H1 of FY20: Overall economic slowdown?

Asjadul Kibria | Published: December 30, 2019 20:53:19 | Updated: January 07, 2020 20:13:57

There is a strong signal of economic slowdown during the first-half of the current fiscal year (FY20). Drop in exports and imports, shortfall in tax collection, drastic decline in stock market, rise in the cost of borrowing and modest growth in private credit are some of the apparent indicators.

However, in the absence of updated data, it is difficult to assess sector-wise picture of the economy. More over, infrequent nature of data is another problem. While five months export and remittances figures are available, there are only four months' data on imports and revenue collection. Understanding the overall trend of the economy is difficult even after the middle of the fiscal year as there is no half-yearly estimate of Gross Domestic Product (GDP), let alone quarterly data.

There is also laxity in updating some regular indicators. Take the example of Quantum Index of Industrial Production (QIIP). Even after the end of 2019, Bangladesh Bureau of Statistics (BBS) has only unveiled QIIP up to August. When BBS is capable to estimate and release the monthly statistics of inflation and wage quite regularly, usually within the first week of the following month, it is difficult to understand why there is lag in case of QIIP. In the absence of updated QIIP, no fair reading of the manufacturing sector is possible. Again, there is no sufficient data on investment. Although, Bangladesh Investment Development Authority (BIDA) occasionally releases quarterly investment position, this doesn't provide an overall investment trend.

Due to lack of some critical indicators, different proxy indicators have to be used with other update indices to obtain a better picture of the economy. For instance, as there is no broad data on consumption pattern during the first half of the current fiscal year, inflation and wage rate index may shed some light on the matter.  Growth of the country's nominal wage rate experienced a mixed trend in the year of 2019.  Wage Rate Index (WRI), released by Bangladesh Bureau of Statistics (BBS), showed that the index stood at 169.51 in November which was 159.89 in December, 2018. On average, there is a 6.02 per cent growth on nominal wage in the last year, as provisional estimate indicates. At the same time, annual average price inflation stood at 5.56 per cent. It indicates that increase of real wage is minimal and so it affects the consumption spending.  Due to yawning gap in income and incremental concentration of resources in a few hands, aggregate consumption may not fully reflect the negative effect of minimal hike in real wage.        Given the unavailability of updated data, we may still try to capture the overall economic situation on the basis whatever statistics is at our hands. 

EXTERNAL SECTOR: Sluggish trend in export and import is now clearly visible.  Exports faced negative growth in the first five months of the current fiscal year as it dropped by 7.60 per cent in July-November to $15.78 billion from $17.07 billion in the same period of 2018. If the first 11 months of 2019 is considered, exports of goods stood at $35.81 billion, according to the Export Promotion Bureau (EPB) statistics,  which as almost unchanged from $35.82 billion in the same period 2018. Setback in exports is a matter of concern no doubt as it indicates the erosion of market share and competitiveness of export-oriented industries.

Merchandise imports during the January-October period of 2019 dropped by 2.41 per cent to $49.44 billion from $50.67 billion of the same period of 2018.  Further decline is visible in first four months of the current fiscal year (July-October of 2019) when import dropped by 3.20 per cent to $19.60 billion from $20.24 billion in the same period of 2018.

Decline in exports and imports, however, helped to reduce trade deficit as it stood at $13.45 billion in January-October period in outgoing year which was $14.88 billion in the same period of 2018. Again, trade gap stood at $5.62 billion in the first four months of the current fiscal year which was $5.32 billion in the same period of the previous year. Robust growth of remittance, 14.60 per cent in the January-October period, halved the current account deficit.  Inflow of foreign direct investment (FDI), however, posted modest growth. Thus, overall BoP situation turned moderately positive.

PUBLIC FINANCE: Shortfall in revenue earnings compels the government to borrow heavily from the domestic sources, especially from banks. Revenue earnings by National Board of Revenue (NBR) in July-October period of 2019 fell short of Tk 202.0 billion against the four-month target of Tk 651.0 billion and registered a modest 4.33 per cent growth over the same period of 2018. Tax revenue earnings in the first 10 months (January-October) of 2019, however, registered around 8.12 per cent growth over the same period of 2018. Thus, there is an overall positive trend in revenue earnings.

Nevertheless, the current rate of revenue growth is not enough to cater for the government's big development financing. That's why there is big jump in bank borrowing. The government almost exhausted the annual borrowing target in first five months of the current fiscal year (FY20). During the period net bank borrowing by the government stood at around Tk 45 billion against the budgetary target of Tk 47.36 billion. 

As a strategy to reduce interest burden, the government has also started to reduce borrowing through savings certificates. That's why net sale of savings certificates dropped by around 70 per cent in July-October period of 2019.

Reliance on bank borrowing is clearly reflected in primary issuance and secondary trading of fixed income securities of the government. Issuance of treasury bills or short-term debt securities increased by around 54 per cent while long-term debt securities or treasury bonds jumped by around 153 per cent in first nine months of 2019.

The secondary trading of fixed income government securities, treasury bills and bonds, doubled in January-November period of 2019. Total value of the secondary trading of treasury bills and bonds stood at Tk 233.49 billion during the period under review. The value was Tk 110.36 billion in the same period of 2018.

FINANCIAL MARKET: Country's financial market experienced a sluggish year. Though money market was mostly stable, condition of stock market deteriorated heavily.   Companies have become less interested in capital market to raise funds. A total of eight firms raised Tk 5.52 billion combined, including premium, by floating Initial Public Offering (IPO) shares in 2019. In 2018, there were 13 companies and a mutual fund collected Tk 6.46 billion though IPOs. Thus, fund raising by companies through IPOs declined by 14 per cent in the last year.

While performance of primary market was lacklustre, secondary market was almost dry.   The monthly average transaction in the stock exchanges came down to below Tk 100 billion in 2019 which was Tk 118 billion in 2018.

Banking sector, however, passed another difficult year. Rise in non-performing loans coupled with the government's intervention to fix interest rates at single digit made the things uncertain. Total classified loans, popularly termed as default loans, increased to  Tk 1.16 trillion at the end of September 2019 which was Tk 0.94 trillion at the end of December 2018.

Over the year, there was also move by the regulators to set lending rates at 9.0 per cent and deposit rates at 6.0 per cent. In reality, banks and financial institutions failed to respond to the 'anti-market' move. Trying to fix the interest rates below 10 per cent also drew criticism of experts who observed the move as an effort to re-establish 'directed interest rate regime.'

As the central bank is yet to unveil the updated data on industrial term loans (so far there is statistics up to June, 2019), it is difficult to say to what extent industrial credit growth dropped. Loan disbursements to Small and Medium Enterprises (SME), however, increased by 4.60 per cent in the first nine months (January-September) of the year under review.  It indicates lower demand of financing.

Nevertheless, Bangladesh Bank on December finally set lending rate for manufacturing industry at 9. 0 per cent and asked all the banks to follow it with effect from the first day of 2020.

It is to be seen whether the single-digit interest rate, as announced, contributes to give a big push to industrial sector in the second half of the current fiscal and reverse the slow pace of economy.


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