Will the Purchasing Managers' Index work in Bangladesh?

The Purchasing Managers' Index (PMI), a monthly survey-based index that measures the prevailing direction of economic trends in the manufacturing and service sectors, was introduced in Bangladesh on 5 February. 

It is an extensive index that predicts future economic conditions as a leading indicator, and provides a bigger picture to firms, policymakers, politicians, and analysts. 

However, it is no secret that economists have always raised significant concerns regarding the lack of reliability of Bangladeshi data. So, naturally, the question arises, how reliable will the data be in Bangladesh? And will the PMI work here? 

The PMI is calculated through a survey of purchasing managers who respond to questions about key areas of their business. Typically, the executives who participate in PMI surveys are asked about various aspects of their businesses, such as production levels, new orders, employment, and supplier deliveries. 

Survey respondents are asked whether each of the business activities have improved, deteriorated, or remained unchanged since the previous month. Individual indices for each business activity, such as production, employment, and so on, are derived by adding the percentage of respondents who report that the activity has improved (i.e. is higher or better) to one-half of the percentage who report no change in activity.

Their responses are then compiled to create the PMI index, which provides insights into the economic conditions of the manufacturing sector. The integrity and correctness of the data supplied by the executives who are polled determine how reliable the PMI data is. 

But the way the questions are framed provides incentives to the executives to be candid and honest. Therefore, the data quality should be good as well. 

Dr Syed Akhtar Mahmood, former Lead Private Sector Specialist at the World Bank Group, is optimistic. 

"The questions listed in the matrix are pretty simple and straightforward. So, the executives do not really have any incentive not to express their honest answers," he said. 

Also, Dr Mahmood believes that the issue of quality of data can be solved by triangulating the data from different angles. 

"Triangulating the findings can ensure that we can see the bigger picture." 

The matrix is being introduced and monitored by the Metropolitan Chamber of Commerce and Industry, Dhaka (MCCI), the oldest trade organisation in Bangladesh established in 1904, in partnership with Policy Exchange Bangladesh (PEB).  

"Since the MCCI is behind the matrix, I am confident of the quality. They know what they are doing," Dr Mahmood said.  

The PMI is usually released on the first Monday of every month, but in Bangladesh, it will be quarterly in the first year. And from the second year on, this will be a monthly one. 

In the US, early warnings from PMI help policymakers take preventive measures to mitigate the impact of economic downturns or capitalise on periods of growth. By surveying purchasing managers across various sectors, it provides real-time information on the health of the manufacturing and services industries. 

Dr Mahmood thinks that the matrix would be quite useful for the formal sector. "The formal sector, like banks, financial institutions and logistical companies, will benefit greatly from the matrix. However, the matrix would not be of much use to the informal economy. It is a big shortcoming, as the informal sector is quite dominant in the economy." 

"But I believe the matrix will be a good leading indicator for the economy," he added. "It can predict what may happen in the near future. Businesses and policymakers may get early forecasts from the matrix. We hear many predictions, but they are not comprehensively organised together in one matrix. There are some questionable forecasts by various parties as well. The PMI can help in this regard," he added.

"So even if the PMI has some shortcomings, it will provide quite useful and important predictions, I believe." 

Dr Mahmood stresses the timeliness of the result publication. 

"In our country, many good things are not published on time. But the PMI is quite time-sensitive. Unless you publish it within two weeks of the survey, it will lose its usefulness, as the matrix is highly time-dependent," he said. 

PMI information about supply and demand affects the prices that suppliers can charge. So if the manufacturer's new orders are growing, it may raise customer prices and accept price increases from its suppliers. On the other hand, when new orders decline, the manufacturer may have to lower its prices and demand a lower cost for the parts it purchases. 

Armed with PMI data, policymakers can make data-driven decisions. By adopting PMI, Bangladesh can benchmark its economic performance against international standards. This allows policymakers to assess how the country is positioned globally and identify areas of improvement. Thus, it is essential for policymakers and government agencies to follow up the PMI matrix regularly. 

"We must ensure that the index and its results are interpreted and utilised by the researchers and academics who work with economic trends. The government's own state machinery and the ministries all produce their respective data and surveys. All the data should be pooled together and analysed to piece together the bigger picture regarding the economy," Dr Mahmood further said. 

Shadique Mahbub Islam. Sketch: TBS