World Bank cuts Bangladesh GDP growth forecast to 6.1% for FY22-23

Infographic: TBS

The World Bank has revised down the GDP growth forecast for Bangladesh to 6.1% for the current fiscal year 2022-2023 from 6.7% growth projection made in April and June this year.

South Asia Economic Focus of the World Bank, titled "Coping with Shocks: Migration and the Road to Resilience" revealed on Thursday found higher inflation and rolling electricity blackouts as major challenges for the economy and cut the growth outlook by 0.6 percentage points.

The global lender also found no significant symptoms to rebound the economy in the next fiscal year and projected a 6.2% economic growth in fiscal year 2023-2024.

Previous projection by the World Bank for the next fiscal was 5.4% and now it has increased the growth rate by 0.8 percentage points.

The government set a target to achieve 7.5% growth of the GDP in the current fiscal year. The growth projection of the World Bank is 1.4 percentage points lower than the government target.

The Asian Development Bank (ADB) also cut down growth projections for Bangladesh and projected 6.6% growth in the current fiscal year in Asian Development Outlook (ADO) 2022, revealed in the last week of September.

Bangladesh to see 3rd highest growth in the region

The World Bank projected 5.8% average growth for South Asian countries, 1 percentage point lower than the previous projection made in June. Growth of Bangladesh would be significantly higher than the average of the region.

Bangladesh would place third largest grower in the region following the Maldives 8.2% and India 7% growth.

The economy of Sri Lanka would shrink by 4.2%. Bhutan, Nepal and Pakistan will achieve significantly lower growth than Bangladesh.

According to the World Bank release, higher inflation and rolling electricity blackouts dampen Bangladesh's post Covid recovery in consumption and investment. The lack of reliable high-frequency indicators creates difficulties for policy makers to track economic developments.

The global lender also said, "Higher inflation may dampen private consumption growth, following substantial energy price increases.

"Export growth is expected to slow, as economic conditions in key export markets deteriorate, while rolling blackouts, gas rationing, and rising input costs weigh on manufacturing output."

While economic distress is weighing down all South Asian countries, some are coping better than others. Exports and the services sector in India, the region's largest economy, have recovered more strongly, while the return of tourism is helping to drive growth in Maldives and to a lesser extent in Nepal.

Plunged into its worst-ever economic crisis, Sri Lanka's real GDP is expected to fall by 9.2 percent this year and a further 4.2 percent in 2023.  

High commodity prices worsened Pakistan's external imbalances, bringing down its reserves, while devastating floods pushed the country's outlook into significant uncertainty, the global lender says in its outlook for the region.

"Pandemics, sudden swings in global liquidity and commodity prices, and extreme weather disasters were once tail-end risks. But all three have arrived in rapid succession over the past two years and are testing South Asia's economies," said Martin Raiser, World Bank Vice President for South Asia, in a press release issued by the headquarters of the World Bank in Washington City.

Inflation in South Asia, caused by elevated global food and energy prices and trade restrictions that worsened food insecurity in the region, is expected to rise to 9.2 percent this year before gradually subsiding. The resulting squeeze on real income is severe, particularly for the region's poor who spend a large share of their income on food.

"Labor mobility across and within countries enables economic development by allowing people to move to locations where they are more productive. It also helps adjust to shocks such as climate events to which South Asia's rural poor are particularly vulnerable," said Hans Timmer, World Bank Chief Economist for South Asia.

Inflation may not capture rising household cost

Inflation has become more broad-based in South Asian countries with higher inflation spreading to non-energy goods as rising global commodity prices continue to contribute to elevated domestic inflation, the World Bank's South Asia Economic Focus says.

But headline inflation may not accurately capture the price inflation for the average household because of the weights of the consumer price index are fixed and have not been adjusted recently to the changes in households' spending pattern, it points out.

For example, India's current CPI weights were based on the Consumer Expenditure Survey 2011-12, while Bangladesh's weights were derived from surveys of 2005-06, it explains.

Households' spending pattern changes over time, which makes the fixed weights outdated after some time. In particular, households' expenditure share of energy rises over time in developing countries (e.g., Bangladesh Bank 2008), as rising incomes lead more consumers to purchase appliances and vehicles that use energy.

As such, headline inflation tends to under-estimate the price inflation felt by the average household. At the same time, households' expenditure on food as a share of total consumption has declined over time, which means the CPI headline inflation with outdated weights could overestimate the actual average inflation when food prices rise rapidly, the World Bank document says.

"For example, the average household's expenditure share on food fell from 60 percent in 2000 to 47 percent in 2016 in Bangladesh (Household Income and Expenditure Survey)," it adds.

Though no official inflation data have been released for the last two months, State Minister for Planning Shamsul Alam on Wednesday said Bangladesh's inflation had escalated to 9.5% in August before falling to 9.1% in September. The annual point-to-point inflation in July was 7.48%.

The World Bank says higher global oil prices and depreciating exchange rates contribute to the elevated inflation levels in South Asia.

The currencies of many regional countries have depreciated in recent months, with Sri Lanka
and Pakistan depreciating their currencies 80 percent and 36 percent against the US dollar dollar since the beginning of 2022, respectively.

In India, the recent depreciation of the rupee contributed to higher inflation, while Maldives stood out to be a gainer as its currency is pegged to the US dollar and has appreciated
against most other currencies during the recent strengthening of the dollar, the lender's economic focus for South Asia points out.

"The contribution of the exchange rate is slightly positive in Bangladesh, as the country's currency depreciated against the dollar in June 2022," it says. 

The pass-through of global commodity prices to domestic prices varies across countries and goods, with wheat and sugar in Bangladesh, diesel in Pakistan and India, edible oils in all three countries saw domestic price volatility because of their co-relation with global prices. However, diesel prices in Bangladesh exhibit low volatility, and price changes are uncorrelated with global price movements, as fuel subsidies play an important role in domestic pricing, it says.

With rising commodity prices and supply disruptions due in large part to the war in Ukraine, South Asian countries have resorted to export restrictions on food to ensure domestic supplies, amplifying the food shortages for others in the region.
Afghanistan, Bangladesh and India implemented export restrictions on grains and grain products in 2022, while India and Pakistan have capped the volume of sugar exports, it says, warning that export restrictions often backfire.  

In general, export restrictions feed into higher global prices by limiting the quantity of goods available on the global market. India restricted sugar exports despite a large harvest earlier this year, it cites.

The bank's economic focus also mentions Bangladesh's ban on export of rice, wheat and sugar alongside the similar ban by Afghanistan, India and Pakistan.

Citing how India's cap on sugar exports impacts sugar price, it says the CPI inflation for sugar increased to over 30 percent in June for both urban and rural areas of Bangladesh, while domestic sugar inflation stayed below 5 percent in India.

It also sounds a note of alarm on mounting external sector pressures in the region.

Higher commodity prices have raised import prices for South Asian countries, contributing to rising trade deficits.

"Worsening terms of trade and unfavorable price elasticities exacerbate trade imbalances," it says.