Virus won’t derail Bangladesh's rising potential growth

A sustained pickup in Bangladesh's growth potential before Covid-19 struck gave the economy more resilience to cope with the shock. We expect growth to stage a V-shaped rebound in the year through June 2021 from this year's slump as it returns to its pre-crisis trend.

Pent-up demand and a favorable base effect are likely to support a post-pandemic pickup in growth. The pace of expansion should accelerate in tandem with potential growth to 7.5% by 2026, up from 6.7% prior to the pandemic, according to Bloomberg Economics' projections. We do not see any long-term scarring on the economy from the virus blow under our baseline scenario.

Bangladesh Insights: Virus Won't Derail Potential Growth Rise (1)
A strong export performance expanded employment opportunities for the vast population, spurred rapid investment and lifted productivity over the last decade. We expect these factors to drive the economy's growth potential upward over the long term.

• GDP growth likely dropped to 2% in the fiscal year that ended June 2020 from 8.2% in fiscal 2019, and is poised to rebound to 9.5% growth in the current fiscal year, based on projections by the IMF. Pent-up demand and a favorable base effect are likely to drive the pickup in growth. Beyond that, the pace of expansion should pick up in tandem with potential growth to 7.5% by 2026, up from 6.7% prior to the pandemic, according to Bloomberg Economics' projections.
• Even with massive disruptions from lockdown measures to curb the virus, GDP in 2030 is forecast to be just 3% lower relative to its pre-pandemic growth trajectory. This is due entirely to lost output in 2020, split over fiscal 2020 and fiscal 2021. We do not see any long-term scarring on the economy from the virus blow under our baseline scenario.

Virus Is Short-Term Setback, Growth Momentum to Prevail

Over the longer term, the economy faces significant downside risks from automation in the garment industry, which poses a severe threat to unskilled labor. In addition, the pandemic has also created near-term external risks -- an expanded current account deficit due to a hit to worker remittances and damage to its garment industry, which accounts for nearly 80% of total exports. If these stall productivity growth, the economy could stagnate.

The country's stable debt profile has allowed it to secure sufficient financial assistance from multilateral agencies to bridge its near-term external funding gap. Our base case projections assume that Sheikh Hasina's government makes more headway on social development indicators, women empowerment, regional transport connectivity, and further refinement of a newly introduced VAT taxation system to increase low tax revenue collections. Increasing the pace of structural reforms to improve the ease of doing business could provide further upside.

Long-Term Growth to 2050
We use an augmented version of the Solow-Swan growth model for our long-term growth projections. These essentially break down potential growth into contributions by labor, human capital, capital stock and total factor productivity growth.

A sharp rise in productivity on account of technological catch-up, improvement in human development and sustained investment growth are projected to lift the economy's potential growth. The contribution from labor and human capital growth is projected to drop.

• We expect the economy's potential growth to rise to 7.5% by 2026, sustain at that level until 2035 and then gradually drop over time to 6% by 2050.
• The key factor lifting growth potential over the next decade is an expected increase in productivity. Rapid progress on human development indicators, technological catch-up with advanced economies and a deeper penetration of the digital economy should all boost productivity. For example, the garment industry is already seeing the adoption of automation techniques, which stand to lift productivity -- though they also pose a challenge to large-scale employment growth.
• Working-age population growth has declined in recent years and as the unemployment rate continues to drop, the contribution of labor to potential growth is expected to fall sharply over time.
• Average years of schooling for the working-age population have been estimated to have increased by four over the past three decades to 7.2 years in 2020, and are projected to rise another 3.2 years to 10.4 years by 2050. This suggests the rate of growth in human capital, which has been broadly steady, will ease slightly in the decades ahead.
• Investment growth has been an average 8.5% per year over the last two decades. We expect greater investment in infrastructure and some diversification within the export sector away from the garments industry to sustain this growth over the next decade. Further out, we have assumed a gradual decline to 6.5% growth by 2050.

Bangladesh Potential Growth Components

Abhishek Gupta covers India for Bloomberg Economics in Mumbai. He previously worked as an economist at DSP Merrill Lynch and as a research analyst at the National Institute of Public Finance and Policy, India's premier macro/finance think tank.

Disclaimer: This article first appeared on bloomberg.com, and is published by special syndication arrangement.