World Bank issues cautious economic outlook: The issues for Bangladesh

While the global economy has experienced better than expected growth in 2017, the World Bank at the present  time warns of difficult times ahead in its latest Global Economic Prospects report (January, 2018). This half-yearly assessment made by the Bank  indicated  a recovery in manufacturing, investment, trade as well as increasing commodity prices. This growth was also spurred by better than expected economic performance in the USA, China and the Eurozone in 2017. Taking those factors into account the Bank has upgraded global economic growth to 3.1 per cent for 2018, up from 2.9 per cent forecast made in June 2017. But the Bank further went on to warn that this modest expansion in the global economy is as good as it will get for the foreseeable future.

The report points out that much of the developed world was running at full capacity. That means unemployment is low, productivity is high and inflation is in check leading to a surge in consumer demand. But such heightened levels of economic activity make these economies vulnerable to a period of inflation and consequently expected interest rate hikes by central banks. Furthermore, near zero interest rates and quantitative easing are also losing their effectiveness also further adding to the slowdown.

The current phase of economic growth has been described as a "short-term upswing'' and longer-term slower growth potential in advanced economies who account for 65 per cent of global gross domestic product (GDP). The report cites there are worrying longer-term risks associated with subdued productivity and potential growth resulting from weak investment and the ageing labour force. Therefore, the advanced economies are expected to experience slowdown in economic activity with growth from 2.3 per cent  last year to  2.2 per cent in 2018 and further slowdown to just 1.7 per cent by 2020.

The main sources of growth will be coming from the emerging market and developing economies (EMDEs). But such projected growth for EMDEs over the forecast period must be viewed within their underlying growth potential. This has declined considerably over the last decade and likely to decline further over the next decade. Such a subdued forecast is reflective of slow pace of capital accumulation and productivity growth coupled with unfavourable demographic trends. Overall the growth prospects are not sustainable.

There are other risk factors on the horizon which largely include surge in stock prices not seen before the stock market crash in 1929; that makes financial markets vulnerable to unforeseen consequences with flow on negative impact upon the real economy. The low interest rate expectations are fuelling this surge in stock prices and very high degree of complacency prevails among investors investing in financial assets. The report warns that disorderly movements in financial markets resulting from abrupt tightening of monetary policy and a rapid rise in market volatility could trigger financial turbulence leading to derailing the economic expansion path.

The report indeed pointed out the extraordinary monetary stimulus of recent years might have encouraged excessive financial risk-taking. This calls for central banks to be very careful how to fine tune monetary policy to bring in improvements in the financial system. This is in view of the fact that there are still risks to financial stability arising from asset price inflation, rising leverage and increased levels of risks in the non-bank financial institutions. China also poses a special problem with high corporate indebtedness, excess capacity and declining profitability which can have negative impact on other economies, especially commodity exporting countries.

The report also indicates merchandise trade volumes have gathered momentum from cyclical rebound in investment contributing to increased trade in machinery, electronics and semiconductors. Overall global trade in goods and services recorded 4.3 per cent increase in 2017. But this momentum is likely to decelerate in 2018-20 as the advanced economies experience moderate growth and growth in China slows down. The report further points out global trade will be constrained by structural forces including the slower pace of global value chain integration and trade liberalisation. The threat of protectionism remains the serious concern which is heightened by President Trump's "America first'' policy which views trade as a form of economic aggression. Indeed Rebecca Harding pointed out in the Financial Times to "the weaponisation of the language of trade''.

 A senior Bank executive called for reforms to promote education and health and also spending on infrastructure development to bolster the economy. The report also highlights the importance of shift in skill composition which will have important consequences for the future of global inequality. This implies in particular in emerging market and developing economies (EMDEs) to introduce reform measures aimed at education, heath and social services by increasing public spending. 

BANGLADESH SCENARIO: According to the report, Bangladesh recorded 7.2 per cent growth in 2016-17 exceeding the June forecast owing to higher than expected outturns in manufacturing and services sectors. Furthermore, robust private consumption, complemented by increased public investment, aided growth performance.  Yet there are downside risks for the future growth performance. Internal risks include fiscal slippages, setbacks to reforms in order to help resolve corporate and financial sector balance sheet deterioration. External risks for the whole of the South Asian Region, including Bangladesh, include an abrupt tightening of global financial conditions or a sudden rise in financial volatility which can set back regional growth. There are also political factors such as rising geo-political tensions and the Rohingya refugee crisis.

On the other hand, stronger-than-expected global growth could benefit the more open economies in the region in the near future. In this context it must be pointed out that Bangladesh still remains the most closed economy in the region. The forecast growth rate for Bangladesh for the period 2018-20 is estimated at 6.7 per cent per year.

Overall it appears that despite volatile export performance, declining remittances and natural disasters in 2017, Bangladesh economy has maintained its growth trajectory. But forecast growth rate for 2018-20 is rather slightly below than that achieved in 2017. To maintain the growth momentum there are some key issues that the government will have to address. These issues include reforms in the taxation regime and the financial sector. If these reforms are not undertaken, they can pose risks to macro-economic stability impacting on growth. There are other long-standing lingering issues relating to regulatory reform and distortionary industry assistance programmes that require revisiting. Some of these issues are closely linked to taxation reform and industry protection. But there are deeply entrenched powerful financial and corporate oligarchs in the country with significant political clout and they will oppose such reforms. These oligarchs fear that such reforms will reduce the amount of economic rent that can be appropriated by them.

Poverty still remains quite widespread in Bangladesh despite the fall in poverty rate in recent times. We are also now witnessing significant rises in income inequality in the country. Therefore, reform measures must also be synchronised to reduce both poverty and income inequality. That calls for increased public spending on social services such as health, education, public housing for the poor and vital infrastructure needs.

Public spending in Bangladesh on education is (2.3%) and health (3.5%) of GDP which are below the average for low-income countries (LICs). Only about 2.0% of GDP goes on to provide social safety net to protect the poorest in the country. Inadequate social spending and cuts in them sparked major protests in Iran and Tunisia in recent days. Bangladesh must take advantage of the current phase of global recovery to undertake those reform measures which will enable it to sustain its long term growth prospects and enhance the ability to undertake measures for equitable distribution of economic gains. 

The writer is an independent economic and political analyst.

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