The Financial Express

Financial Repression and GDP Calculation

Financial Repression and GDP Calculation

Financial repression is defined as direct government intervention that alters the equilibrium in the financial sector. It is usually aimed at providing cheap loans to business firms and governments by reducing their burden of repayments through lowering returns to savers below the rate that would normally prevail. Its typologies include ceilings and floors on interest rates for loans and deposits, directing credits to certain industries and businesses, and imposing constraints on the composition of bank portfolios. This repression appears to be in vogue in both the money and capital markets of Bangladesh, but if the past is an indicator then the outcome is unlikely to be good for the economy in the medium and long term.

Based on cross-country experiences, it has been found that growth cannot be enhanced by keeping interest rates artificially low in the money market with the objective of encouraging investment. Rather, the financial market should be allowed to reach its equilibrium by encouraging savings and achieving efficient allocations for investments. Many experts therefore support abolishing interest-rate ceilings and directed credit, as well as promoting market-driven competition in the banking sector for its holistic and healthy growth.

The capital market of Bangladesh is also being subjected to financial repression, as the Securities and Exchange Commission (SEC) imposed a new circuit-breaker rule in the second half of March this year, which set a floor price for every stock and stipulated that prices could not go below their average prices over previous five sessions with effect from 19 March. The rule is indeed a rarity, as it implies that the prices can go down only marginally, with no concomitant upward restriction. Although enforced as a short-term emergency measure, this rule is still in vogue even after five months. As a result, the speculators are tempted to invest in the stock market in larger numbers, spurred by the 'herd instinct', where people tend to follow what others do with the hope of making quick bucks. But this is a dangerous game, as it may trigger another collapse in the country's stock market once the circuit-breaker is lifted, thereby catapulting a huge number of financially illiterate investors into destitution once again.

Another problem dogging the Bangladesh economy has been the aberrations in official data, including GDP figures. The most comprehensive measure of the total output in an economy is its gross domestic product (GDP). It is the value of final goods and services produced by an economy each year, and are simply the sum-total of personal consumption (C), government expenditure on goods and services (G), Investments (I), and net exports (X-M).

Estimation of national income accounts of Bangladesh is the core function of 'Bangladesh Bureau of Statistics' (BBS), which follows two approaches for estimating GDP. Calculation of GDP by expenditure components are less elaborate, where estimates are made for basic aggregates like private and public consumption, gross fixed capital formation by private and public sectors, savings, exports and imports. GDP estimation by BBS based on production approach is also subject to a number of qualifications, often due to non-availability of needed data. Besides, expenditure-based GDP estimations are relatively imprecise in nature because of weaknesses in database used in calculations.

In the above backdrop, criticisms have been repeatedly levelled by the country's leading think-tanks regarding the system of GDP measurement by BBS and its credibility. An analysis by the Centre for Policy Dialogue (CPD) showed that despite claims of high growth rate, commensurate contributions to GDP by relevant sectors were not being observed. As there have not been sufficient investments against high growth, the labour productivity should have risen. But no technological or innovative transformation has taken place in Bangladesh in recent times that could enhance the productivity radically. The workers' income should also have increased in case of productivity improvement. But even official data show the reverse to be true.

The GDP data claimed by BBS have not been realistic in recent times, as evidenced from the latest provisional figures for 2019-20 that showed a growth of 5.24 percent amid the Covid-19 pandemic. The whole country was under an informal lockdown (general holiday) from 26 March to 30 May, and mostly the garments factories in the manufacturing sector were opened in June. Besides, the hotels and restaurants, construction and transport sectors mostly remained closed during the March-June quarter. But instead of showing a negative growth, the manufacturing, construction, hotels & restaurants, and transport, storage & communication sectors (accounting for 44% of GDP) have been shown by BBS to have recorded growth rates of 5.48%, 9.06%, 6.46% and 6.19% respectively. These figures also contradict significant declines in two other indicators, viz., exports and revenue collection, which are usually positively correlated to GDP. Besides, BBS itself claims that there had been 82 percent fall in manufacturing output during April 2020, which is most likely to hold true for May as well because of the general holiday. 

The country's leading economists including the CPD have therefore raised questions about the authenticity of GDP figures provisionally announced by BBS, even claiming that growth rate has now assumed the shape of a political number. CPD executive director commented, "A kind of infatuation appears to have grown among the country's policy-makers regarding growth. Growth data are therefore being used politically. Exaggerating growth cannot be beneficial; it does not help policy-making".

Even a former secretary of the statistics division claimed at a citizens' dialogue in 2019 that she had seen how development-related statistics were polished or doctored during her tenure. It is sad that Bangladesh has not yet been able to develop a credible statistical system even after 49 years of existence. This lack of credibility of statistical methods needs to be addressed swiftly. There should be a transparent dialogue on the subject by involving all stakeholders, in addition to streamlining the statistical system. Otherwise, the real picture of our socio-economic growth can never be gauged properly, which in turn proves to be a hindrance to adopting development policies and programs in a realistic manner.


The writer is a retired Additional Secretary and former Editor of Bangladesh Quarterly.

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