K-shaped recovery

Bangladesh's economy is experiencing a K-shaped recovery with some sectors bouncing back and others falling behind, and a second stimulus is required to put the recovery on an even and sustainable path, says the Centre for Policy Dialogue (CPD).

The overall recovery has so far been "comparatively good" on the back of resilient domestic demand and strong performance in some sectors such as remittance and manufacturing, the research organisation finds, analysing the indicators under the shadow of the Covid-19 pandemic.

A budget surplus in a time of crisis reveals inefficiency in public finance management as the economy needed higher government investment to offset the vacuum of stagnant private investment, it points out in its review of the state of Bangladesh economy released yesterday.

The performances in various sectors are mixed, which indicate a K-shaped recovery in Bangladesh. The economy is most likely to require a second round of stimulus packages for the attainment of a sustainable recovery, the research organisation says.

By definition, when an economy shows a mixed trend of recovery – some sectors faring well and some lagging behind, it indicates a K-shaped recovery path, says Prof Mustafizur Rahman, distinguished fellow of the CPD.

"We have seen such mixed trends," he adds.

Since monetary stance is not enough for a full-fledged and even recovery, a revision of the budget is urgently needed to recraft the fiscal policies to put the economy on the desired track in the remaining period of the fiscal year, the CPD thinks.

Taking the experience of the first stimulus package into cognisance, the next round of packages will require serious revisiting to formulate and design new support measures, prioritising small industries and focusing on employment.

Large industries were more successful in accessing and attaining the benefits of the stimulus packages compared to their smaller counterparts. So the continuation of the same packages with an extended timeline will not produce the intended results and outcomes, the CPD cautions.

The second stimulus package should not be based on banks alone, alternative instruments need to be devised so that those who need the most are not excluded, Professor Mustafizur Rahman said.

The CPD identified positive trends in a number of areas like revenue mobilisation, industrial production of large and medium industries, remittance inflow, and foreign exchange reserve.

Macroeconomic stability was maintained to a large extent during the first half of the current fiscal year, which was reflected in the surplus budget, declining aggregate inflation as per official data, the large overall surplus in the balance of payment, and a stable exchange rate of taka against the dollar.

But both public and private investment correlates remained subdued throughout the first half of FY21, which might slow down employment and domestic demand growth, it apprehends.

The surplus in fiscal balance indicates a lack of institutional capacity in public expenditure as high-priority "fast-track" projects saw low implementation.

Public expenditure fell by 12.9% during the first four months of the current fiscal year compared to that of the pre-Covid period, meaning that an expansionary fiscal policy, which was needed to pull the economy out of a recession, was not in place.

A substantial fall is noticed in development expenditure with a 35.1% decline in ADP expenditure over the corresponding period of FY20.

The government expenditure rather moved to a direction of contradictory policy, which is quite incompatiable to what was needed in the time of crisis, says CPD Senior Research Fellow Towfiqul Islam Khan, while presenting the CPD's review on the state of the Bangladesh economy at a virtual platform.

The event was also joined by CPD Executive Director Dr Fahmida Khatun and Research Director Dr Khondaker Golam Moazzem.

"It seems that the design of the stimulus packages and their distribution are driving a K-shaped economic recovery path for Bangladesh," reads the CPD review.

The positive balance of payment, budget surplus, macroeconomic stability, stable exchange rate and inflation, growth in domestic demand, remittance growth, all are positive trends.

At the same time, these are causes for worries because the balance of payment is good owing to falling imports, including those of capital machinery and intermediate goods, which is not good for production for both domestic and export markets, Prof Mustafizur elaborates.

Low public spending, falling export, private sector credit growth still remaining far below the target are among the negative trends, he cited.

"These are uncomfortable issues amid some positive signs as these indicate weaknesses of an economy."

"Overall recovery is comparatively well. Now a second stimulus is needed," he said.

However, there are some "ominous signs" ahead, Prof Mustafizur noted with caution. Since there is no immediate sign of a big jump in external demand, higher government spending is needed to stimulate domestic demand which will create jobs and encourage private investment as well, explained the economist.

"Private sector is unlikely to see growth in the next six months or a year. So, public spending is needed in infrastructure and income-generating activities in rural areas," he pointed out.

Remittance posted an impressive 38% growth, but the trend is unlikely to continue, and banks are having excess liquidity for the dipping credit demand, he replied to queries from the media sharing his worries about future recovery.        

Budget surplus at a time of crisis

The last fiscal year ended with a budget deficit of 5.5% of GDP, but the first four months (July-October) of the current fiscal year saw a surplus in the fiscal balance.

The overall balance of payments registered a buoyant surplus of about $6.2 billion during the first six months of FY21, providing a big boost to foreign exchange reserves and a stable exchange rate.

The trade deficit narrowed further riding on reduced import payments, while an extraordinary remittance inflow helped the current account balance post a surplus of $4.3 billion as of December. This has created a large flow of net foreign assets for commercial banks.

In the first half of the year, the implementation in FY21 has been the lowest in the Health Services Division with only 14.6% of the initially allocated amount being spent, which is lower than pre-Covid spending of FY20 for the same period.

The implementation status of eight mega projects during the first half of FY21 indicates that only 17.4% of allocations has been spent, which is far below the average implementation rate for the total ADP, the CPD analysis shows.

The Finance Division has set the development expenditure ceiling at 75%, suspending low-priority projects and putting more money into high-priority projects.

"But, the created fiscal space was not diverted to expenditure for other priority purposes, making Bangladesh an exception in the global map as the country had apparently gone for austerity during the time of a crisis," reads the CPD review.

Prof Mustafizur Rahman said while banks have surplus liquidity, inflation is in check, and a space is there to borrow more from external sources at a lower interest rate, a budget deficit up to 6.5% is not a matter of concern. 

A 5.2% growth, though lower than projected, proved that the economy remained resilient in the FY20, thanks to its domestic strength – high agricultural production, remittances and a brief export recovery driven by apparels.

The 7.2% growth target set for the current fiscal year, if even achieved, may not contribute to the recovery of all sectors in the same way, it says.

Despite export volatility, industrial production saw a turnaround. The last fiscal year saw a slump in exports, and the trend continued in the July-January period of the current fiscal year.

But industrial production for large and medium industries increased by 7.7% during July-October of FY21 while the corresponding figure for FY20 was 5.4% with the leather sector seeing a 58% increase.

What excess liquidity means to small savers

Domestic demand has shown stronger resilience, helping various business sectors turn around.

Agro-based enterprises and businesses have recovered well and reached the pre-Covid level. The pandemic came as a blessing for the e-commerce industry.

Service sector enterprises have somewhat witnessed a recovery faster than manufacturing ones. The pharmaceutical sector has performed exceptionally well, thanks to the rise in the demand for medicine and medical equipment both from local and global markets.

However, if electricity use is taken as a proxy indicator, it is seen that manufacturing and service-oriented industries are yet to create adequate demand for electricity.

The decline in investment by large scale enterprises, which accounted for 76% of total industrial term loans, also portrays a medium-term recovery challenge for manufacturing and service-oriented industries.

Excess liquidity in the banking sector has nearly doubled in a year to Tk2 lakh crore, leading to a fall in both lending and deposit rates. The low-cost funds in the call money market indicate that there was hardly any demand for the funds.

The real deposit rate, if adjusted with inflation, turned negative, meaning that the value of people's savings was depleting during the pandemic – a time when they needed to utilise their savings the most, says the CPD review.