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Slow trade in Q1 sends mixed signals on economic growth trend

Asjadul Kibria | Published: October 17, 2019 21:52:20


During the first quarter of the current fiscal year (FY20), there is an indication that economic activities are slowing down. Export earnings from goods dropped by 3.0 per cent in July-September period compared to the same period of the last fiscal. Import payments also declined by around 2.30 per cent in July-August. Tax revenue from large taxpayer unit (LTU) declined by Tk 20.78 billion in the same period.

Decline in these areas does not however set an overall trend of the economy in the first quarter which could be termed as distinct slump. As there is no quarterly statistics of Gross Domestic Product (GDP), one needs to go through the other available indicators to locate the pace of the economy.

So far, it is the external trade which is clearly on downturn. Earnings from merchandise export dropped to $9.64 billion in the first quarter of FY20 which was $9.94 billion in the same period of FY19.

Two weeks ago, the World Trade Organisation (WTO) released its updated global trade forecast saying that world merchandise trade volumes are now expected to rise by only 1.20 per cent in the current year which is substantially slower than the 2.60 per cent growth forecast in April. The WTO revised the trade forecast due to 'escalating trade tensions and a slowing global economy.' WTO also projected that merchandise trade would increase in 2020 by 2.70 per cent which will depend on the ease of ongoing trade tensions. It also mentioned that world merchandise trade increased by only 0.60 per cent in the first half of the current year.

Slowdown in export of Bangladeshi products is largely in line with global trend. WTO statistics show that during the first half of the current year, export registered 1.30 per cent growth in developing countries. For Asia, it was only 0.70 per cent. Moreover, global purchasing manager index (PMI)-based new export orders index dropped to 47.50 in August from 54.0 in January this year. Leading exporters of Bangladesh, exporters of the ready-made garments (RMG) to be precise, also mentioned that they were getting fewer export orders.

On the other hand, Asian Development Bank (ADB) pointed out that the trade war between China and the United States (US) has become a boon for Bangladesh. In the first half of 2019, due to trade redirection, Bangladesh's share in the US market has increased by 13.40 per cent among the Asian nations while export from Vietnam increased by 33.0 per cent.

On the internal front, there is the problem of productivity and market diversification.  Local entrepreneurs, especially those engaged in RMG, do not pay enough attention to enhance productivity of the workers or to diversify their product range.  Most of them are heavily reliant on traditional big markets in America and Europe.

RMG exporters recently demanded some incentives to enhance the export. Besides the regular 4.0 per cent incentive for the sector, the government has added a special incentive to RMG exporters in the current fiscal year with a number of conditions like at least 30.0 per cent local value addition and not taking any duty-draw back or bond facility. The rate of incentive is 1.0 per cent of the net FoB (Free-on-Board) value of export.

On the import side, slowdown helped reduce trade gap and turned the current account balance positive in the July-August.  Trade gap declined to $1.98 billion in the first two months of FY20 from $2.10 billion in FY19.

One may argue that decline in import is in line with global trend and has nothing to do with internal factors. WTO statistics showed that import increased by only 1.10 per cent in developed economies but declined by 0.40 per cent in developing countries.  The decline in import in Asia was also 0.40 per cent in January-June period.

Fall in import has several implications. It is a sign of lower consumer demand, modest investment and slower business activities. Lack of up-to-date data on manufacturing output makes it difficult to link import decline with slower manufacturing activity. Bangladesh Bureau of Statistics (BBS) is yet to release the statistics of quantum index of industrial production (QIIP) since June. Bangladesh Investment Development Authority (BIDA) website provides data on investment proposal registration up to November last year. 

Bangladesh Bank statistics, however, showed that private sector credit posted double digit growth in August and the rate (10.62 per cent) was the lowest in the last eight months.  Bank advances increased by only 0.39 per cent in August from July this year. Farm credit dropped nearly 6.0 per cent in the first two months of FY20. These are some proxy indicators of slowdown.

Gradual decline in growth of wage rate index (WRI) may also be used as another small proxy indicator of economic activity of the country. The WRI posted 6.58 per cent growth in June this year which dropped to 6.46 per cent and further declined to 6.43 per cent in August.

Against this backdrop, three projections of the country's GDP growth in the current fiscal may need a quick review.

The Asian Development Bank (ADB), in its Asian Development Outlook Update (ADOU) released last month, projected that Bangladesh economy would post 8.0 per cent growth in the current fiscal year, and it would be the highest growth in Asia. Despite a weaker global growth, ADB expected continuation of favourable trade prospects and further strengthening of export and workers' remittance. The ADB forecast is backed by 'robust public investment due to continued policy environment and expediting implementation of large infrastructure projects'.

The World Bank (WB) in its development update, projected that Bangladesh economy is set to grow by 7.20 per cent in FY20. Escalating trade tensions in major economies, vulnerable financial sector governance, weak government revenues, exchange rate appreciation and slower export growth are the major factors that the Bank considers for holding back higher growth.

Bangladesh Bank, in its quarterly report released in the second week of this month, mentioned that targeted growth would be achieved in the current fiscal year. "Looking ahead, economic growth outlook is expected to remain strong at the targeted level (8.2 per cent) and inflation remains at below the targeted level (5.5 per cent) in FY20," said the central bank's report.

The central bank, at the same time, tagged a number of external risk factors deterring higher growth. These are sluggish global growth, disrupted supply chain by the escalating trade war, Brexit-related uncertainty and rising geopolitical tensions. On the domestic front, managing high Non-Performing Loan (NPL) and tight liquidity condition mainly due to slower growth of deposit will be critical.

While the ADB projection is based on positive developments, WB focused on weaknesses of internal environment along with external challenges. Bangladesh Bank also pointed out similar risk factors with caution.

Taking cue from these projections and keeping in mind the trend of the first quarter, it appears that there is a mixed signal on the trend of economic growth. A clearer picture is likely to appear after the second quarter of the current fiscal.

 

asjadulk@gmail.com

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