A mini buffet of views on our macroeconomic malaise

The economic pie, whether measured in GDP size or national income per capita, has increased notwithstanding a variety of recent adversities. The pace of expansion, outlook and policy response are subject to debate. Dollar shortage has joined inflation in household vocabulary. Unlike the consensus on the broader development agenda, there is divergence of views on the state of play and the timing and sequencing of policy adaptation to the abruptly changing conditions, global and local. 

The views can be caricatured into two reading the same data very differently. The insiders, those running the government (the executives, the administration etc.) and their sympathisers, attribute the macroeconomic pressures essentially to global factors and see management by fiat as appropriate policy response to dollar shortage and inflation. The outsiders, a heterogeneous group of researchers, think tanks, and academicians, draw attention to domestic factors and the roadblocks to market solutions created by administrative controls on prices and quantities. 

Onlookers such as the World Bank, the International Monetary Fund, and the Asian Development Bank tend to align with the outsiders at an academic level. They are more strategic in voicing their macroeconomic policy and institutional evaluations. 

Don't worry, be hopeful, if not happy 

Global shocks such as the pandemic and the Ukraine war caused the prevailing internal and external imbalances. Supply bottlenecks, commodity price increases, rate hikes by globally significant central banks, and the rise of the dollar derailed post pandemic recovery. The war in Ukraine exacerbated all these while making geopolitical uncertainties uglier and deeper. 

This is well articulated in the government's Memorandum of Economic and Financial Policy for the IMF program. "Our economy was recovering strongly from the Covid-19 pandemic until the onset of the Russia-Ukraine war. The unprecedented rise in global food, energy, and other commodity prices and disruptions in international supply chains have adversely affected the global economy, including Bangladesh. Inflation rose to a decade high…. current account (CA) deficit widened sharply...." The IMF echoes this view, attributing higher inflation, reserve losses and "slow growth" to the same shocks (Program Document 2023).

The government took a "comprehensive set of measures", asserts the MEFP, to mitigate the imbalances. "Monetary conditions have been tightened. Increases in the repo rate and unsterilized foreign exchange (FX) interventions have reduced liquidity in the banking system. Greater exchange rate flexibility was allowed to reduce FX pressures and the prices of fuel, fertilizers, electricity and gas were raised" apart from measures to curb non-essential imports and curtail energy demand.

Headline inflation has been declining for the last five months, import growth has slowed, remittances are recovering, maritime-freight expenses sharply dropped, and the current account deficit shrank in the first half of FY23. Cash support from the multilateral institutions are beginning to flow in. The US dollar has depreciated in the international markets. Further commodity price declines are forecast in several global flagship reports by various institutions. Adverse risks have moderated (IMF WEO January 2023 Update). 

It should be possible to bring down inflation to within the 5–6 percent range and increase net international reserves to four months of prospective imports by taking appropriate policy measures. The Fund believes the "ECF/EFF arrangement, along with its catalytic role in mobilising other financing, will support a relaxation of strict demand and import management measures and rebuild reserves. Over the medium term, the program will enable a fiscally sustainable scale-up in social and development spending." 

The challenges ahead are surmountable. The government is working to address the short-term macroeconomic stresses. The medium to long term structural change agenda is on the move with budget support from the multilateral institutions.

Can't be so sanguine

The mono causal theory that the shocks are all external is a stretch. This is evident from data on inflation, GDP growth, and external current account balance reported by the BBS and the Bangladesh Bank. Domestic market and policy factors have played a visible role in shaping the transmission of global shocks into the domestic economy in the last twelve months. We miss evidence on these forces if we don't look for them. 

The direction of movements in GDP growth and inflation is a case in point. Growth and inflation have notched upwards since the peak of the pandemic in 2020. A confluence of supply shocks and expanding demand explain a sharper increase in inflation than growth since FY21. Demand resurgence retained momentum as social distancing continued to wane amidst the renewed wave of the energy price and supply chain shocks following the start of the war in Ukraine in FY22. 

Demand pull complemented inflation imported from abroad. The growing excess of external current account payments over current account earnings in FY21-22 is a mirror image of growth in national savings falling behind the growth in domestic investments. This is approximately true in BBS's national savings and investment data, except in FY22 when investment saving differences (2.7% of GDP) is well short of the 4% of GDP current account deficit reported by the BB. 

FY22 national accounts data seem to understate the role of domestic demand in explaining the macroeconomic imbalances. A 1.2% of GDP statistical discrepancy between nominal GDP and nominal national expenditures plus an unexplained 0.1% of GDP of "excess current account deficit" necessarily imply an overstatement of gross national income or understatement of gross domestic expenditures in BBS data, assuming the BOP data is more reflective of the true current account balance. It is probably a mixture of both.

Quite apart from domestic demand, the unintended consequences of some of the "comprehensive set of measures" exacerbate balance of payment pressures and inflation while slowing growth. The policy measures can be counterproductive, producing exactly the opposite of what is intended, or cause collateral damages as they treat the perceived problem. 

For instance, loadshedding is counterproductive if it increases the consumption of diesel when the intention is to save diesel. The lending rate cap on the other hand may not be counterproductive (in terms of impact on the cost of bank credit) but collaterally damages important market segments by rationing them out of credit. Multiple exchange rate caps qualify and extended loan forbearance for the counterproductive category (disincentivising supply of dollars, loan repayments) while administrative controls on imports and energy price increases inflict large collateral damages (a wide variety of goods and materials shortages, cost-push inflation). 

Both the government and the Fund recognize more the collaterals than the counterproductive. "We acknowledge that these measures, though temporary, are not sustainable and costing our economy and people tremendously", says the MEFP. "These measures are disproportionately affecting the poor and the vulnerable…", adds the Fund.

Yes, the global economic outlook is not as bad as feared at the dawn of 2023. However, "less bad doesn't quite yet mean good," cautioned the IMF chief very recently. A nagging sense of uncertainty is evident in the short-term outlook for global economic activity, prices, and monetary policy, the clean-energy transition, the resetting of global supply chains, and the intercourse between globalisation and geopolitical power configurations. 

Bangladesh's GDP growth is projected to slow in FY23. The inflation rate could get stuck at 7-8% over the rest of this year as food inflation stops declining and non-food inflation persists. Monetary accommodation of fiscal deficit and debt, elevated BB lending in the money markets, and disbursements from BB's expanded refinancing facilities have money creation effects. If the supply response from the expansion of credit to the public and private sectors are less than proportional with long lags, disinflation may be shorter and milder. 

Policies are constrained by the multiplicity of mandates and inertia. Monetary policy is hamstrung by fixed exchange rates driving the behaviour of official international reserves. Capped lending rate, the government financing needs, and quasi-fiscal demands drive the behaviour of BB lending to the government and the banks. The room in the BB balance sheet to sail against the wind is narrow and shallow. Fiscal space to absorb shocks because of favourable debt dynamics is shrinking. Structural reforms are inertial with some (Customs Act, Banking Companies Act) moving in circles.

So, no panic, be pragmatic and nimble.

Uncertainty warrants informed flexibility 

Viewing the stress as transitory comforts the insiders' wish that it is a short-lived, reversible phenomenon. It misses the need to adjust behaviours. After all, if dollar scarcity and inflation are only temporary, the best way to deal with it is simply to wait it out, letting the chips fall where they may. Complacency and inertia logically associate with such a view. 

Bringing candid feedback into the political and administrative system is a principle the insiders and outsiders should not disagree on. These attributes define an adaptive policy regime. No single static policy performs well in all conditions. Policies must be robust across a range of plausible futures combining urgent actions with important future commitments while preserving the flexibility needed for the unforeseen. 

The political and administrative system's feedback channels need building back better. People have to be enabled and incentivised to speak the truth in platforms openly debating data and policies. State officials and institutions, the media, researchers, and activists should feel fearless in observing, listening, and reporting the realities on the ground. That will not happen if facts are silenced, and malfeasance rewarded.

Zahid Hussain is the former lead economist of The World Bank, Dhaka Office