World Bank forecasts lower growth, high inflation amid pre-election uncertainty

The World Bank has lowered its growth projection for Bangladesh to 5.6% in the current fiscal year, which, it forecasts, will see 9% average inflation due to high energy cost, import curbs, insufficient dollars in banks and sluggish monetary tightening.

It projected 6.2% GDP growth for FY24 in April. The official growth target is 7.5%.

In its latest report, the global lender has identified uncertainty ahead of the election as a major risk to the economy along with stabilisation of the external sector dependent on removing distortions in exchange rates and lifting exchange rates. Failure to address these risks may put the economy under more pressure than the projection, it has stated in the Bangladesh Development Update of the World Bank, titled "New Frontiers in Poverty Reduction".

The Dhaka office of the World Bank disclosed the Bangladesh chapter of the report on Tuesday from a briefing arranged following the virtual launching of the South Asia Development Update titled "Toward Faster, Cleaner Growth".

The World Bank projected the inflation to stay at an elevated level in FY24, before easing to 8.5% next year and 7.7% in FY25.

Despite the government's efforts to provide essential food items to low-income groups at subsidised rates, inflation is anticipated to disproportionately affect the poor.

Improved transmission of monetary policy through the relaxation of interest rate caps, easing of foreign exchange shortage through exchange rate flexibility and the consequent normalisation of imports are likely to help ease inflationary pressure gradually in the medium term, it added.

The global lender revealed that the supply side of the economy is facing significant challenges due to slower industrial production caused by disruptions in the imports of raw materials, higher energy prices and shortage of power and gas.

The demand side is also under pressure due to slowing growth in private consumption and investment as a result of high inflation and rising uncertainty, reads the Bangladesh Development Update of the World Bank, titled "New Frontiers in Poverty Reduction".

The report said that Bangladesh made a strong recovery from the Covid pandemic from 3.4% in FY20 to 7.1% in FY22 but the post-pandemic recovery was disrupted in the last fiscal year to 6.1% with rising inflation, financial sector vulnerabilities, external pressure and global economic uncertainty.

Bernard James Haven, senior economist of the World Bank, and Nazmus Sadat Khan, economist of the development agency, presented the keynote at the event.

They said that strong economic growth in Bangladesh improved living conditions and reduced extreme poverty to 5% in 2022 from 9.0% in 2016, which is comparable to Latin America and the Caribbean countries and fares better than the South Asian average.

Moderate poverty declined by 1.6 percentage points annually over this period, while extreme poverty declined by 0.6 percentage points annually.

World Bank Country Director Abdoulaye Seck said data from the first two months of the current fiscal year shows weak performance in export earnings and remittance inflow. He stressed strong reform policies to ensure sustained growth.

Macroeconomy worsened in most indicators

The World Bank revealed that most of the indicators on the supply and demand side of the macroeconomy have deteriorated in the last fiscal year compared to the post-pandemic recovery period.

Private consumption and investment growth slowed in the last fiscal while the growth in industrial production also reduced.

The report found 3.5% growth in private consumption in the last fiscal and projected 5.3% of growth in the current fiscal substantially lower than 8% growth in FY21 and 7.5% in FY22. The World Bank found high inflation and rising uncertainty behind the slowing consumption growth.

The uncertainty also lowered the private investment growth and it declined by an estimated 10.4 percentage points to 1.4% in FY23.

The industrial production index slowed from 11.9% in FY22 to 5.1% in FY23 as a result of import restrictions, rising raw material costs, increased energy prices, and electricity and gas disruptions.

WB suggests strong reforms

The report stressed structural reforms in the field of monetary policy, exchange rate flexibility, fiscal policy, and addressing fiscal sector vulnerabilities.

Presenting his paper, Bernard James Haven said the Treasury rate will need to be market-driven for the six-month moving average rate of treasury bill (SMART) to serve as a market proxy. Removing interest rate caps would further improve monetary policy transmission.

He termed exchange rate flexibility as crucial to remove foreign exchange distortions and attract inflows through formal channels.

He recommended reducing tariffs on essential imports to ease inflationary pressure, in line with the new National Tariff Policy. He also said that strengthening revenue mobilisation is a priority, particularly VAT and Income Tax. The monetisation of the budget deficit can contribute to inflationary pressure further, he warned.