A Case Study on Macro Economic Conditions of Bangladesh
Md. Rifayat Islam1*, and Afroja Rehan Rima2
1. Independent Consultant, Business Development and Research. 2. Independent Scholar & Consultant.
Bangladesh is a developing country. The country is not only technologically and managerially inefficient but also underdeveloped in the areas of key infrastructure such as transport, telecommunication, and energy sectors. Despite a low GNI/capita (PPP, current) of $1,940 the growth fundamentals of the economy has received widespread international attention. Guardian has enlisted Bangladesh among the economies that have the potential of overtaking the west by 2050. Bangladesh’s economic stability fares well even in comparison with the “Emerging Asia”. Bangladesh’s growth is overly dependent on two growth drivers—exports and remittances—making growth highly vulnerable to developments in the global economy. The economy of Bangladesh suffers from both supply side and demand side problems. The main objective of the study was to select four macro-economic factors and know how the factors of macroeconomics work in our country in the reference period (January 2013 to March 2013) and compare with the same period of 2012.
Economic condition of the economy can be referred to as the strength of the current economy in terms of many economic concepts which tell us the consumer‘s wellbeing and also the wellbeing of industries as a whole in the country. There are many ways to find out the state of a country‘s economy. Many useful economic aggregates or indicators are available such as GDP, Government expenditures, consumption, Inflation, Exchange rates, Unemployment, exports, imports etc. Against the backdrop of the global economic slowdown, the Bangladesh economy has performed strongly over the past few years. Despite the fallout from the Euro debt crisis still contributing to an uncertain environment, the Bangladesh economy has pursued accommodative
monetary and fiscal policies. However, if the global economic slowdown is much more prolonged than the current forecasts indicate, the impact on Bangladesh is expected to be adverse. The economy has persevered so far in the face of global recession, but the domestic challenges are manifold with respect to soaring inflation, import-export imbalances, devaluation of the currency, a slow growth of remittances, increasing budget deficit and government borrowing.
In this case study, following 4 macro aggregates have been chosen.
1. Inflation
2. Remittance
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3. Exchange Rate
4. Exports
Firstly, these four would be the most relevant and useful in terms of explaining our country‘s economic condition because the purchasing power of consumers tells us how well the consumers are satisfied when they buy things from the market. Secondly, any developing country‘s economy can be improved by their performance in exports; this would indicate the strength of industries and international competitiveness as well. Thirdly, exchange rate would indicate the value of our currency in terms of US dollars, because we need to import lots of things both a raw materials and consumer goods. Therefore the value of our currency would indicate the purchasing power of imports, but also the value of our exported items. Lastly, foreign remittance and aids are the most common and important for any developing or underdeveloped country since, we still have to be dependent on foreign aids and we must know if the aid is being utilized properly or not. The assessment was made by comparing the first quarter of the current fiscal year (2012-2013) to the first quarter of the fiscal year of 2011-2012 as instructed.
INFLATION
Inflation is a rise in general price of price of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services; consequently, inflation is also erosion in the purchasing power of money- a loss of real value in internal medium of exchange and unit of account in the economy. Inflation is an increase in the price of goods and services as experienced by all consumers. Because inflation decreases the purchasing power of money, its direct impact can be measured as a reduction in the real return on investments. A chief measure of price inflation is the inflation rate the annualized percentage change in consumer price index overtime. CPI is an index to compare the value of the base year‘s consumption basket with value of same basket in the current year.
Inflation has positive and negative effect in Bangladesh economy. Negative effect of inflation include loss in stability in real value of money and
other monetary items over; uncertainty about future inflation may discourage investment and saving and high inflation may lead to shortage of goods if consumers hoarding out of concern that prices will increase in future. Positive effects include a mitigation of economic recession and debt relief by reducing the real level of debt.
(Table 1)
(Figure 1)
(Figure 2)
Findings on Inflation
The inflation situation in Bangladesh of first quarter of 2013, we can see that the inflation came down to single digit when compare to same quarter of previous year 2012. The decline in inflation was due to lower food price as reasonable productions took place. And also slowdown in international food price. Also because government‘s food stocks were sufficient and helped contain expectation-driven price hike of food. Resulting in a fall in the overall inflation in 2013 first quarter compared to that of 2012.
In 2012 first quarter, there was a declining trend of inflation began to happen. There was 10% decline in February 2012 compare to January 2012 and 3% decline in March compare to February.
In 2013, inflation slightly increased by 7% in February compare to January 2013 and declined 2% in March compare to February 2013.
In 2013, the headline rate rose in the subsequent months, reaching 7.87% in February 2013 following the rise in prices of some food and nonfood items due to religious festivals, supply disruptions because of political unrest, and rise in power and fuel prices, but it was still lower than 24.5% in February 2012.
Both food and nonfood inflation declined. Food inflation was 8.3% in February 2013 compared with 8.9% in February 2012. Nonfood inflation eased more steadily, slowing to 7.1% in February 2013 from 13.6% in February 2012 responding to monetary tightening by the central bank and as taka depreciation slowed. Urban inflation is higher than rural inflation.
Exchange Rate is price of one country's currency expressed in another country's currency. In other words, the rate at which one currency can be exchanged for another. For instance, if the United States Dollar exchange rate for Bangladeshi taka stands at 80, this means that 1 dollar can be exchanged for 80 Taka. The exchange rate is one of the most important policy variables, which determines the trade flows, capital flows & FDI, inflation, international reserve and remittance of an economy. Many economies, especially Asian countries encountered crisis in 1990s due to imprudent application and bad choice of this policy. However, there is no consensus in the theoretical or empirical literature about any unique effect of the exchange rate volatility on macroeconomic indicators. Bangladesh followed a ‗fixed exchange rate‘ system until 1979. Between 1979 and mid-2003, the country pursued a managed floating exchange rate regime. Continual devaluation of the domestic currency, in order to maintain a stable real exchange rate and avoid overvaluation of the domestic currency, was the hallmarks of this regime. Since the end of May 2003, Bangladesh has introduced a kind of ‗clean floating‘ exchange rate policy by making it fully convertible on the current account, although capital account controls still remain. All the exchange rate policies Bangladesh has taken, mainly, to accelerate exports, reduce extra pressure of imports and thereby improve the balance of trade.
Exchange rate plays an important role in modern economy as an economic tool for promoting domestic and international trade. Most recently, a researcher of Harvard University Dani Rodrick has shown how a weak exchange rate management may lead to a disastrous effect on a country's economic growth. His research work was mainly meant for developing countries. He has shown how a strong and timely exchange rate management policy can accelerate economic growth as well as develop the overall economy. From March 2011, exchange rate of Bangladeshi Taka (BDT) against US Dollar (USD) was rising sharply i.e., BDT was depreciating largely against USD. The rise was continuing until mid-January
2012. In January 2011, USD 1 was BDT 71.04, and then the price of USD was appreciating and rose to BDT 84.47 until mid-January 2012. However, the scenario changed subsequently. The price of USD in BDT started declining steadily after mid-January 2012. The declining trend of exchange rate of BDT against USD persists until March 2013.
(Table 2)
(Figure 4)
(Figure 5)
Findings on Exchange Rate
In the first quarter of 2013, Exchange rate appreciated when it is compared to same quarter of 2012. But in March 2013, the gap with March 2012 seems to get reduce.
The major influential factors that lead to appreciating Taka are export, import, remittance and finally foreign exchange reserve. Higher growth of export, declining import payments, robust remittance inflow, increasing foreign direct investment (FDI) and sharp increase in foreign exchange reserve have led to the declining exchange rate (BDT appreciating against USD).
The central bank of Bangladesh resumed purchasing the US dollar from the commercial banks directly from early December 2012 aiming to keep the inter-bank forex market stable through offsetting its increased supply in the market.
Bangladesh bank is intervening in the market to protect the interest of exporters and migrant workers by keeping the exchange rate of the BDT against the greenback stable. As part of the move, the BB bought US$2.053 billion from the commercial banks so far in the current fiscal year (FY 2012-13).
A stable local currency exchange rate is imperative for keeping the inflow of remittances and export earnings intact. Dollar depreciation might encourage remitters to go for informal channels other than banks to send their money home. But the reduced value of the dollar will hold back the earnings of the exporters.
EXPORTS
The word export is derived from the conceptual meaning as to ship the goods and services out of
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the port of a country. The seller of such goods and services is referred to as an ―exporter‖ who is based in the country of export whereas the overseas based is referred to as an ―importer‖ (foreign buyer). In international trade ―exports‖ refers to selling goods and services produced in home country to other foreign markets.
Bangladesh exports about 168 different products and services to almost 186 countries. The main exportable are Readymade Garments, Knitwear, Home Textile, Frozen Food, Leather & Leather goods, Jute and goods which contribute near about 89% of our total export. On the other hand the main export destination of Bangladesh are USA, Canada, EU Countries including U.K, Germany, France, Italy, Sweeten etc. contributing almost 93% of total export. The export statistics reveals that Bangladesh is proceeding with positive export growth since 1974-75.
Increase the exports can help Bangladesh in term of improve terms of trade, help the country to pay its national debt, Improve the unemployment rate, Product improvement, Market diversification. Services is also exported and are equally important (activities carried out by people), such as financial services, information technology (IT), e-commerce (business using the internet), architectural design, security and engineering services.
(Table 3)
(Figure 6)
(Figure 7)
Findings on Export
In first quarter of 2013 Bangladesh export earning was better than same time of previous year earnings.
In January 2013 Bangladesh registered a moderate growth of 19.0 percent totaling US$ 2554.28 million against $ 2149.87 million fetched in January last year.
In February 2013 registered a growth of 113.0 percent totaling US$ 2246.50 million against $ 1979.32 million fetched in February last year.
And in March witnessed a growth of 16.0 percent totaling $ 2303.42 million, the export earnings for March 2012 were $ 1982.46 million.
This shows that in 2013 Bangladesh export performance was better than previous year. This rise in export is due to increase performance of woven garment, and agricultural and leather products.
But however Bangladesh is likely to miss its export target of US$ 28 billion set for the current fiscal year (FY 2012-13) as the growth of export during the first half of the fiscal was below the expected level.
While overall export growth was sluggish in the early part of fiscal 2013, it has since risen steadily. During the first eight months of fiscal 2013 (July-Feb), exports grew by 9.4 percent compared to same period in fiscal 2012. Ready-made garments (RMG) continue to dominate export growth, growing by 10 percent in fiscal 2013 (July-Feb) compared to the same period last year.
On the other hand ready-made garment (RMG), comprising knit and woven clothing, had attained only a 7.6 per cent growth during period against the yearly target of 12.8 per cent.
In order increase export the new destinations should be targeted to take the next leap forward.
REMITTANCE
Transfer of money by a foreign worker to his or her home country. Remittances to Bangladesh have been growing steadily over the last decade. Since 1999, workers‘ remittances have been the second largest resource flowing into developing countries after foreign direct investment (FDI). In addition workers‘ remittances are not liabilities but cash transfers from overseas, which in principle, they do not cost any to recipient countries. Now a day‘s remittance has kept the economy of Bangladesh more dynamic. Remittance inflows in the economy of Bangladesh are getting larger every passing year, matching with the increasing external demand for its manpower. The ensuing development impacts of remittances, as a means of transfer of wealth, on socioeconomic factors are increasingly viewed with importance. Remittances have helped improve the social and
economic indicators like nutrition, living condition and housing, education, health care, poverty reduction, social security, and investment activities of the recipient households. The relative weight of remittances has also increased against most of the macroeconomic variables alongside the contribution to GDP. Moreover, Bangladesh has been able to avoid any serious in Balance of Payment‘s current account, although it has persistent merchandize trade deficits. Thus flow of remittance has kept Bangladesh economy dynamic.
(Table 4)
(Figure 8)
(Figure 9)
Findings on Remittance
In the first quarter of 2013, that is starting from January 2013, we can see that the remittance increased when compare to same quarter of previous year 2012.
This figure represented a 4 percent increase over 2012 whereas in 2011, remittance grew 10 percent from 2.5 percent in 2010. And the growth is due to combination of factors – high value of US dollars, rise in wage. Thus when US dollar went up to as high as 85 taka at one point, people sent money even from their savings." Exports grew at a healthy five percent, imports slowed and foreign aid disbursements were also much better in the year of first quarter of 2013.
January was the month of highest remittance, BDT 105559.90 million; the receipt of remittance is high as it was, coinciding with end of the year of. As on after year ending people sent more money home.
In February 2013, the remittance was BDT 91904.24 million which is lower than same period of previous year unfortunately. It was 2 percent less when compare to remittance received in February 2012. The amount was lower by 13 percent than the level of remittance receipts in the previous month, January 2013. We may assume due to the political unrest situation people did not feel good to send money in Bangladesh.
But in March 2013, remittance inflow witnessed a hefty 7 percent growth as the Bangladesh received BDT 96605.19 million comparing to same month of March last year, 2012. Additionally, remittance inflow increased by 5% from the previous month February 2013.
Growth in remittance has picked up, stimulating both rural and urban domestic consumption. Remittance grew by 16.6 percent during the first nine months of fiscal 2013, compared to the same period of fiscal 2012 (Figure 2). The increased inflow of remittance can be attributed to a rise in outflow of workers and depreciation of the taka in fiscal 2012. Bangladesh sent 691 thousand workers abroad in fiscal 2012 compared to 439 thousand the year before. Expansion of formal channels for sending remittance has also contributed to this growth. The government projects remittance to reach US$ 14.7 billion in fiscal 2013, a 15 percent increase over fiscal 2012; Bangladesh is on track to attain this target, assuming remittance grows by 10.5 percent or more during the last three months of fiscal 2013 compared to the same period last year.
CONCLUSION AND RECOMMENDATION
The economy of Bangladesh has done well during the year 2012 when compare to 2011, and even better so far in 2013, indicators that were used in this report showed a better picture of the economy. Recent statistics showed that Bangladesh growth is 6.5 percent which is good when we see that most of the European countries are facing economic hardship. And the recent global recession did not have any negative impact on Bangladesh‘s exports. Bangladesh economy is at a critical juncture, where the policymakers will have to tackle the ongoing and emerging macroeconomic pressures head-on. Although the economy is still quite robust, the macroeconomic indicators do point to warning signs that need to be heeded. Inflation is still rampant and it risks becoming a drag on the growth rate. Bangladesh Bank has finally adopted a contractionary policy to counter the excess liquidity which has been further exacerbating the inflation. However, there is a risk that private investment might be deterred with the spike in interest rates and a slowdown in private sector credit growth. Furthermore, the
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government needs to cut back its borrowing in case it spirals out of control. To that end, revenue mobilization has to be stepped up further to lessen the need for excessive borrowing. It is also high time that Bangladesh diversify its export basket - a continuing reliance on RMG exports will result in Bangladesh being a perennial producer of garments. Dependence on just one commodity might prove to be unwise if the global economic downturn takes a turn for the worse - the trade balance will become even more unfavorable.
Controlling inflation has become a priority for any government because high inflation creates obstacles to the economic development, causes unemployment and reduces the living standards of the fixed-income and low-income groups. If the country can control the inflation rate, especially the food inflation, it will be a good sign for the country‘s economy.
Human development index is more important than the development in economic indicators. Macroeconomic indicators show a good sign of economic development in the country. But we have to understand that economic statistics and indicators are not everything that refers to absolute happiness of the people of a country. Bangladesh has achieved significant progress, especially in primary education and agriculture sector.
A huge amount of remittances sent by our migrant workers which is giving strength to our economy. The remittance inflow has increased and the country‘s foreign exchange reserve hit all-time high, but employment opportunities for Bangladeshi workers have to be increased.
Economic stability is highly requires to sustain the growth of the country. a series of hikes in fuel and electricity prices has created much economic uncertainty and disturbances. Besides, extrajudicial killings, political turmoil, failure to implement some mega projects, corruption, scams in banking sector and no improvement in the capital market were the major threats to the economic progress and sustainability. These unfavorable situations needs to be taken care by the government of Bangladesh to reach the economy in another hike.
Bangladesh‘s growth is overly dependent on two growth drivers—exports and remittances—making growth highly vulnerable to developments in the global economy. In addition, exports are concentrated on a few products and market destinations while remittance inflows are overwhelmingly dependent on middle-eastern sources, and are strongly influenced by movements in oil prices. To expand growth opportunities, Bangladesh needs to diversify its export and domestic market-based manufacturing and modern services sectors. Bangladesh has comparative advantage in low and semi-skills-based activities as labor costs are low because of the country‘s abundant labor supply. In addition, its advantageous geographic location—situated between two fast growing large economies—adds to economic competitiveness. Finally let us be optimistic about our economic development in the years to come. But for a better and sustainable result, we need to focus more on human development than economic indicators and statistics. Priority should be given to poverty alleviation and reducing our dependency on the single-product export economy through the expansion and diversification of products and development of SME sector. It will help generate more employment in rural and backward areas. If we can maintain political stability, keep our corporate sector free from corruption, and ensure uninterrupted power supply, we can surely expect that the pace of our economic growth would be faster in the years to come.
