A laudable step towards credibility

The estimate of GDP and its components, released on 5 August by the Bangladesh Bureau of Statistics (BBS), are plausible in their depiction of the state of the economy prevailing during FY20 and FY21. This has not been the case in recent years with GDP growth estimates trending around preannounced targets and diverging significantly from what could be presumed from the high frequency indicators. Consequently, we got used to debating, forever inconclusively, the credibility of the reported actuals. This created more heat than light with different numbers telling different stories.

The BBS deserves kudos for saving us from the numbers controversy this year. The government and the planning ministry under the leadership of the planning minister must be congratulated for letting the data speak. Estimates within reasonable confines create room for a constructive debate on getting the numbers right without distracting from the fundamental policy and structural challenges facing the economy.

There is always room for improvement. If the timing were a little better, both the national budget and the monetary policy for FY22 could have benefited from these more realistic estimates than the 6.1% GDP growth they used in their FY21 baseline. Be that as it may, better late than never. Accurate national accounts statistics help researchers and policymakers understand various economic and social phenomena, thus setting the context in formulating economic policies both in government and the non-state sectors.

What are the key messages from the national accounts data now made available?

The economy skidded in FY20

Growth was weakening in FY20 even before the pandemic. This was evident from most high frequency indicators during July-February, FY20. The pandemic spiked the growth deceleration steeper during the rest of that fiscal year. The downward revision of this preliminary 5.24% growth estimate for FY20 has bridged the gap between the reality experienced by the citizens and the growth reported by the BBS.

The new numbers for FY20 tell a story broadly consistent with various survey findings. The pandemic hit the industrial and service activities hardest while agriculture managed to grow at a healthy rate. Rural Bangladesh was not nearly as ravaged by the pandemic last year as has been happening since March this year.

A rise in agricultural growth from 3.9% in FY19 to 4.6% in FY20 helped cushion the decline in the rest of the economy. More generally, the resilience of the rural economy and the rise of digital trade enabled Bangladesh to harvest 3.5% growth in FY20 despite the pandemic. Only a handful of economies in the world were able to keep GDP growth in a positive territory in 2020.

The pandemic took its economic toll, nevertheless. Industrial and services growth plunged as the center of gravity of Bangladesh's urban economy – Dhaka and Chottogram – were disrupted big time by the measures that had to be taken to try to flatten the virus spread curve. Industrial growth nosedived from 12.7% in FY19 to 3.3% in FY20, driven by a drastic fall in manufacturing growth. Growth in services fell from 6.8% in FY19 to 4.2% in FY20, driven by collapsing growth in wholesale & retail trade, transport, tourism, and hotel & restaurants.

Private consumption demand hibernated with decreased mobility and social interactions. The effect on real consumption growth happened with a lag as households initially drew down their savings and access to borrowing. However, even though real private consumption growth at the household level rose from 3.9% in FY19 to 5.2% in FY20, the share of private consumption in total GDP stagnated at around 70%. Real growth in general government consumption fell by 3 percentage points.

Investment plans had to be shelved. Deep uncertainties about the future coupled with sharp increases in prospects of expanded unutilized production capacity brought investment growth to a halt. Growth in gross capital formation slid from 8.4% in FY19 to 1.9% in FY20 as the level of private real investment declined by 1%.

The final BBS estimates for FY20 reflect both the supply and demand side reality reasonably well. Any question on the drivers of the rise in real consumption growth at the household level is fair. It deserves deeper scrutiny. But the overall picture emerging from the full set of BBS's GDP estimates is consistent with the narrative from micro level survey evidence and the high frequency indicators.

There was recovery in FY21

The preliminary estimate for FY21 indicates a recovery. The BBS made the preliminary estimate based on data for the first nine months. The virus struck massively in the fourth quarter, the GDP consequences of which are most likely not captured in the preliminary estimate. However, the key message – that there was a recovery in FY21 – will most likely stand its ground even after the impact of the delta variant is considered. The 5.47% estimate may need some downward adjustments when BBS works on finalising it, hopefully sooner than later.

The recovery is not a statistical artifact. Lower growth in FY20 raised the base nonetheless thus limiting the preponderance of arithmetic effects resulting from decline in base levels. Industrial growth recovered to 6.1%, driven by growth in manufacturing. Services growth recovered to 5.6%, driven by transport, trade, tourism, and hotels & restaurants. The growth resurgence in these sectors was indeed the case in the first three quarters of FY21.

The arithmetic of the story from BBS on the demand side for FY21 is somewhat problematic. The main contributors to the recovery in demand growth appear to be real imports, with 10.6% growth in FY20 turning into 10.4% decline in FY21, and "statistical discrepancy (SD)", whose growth rose from 7.3% in FY20 to 9.7% in FY21. As we know from the national expenditure identity, a decline in the level of real imports boosts the contribution of net exports to aggregate demand as does growth in SD. It typically is a positive number in Bangladesh and constituted 1.6% of real GDP estimated for FY21.

Growth in real total private and public consumption, accounting for 75.8% of total demand, is projected to have declined from 5.3% in FY20 to 5.1% in FY21. Survey evidence suggests slower growth in household consumption. Growth in real capital formation declined as well. This is consistent with data on growth in imports of capital machinery, private credit, and ADP spending.

The recovery was believed to be export driven, but BBS has estimated a decline in the level of real export of goods and services. The Bangladesh Bank data on merchandise and services exports in dollar terms show double digit growth in both. This is not, at least on the surface, in sync with the decline in real exports of goods and services reported by the BBS.

The second wave stunted growth for sure, but perhaps not to the extent of wiping out all the gains achieved in the first three quarters. Most high frequency indicators covering nearly the full year (FY21) suggest a recovery relative to FY20. Merchandise exports in US dollar terms grew by 15.1% in FY21, compared with a 16.9% decline the previous year. Collection of domestic VAT, an indicator of private consumption expenditure, registered 11.1% growth in the first eleven months of FY21 in nominal taka terms, compared with 0.2% during the same period the previous year. Remittances through formal channels were the most buoyant with 36.1% growth in FY21 in nominal US dollar terms, compared with 10.9% the previous year. Other high frequency indicators such as electricity generation suggest similar recovery.

The recovery is fragile

The pandemic has hit the economy hard. Social distancing and health security have become more critical than routine business and commerce in almost every sector. The futures of many businesses are uncertain as the spread of the delta variant and the consequent restrictions on mobility and assembly have forced many businesses to an off again, on again mode in their operations.

The economic recovery achieved in FY21 cannot be sustained if the community transmission of the virus is not drastically reduced from the current 30% level. Amid a horrific tragedy of sickness and death, much of it taking place in hospitals staffed by overworked and under-equipped doctors and nurses, we are all learning what it feels like when the wheels of the economy come to a shuddering stop.

Though radical measures must be adopted to slow the spread of the virus, these are having toxic side effects on the economy. Investment, a key to productivity growth, remained shackled in FY21, notwithstanding the recovery. The level of real private investment, low to begin with, is estimated to have declined by over 2% relative to its pre-pandemic level. If hard measures such as lockdowns fail to flatten the epidemiological curve to keep the caseload manageable for our health system, the virus combat strategy will require revisiting.

A better acknowledgment of the reality on the ground is what we got from the GDP estimates this time around. The system of checks and balances on national statistics appears to have trumped pressures to paint a rosier than the real picture. Integrity of national statistics is a precondition not only for finding ways to fight the battles germane to the pandemic, but also to address the constraints on growth inherited from before the pandemic.

Much better covid management will be key to accelerated and inclusive economic recovery in the days to come. This may not be sufficient, but it is an absolute necessity to keep recovery going.