Economy's health: Low pulse, high pressure

Illustration: TBS

The economy's pulse is currently beating low while the pressures from inflation and expectations are running high. The first quarter of the current fiscal year ended with sharply weaker growth, increased underutilisation of labour, and deeply entrenched inflation. The subsequent rise in exports and remittances and stable foreign exchange reserves inspire hope for an imminent recovery towards a new normal. Political uncertainties loom large. The cost of inaction on the economic front is increasingly salient. Catch-22s all over.

Receding Growth

Bangladesh's economic growth has been on a downward slope for at least half a decade now. Recently released data pertaining to the July – September 2024 quarter show growth dipping to 1.81% from 6.1% in the same quarter a year ago. The fall is sharp even discounting some political "add factors" in the FY24 Q1 estimate reported under the manipulative spell of the previous regime. The decline surprises no one because the quarter under review was exceptionally disruptive in our recent history.

The Bangladesh economy navigated the most turbulent times when a bloody revolt crushed a 15-year-long despotic autocracy in July-August 2024. How much can any economy grow under such volatile circumstances?

Political upheaval made it hazardous to pursue any kind of outdoor economic activity. Internet shutdowns made the pursuit of indoor economic activity impossible as well. Floods affecting 73 upazilas across 11 districts in northeastern and southeastern Bangladesh destroyed crops, livestock, and fisheries. Frequent labour unrest shut manufacturing in industrially dense areas such as Gazipur and Ashulia. Groups with varying identities, including from within the public administration, often took hold of public spaces demanding remediation of their grievances. The purchasing power of a vast number of people eroded as their nominal income growth fell well short of persistently high inflation.

Yet the economy managed positive growth. This may be real because of the relative insulation of informal activities in rural and peri-urban areas from urban-centric chaos and the coping capacity of the micro, cottage, small and medium enterprise sector. It could also be statistical, reflecting downward rigidity of growth estimates resulting from the way growth is computed in several sub-sectors.

Be that as it may, the bottom line is the growth process took a major hit in agriculture, industry, and services from the natural and human-made disasters in the quarter in question. Political malaise had already suffocated productivity growth as well as physical and human capital accumulation.

Weaker Employment

Labour market weaknesses grew in the first quarter. Unemployment increased and the labour force participation decreased relative to the same quarter the previous year and the annual rates in 2023. A decline in production growth reduces growth in demand for labour, which usually leads to a higher rate of unemployment. Total employment decreased as labour demand contraction outweighed supply expansion.

Industrial unrest and natural disasters caused labour shedding as reflected in the decline in the number of employed workers in agriculture, industry, and services. Employment level was the lowest in the last three years. The decline in employment was the largest in agriculture and overwhelmingly amongst women. One primary determinant of the demand for labour from firms is how they perceive the state of the macroeconomy. When firms perceive that the economy is slowing down, they tend to hire a lower quantity of labour at any given wage.

Continued turmoil must have discouraged workers from looking for work, thus causing a sharp decrease in the labour force participation rate. The number not in the labour force increased by 3.8 million, of which 84.2% were women and 57% youth (15-29 years old). They surely did not choose to leave the labour force because of better options to make a living or to just enjoy leisure. When economic conditions deteriorate, more people leave the labour force. Political unrest restricts mobility. People become more reluctant to move to areas where their safety or job security might be compromised.

Eroding Purchasing Power

Inflation declined in December from a very high level. Although not much can be made from the 44 basis points decline relative to November, the good news is both food and non-food inflation declined in urban as well as rural markets.

This gives some hope that perhaps a turnaround is around the corner. The exchange rate has been generally stable (except for some volatility in December). A more transparent and market-based exchange rate mechanism is planned to be in place from 12 January. The BB has steadfastly stuck to a tight monetary policy stance despite mounting pressures from the business community for easing rates. With the exception of monetising liquidity of several distressed banks, BB has generally refrained from printing money. The interim government cut taxes on a variety of food items, including rice, edible oil, sugar, and eggs while also relaxing import restrictions.

Yet the hope stands on quicksand because inflation has increased in clothing and footwear, transportation, recreation and culture, education, restaurants and hotels, and miscellaneous goods and services. Recent increases in VAT rates on 43 items are likely to boost non-food inflation some more. Low-income and poor families remain deeply stressed with an 8.1% nominal wage growth remaining significantly behind food inflation in double digits and non-food inflation nearly so. The extent of tax reductions pass-through to prices at the consumer level is uncertain.

Improved Visibility

The Bangladesh Bureau of Statistics made significant pieces of history recently. For the first time, we now have methodologically comparable quarterly growth estimates. The quarterly growth estimates covering the FY16-23 period are derived from backcasting annual data. The ones from the first quarter of FY24 and onwards are direct estimates.

BBS also made history by sharing the growth data in Excel format, which significantly improves their user-friendliness. Hopefully, BBS will follow this footstep in other data releases such as the monthly Consumer Price Index and the quarterly Labour Force Survey. Others such as BB will do well by imitating.

The disinfection of statistics from higher executive influences is beginning to show in growth, inflation, and employment data. The fear factor which may have played an inhibiting role under the previous regime even in reporting the original estimates internally appears no more. Nor is there any evidence or gossip on instruction from above to revisit the original estimates to facelift the government's economic management.

Research globally finds that economic openness and democracy generally reduce data manipulation. Bangladesh is a case in point. There is more openness and democracy in Bangladesh today than used to be the case before 5 August 2024. We look forward to the consolidation and irreversibility of reinvented integrity and veracity of data generation and dissemination by the BBS and others.

Changing Reform Gears

A remittance boom and export recovery in the first half of FY25 bode well for growth recovery in the rest of the current fiscal year. The foreign exchange reserves have grown, albeit still below a comfortable level, and political instability has receded, although not yet out of the woods. Public administration is still not back to a normal level of functionality but better than the low it hit in the immediate aftermath of the fall of the previous regime.

The interim government is facing elevated expectations from a low base. Regardless of developments in the political space, the state should protect the economy first. Being in charge, the interim government cannot escape culpability if henceforth growth does not recover, inflation does not decline, and employment does not increase.

Growth will not revert to its historic 4-5% normal immediately, but the bottom needs to be behind. Inflation will not deflate to the 5-6% target in just a few months, but the peak ought to be past. Labour utilisation cannot be improved without structural policies, but labour shedding can be stemmed if security and stability are normalised. Watch also for symptoms of financial distress that could potentially spoil the economy's broth.

Externally, there are both downside (higher dollar, tariffs, geo-economic fragmentation) and upside (lower commodity prices and interest rates) risks. In dealing with them, we cannot afford to experiment with policies the way the previous regime did. The shifts in policy stance so far signalled are encouraging but not yet fully convincing on their depth, breadth, and stickiness. The low base is an opportunity for major gains if the reforms are tall enough to go past harvesting the low-hanging fruits. Political stability is a sine qua non for policies to remain consistent and predictable.