality as all three major indicators of macroeconomics – investment, private sector credit growth, and capital machinery import – have been beeping red in the pandemic.

According to the state-run Bangladesh Bureau of Statistics (BBS), the country's Icor reduced to 3.87 in the fiscal 2018-19 from 4.17 in FY16.

Up from FY19's 3.87, the ratio was at 6.07 in 2019-20 – that means Tk6.07 investment was required in 2019-20 to produce Tk1 output.

Bangladesh witnessed more than Tk8.87 lakh crore investments in FY2019-20. The investment volume in the previous financial year was around Tk8.02 lakh crore.

The government aims at 7.2% GDP growth in the next fiscal year with a 33.1% investment of the GDP. In the current fiscal year, the finance ministry revised the growth target to 6.1% with a 32.3% investment of the GDP.

The comparison between the growth projections suggests the GDP will grow faster than the rate of investment growth.

In the fiscal 2018-19, Bangladesh's economy grew at the highest 8.15% rate with the 31.75% investment of the GDP.

Dr Shamsul Alam, a member of the Planning Commission, thinks the investment-GDP growth rate projected for the next fiscal year is rational.

He said the government proposed a number of tax exemptions in several sectors to boost the investment which also would help perform ratio better.

CPD Executive Director Dr Fahmida Khatun said a rise in Icor reflects the lower productivity of capital. If a country glides to capital intensity, Icor starts to surge.

"It is not logical for a country like Bangladesh to pull down the Icor target during the pandemic," she told TBS.