Trendspotting
Economic growth has slowed while inflation remains elevated
Bangladesh’s economy has continued to experience significant difficulties in the first few months of 2024. Economic growth has slowed, with clear weaknesses in a number of indicators, most ominously exports. Nonetheless, inflation remains elevated. Policy settings are gradually being tightened to combat inflation and restore stability in the external sector. But there is a way to go, and further tightening could lead to a sharp downturn in late 2024.
That is, country’s policymakers face a tricky balancing act.
Economic Activities
The economic growth slowed sharply in the second half of 2023 (Chart 1). The services sector remained weak throughout the year, while the industry sector failed to sustain its mid-year turnaround.
The weakening of growth in the industry sector have continued into the spring of 2024 according to the growth in industrial production (Chart 2). This series is a strong correlate of GDP growth. If the historical relationships between the two indicators have held, the economic growth could have slowed further in 2024.
Exports slowed sharply in 2023 and were declining in early 2024 (Chart 3). That is, one of the twin engines of the country’s economy has clearly not been firing for a while. Imports, of course, have been declining for nearly a year (Chart 4), reflecting various restrictions. That is, net exports might have made a positive contribution to growth in the second half of 2023. Nonethelss, declining exports present a significant dampener on the overall economic outlook.
Tax revenue is another correlate of economic growth. Tax revenue growth has been slower than pre-pandemic growth rates (Chart 5), which is not surprising because import taxes would have declined in line with falling imports. If the historical relationship between tax revenue and GDP growth have held, economic growth could have been soft in early 2024.
Turning to the other side of the public finance ledger, both non-development and development expenditures grew in the first half of 2024-25 fiscal year (Charts 6 and 7), shaking off the severe austerity of the previous year. That is, public demand likely to have been contributing to economic growth, particularly in the months leading upto the election.
There isn’t, however, any clear sign of strength in the private sector demand. Growth in credit to the private sector is an oft-used proxy for private investment. This series slowed throughout 2023 and yet to bottom out (Chart 8), suggesting continuous weakness in the corporate sector.
Electricity sale (and generation) is a widely used correlate of economic growth. While electricity generation growth staged a rebound in 2023 after a sluggish 2022 (possibly reflecting external sector problems), electricity sale appears to have weakened into the beginning of 2024 (Chart 9).
Prices and Income
The picture is mixed when one considers indicators of prices and income. The wage rate index has grown strongly (Chart 10) and yet have failed to keep pace with inflation (Chart 11), suggesting an erosion of real income.
Food prices have eased somewhat, even though rice prices remain elevated compared with pre-pandemic levels (Chart 12).
The Khichuri Indicator is a simple measure of the living standard of the urban worker. It shows the number of plates of khichuri — rice, lentil, oil and salt — one can buy on the daily wage of a skilled industrial worker. The recent recovery in this indicator augurs well for the economic outlook (Chart 13).
Another indicator boosting the economic outlook is the large number of Bangladeshis going overseas to work (Chart 14). To the extent that the labour markets in the hosting countries are booming, the outflow workers should result in a strong inflow of remittances. And formal remittances appear to have finally started to recover (Chart 15). These should put a floor on domestic consumption growth.
Policy Settings
Draconian import restrictions did not prevent the taka from sliding in 2023. Nor did it stem the bleeding of the stock of international reserves held by the Bangladesh Bank (Chart 16). Measured in terms of the months of imports, reserves appear to remain in the ‘safe zone’ of above three months. However, this is because imports have been slammed with policy measures.
The effect of the recent official depreciation of taka or the ‘crawling peg’ is yet to be seen in the data. However, the effects of new monetary policy is visible in the interest rates (Chart 17). Particularly, real borrowing rates have finally become positive, albeit it is still far lower than the pre-pandemic norm. That is, while tight money is perhaps affecting demand, interest rates may well have to rise further before inflation declines.
Meanwhile, public sector borrowing growth softened somewhat in the spring of 2024 (Chart 18), but remains much stronger than the pre-pandemic period.
That is, macroeconomic policy settings are gradually becoming more appropriate for the inflationary environment, even though further tightening may be needed to bring inflation down and restore external sector stability. However, given the weakness in economic activities, particularly the exports sector, tighter macroeconomic policies could result in a sharper economic downturn in late 2024.
Further Reading
Nowcasting Bangladesh’s economy
Forum for Bangladesh Studies webinar on the banking sector
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I remain optimistic for the second half of the decade. Major nuclear and coal power projects are coming online by the end of this year. Major port projects are also coming online by the end of 2025. The government is also focusing on solar deployment. We approved around 2.3 GW of solar just last year. The unrelenting expansion of American LNG exports will also keep gas prices low globally.
There is also a lot of room for growth in the country's finance and tech sectors. Our sectors are at least 10 years behind neighbouring India's but that also means we have a lot of low hanging fruit in that department. We're likely to get the first IPO for BPO company this year.
What are your thoughts on the recent offshore banking liberalisation?