A collapse in industrial or manufacturing output, partly driven by the dollar crunch facing the country for quite some time now, contributed to a significant slowdown in the Bangladesh economy in the second quarter of the current fiscal, with gross domestic product (GDP), or economic, growth having grinded to a pedestrian 3.78 percent.

An analysis of the country's latest macroeconomic data released by the Bangladesh Bureau of Statistics showed the services sector was also affected in the Q2 (October-Dec) of the current fiscal (2023-24).

Agriculture, once overwhelmingly the largest sector of the economy, proved a saving grace, however. The farm sector gave a better output to the national economy in the period under review, according to the latest quarterly data, now being made publicly available more promptly under an agreement with the International Monetary Fund.

The slowdown in Q2 also represented a significant slowdown year-on-year, i.e. compared to the same quarter of the previous fiscal, when it was 7.08 percent, and the one before that as well, when it was 9.3 percent. In Q1 of the current fiscal, the GDP-growth rate was recorded at 6.01 percent by the state statistical bureau.

Economists say the nagging dearth of the US dollar mainly affected the GDP in the Q2 when both import and export slowed down and the inflationary pressure from the supply side affected consumption.

The government has been forced to revise down the economic-growth projection for FY2024 to 6.5 percent from the initial 7.5 percent in view of the ongoing challenges facing the economy. Besides, the World Bank (WB) and the Asian Development Bank (ADB) have also forecast down the GDP growth in Bangladesh for the current fiscal amid the slowdown in economic activity.

The WB in its latest Bangladesh Development Update has said the country's GDP will grow at 5.6 per cent. And the other development financier, ADB, has projected the growth for the current FY2024 at 6.1 percent.

Growth rate in the industrial, or manufacturing sector dropped to nearly one-third or 3.24 percent in Q2 (Oct-Dec) of the current FY from that of the corresponding period of the last fiscal.

Two years ago, the industrial output in the same period of FY2022 was recorded at a stunning rate of 14.50 percent. In lockstep with the industrial sector, the growth in the services sector also nearly halved to 3.06 per cent in the second quarter this fiscal from 6.62 per cent in the same period last fiscal.

In the Q2 of FY2022, the growth in the services sector was recorded at 7.25 percent.

Meanwhile, the economic output from the agriculture sector actually grew, even though slightly, as it was recorded at 4.65 percent against 4.22 percent in the corresponding period last FY2023.

In the same period two years ago, the agriculture sector expanded at 2.2 percent, the BBS statistics showed.

Publishing quarterly GDP data started in the Q1 this fiscal as per suggestion of the IMF, part of the $4.7 billion loan package's economic-reform recommendations. It is aimed at capacity improvement in BBS in presenting quality data.

However the quarterly GDP data still has some way to go by way of authenticity, since it is still forced to rely on the administrative data of different ministries, instead of collecting all the data through its own surveys.

Policy Research Institute (PRI) Executive Director Dr Ahsan H Mansur thinks the US dollar crisis mainly affected Bangladesh's economic growth in the second quarter.

"Although the US dollar crisis has been persisting for a while now, imports were mostly affected in the Q2 this fiscal. That time the export also plunged. So, the overall economic output has slowed down. It was expected," he said.

Dr Mansur predicts that the situation is set to continue, as the dollar crisis is not about to resolve itself very soon. The third quarter of the fiscal might feature a further slowdown.

The government will have to work very hard to turn round the situation even in the fourth quarter, i.e. by the end of the current fiscal.

Bangladesh's GDP size at current price has stood at Tk 13.098 trillion and at constant price Tk 8.458 trillion, the BBS data showed.

Inflationary pressures

The IMF meanwhile has further revised down the growth forecast for Bangladesh's economy for the ongoing fiscal year owing to persisting global and local challenges, including higher inflation.

The Washington-based lender said the economy would grow by 5.7 percent in 2023-24, lower than the 6 percent forecast in October. The GDP projection was 6.5 percent initially.

Growth will rebound to 6.6 percent in 2024-25, said the IMF in its World Economic Outlook this week.

The downward revision for the current fiscal year comes although the IMF raised its outlook for the global economy for 2024, while maintaining a gloomy forecast over the medium term.

The lender expects the world economy to grow by 3.2 percent this year, up 0.1 percentage point from its previous forecast in January, and by a further 3.2 percent in 2025.

The World Bank has forecast Bangladesh's real GDP growth to remain relatively subdued at 5.6 percent in FY24, compared to the average annual growth rate of 6.6 percent over the decade preceding the Covid-19 pandemic.

Among the South Asian countries, the IMF has projected a 6.8 percent GDP growth for India, 2 percent for Pakistan, 5.2 percent for the Maldives, 4.3 percent for Bhutan, and 3.1 percent for Nepal.

Bangladesh has been experiencing something of a mini economic crisis since the summer of 2022, due partly to escalated prices of global commodities in the wake of the Russia-Ukraine war the country's foreign currency reserves depleted fast amid higher import bills.

The government is eager to point to recent Middle East tensions as also hurting the economy as the dollar crunch shows no signs of disappearing, forcing the Bangladesh Bank to maintain import restrictions, squeezing supply.

The IMF report projected that Bangladesh's inflation will stay above 9.3 percent in the current fiscal year, which ends in June. Inflation may decelerate to 6.1 percent in FY25.

Inflation edged up in March after marginally easing in the previous month, showing no signs of respite to consumers already hurt by the consistent erosion of buying capacity due to elevated prices.

In March, inflation, a measure of the increase in the prices of a basket of goods and services over a period, rose 9.81 percent, compared with 9.67 percent in February, as prices of both food and non-food items increased, according to data released by Bangladesh Bureau of Statistics today.

In March, prices of rice, potatoes and pulses surged, eroding the purchasing power of low-income and poor people who spend half of their income on food.

Nationally, food prices grew 9.87 percent in March. In February, the rate was 9.44 percent. Non-food prices also rose at a higher pace in March than in the previous month.

With the spike in prices in March, annual average inflation is expected to register another round of increase from 9.6 percent recorded in February, indicating that the tight monetary policy pursued by Bangladesh Bank is yet to impact the market.

In a report last week, the World Bank said inflation remained elevated in the first half of the current fiscal year, driven by rising food and electricity prices.

"High inflation has halted poverty reduction. Higher food prices particularly impacted poor households, which allocate over half of their budget towards food expenditures," it said.

With inflation remaining above 9 percent persistently for more than a year, the government earlier revised the upward inflation target to 7.5 percent for fiscal 2023-24.

The World Bank said around 5 lakh people in Bangladesh likely fell into extreme poverty between the fiscal years 2022-23 and 2023-2024 due to the erosion of purchasing power.

The 9-plus percent inflation in the last fiscal as well as in the first nine months of FY24 means the buying power of a majority of the people in the low-middle-income nation and aggregate demand have remained depressed, handing a blow to the country's growth aspirations.

The WB said the relatively slower growth is driven by a modest recovery in private consumption supported by a moderation in inflation.

Persistent inflation is expected to weigh on private consumption growth, and shortages of energy and imported inputs combined with rising interest rates and financial sector vulnerabilities are expected to dampen investor sentiment, it said.

The development lender projects that average inflation will moderate to 8.4 percent in FY24 and enable private consumption to grow.

The ADB has projected Bangladesh's economy to grow at 6.1% in the 2023-24 fiscal. In its April 2024 Asian Development Outlook, published on April 11, the Manila-based lender said the country's gross domestic product (GDP) may grow 6.6% in the upcoming 2024-25 FY.

"In Bangladesh, garment exports will push growth up to 6.1% in FY24 and 6.6% in FY2025," ADP said in the report.

The 6.1% GDP growth projected for FY24 is 0.3 percentage points more than the 5.8% growth by the end of FY23.

Economic growth in Bangladesh moderated in fiscal 2023 as monetary tightening in the advanced economies lowered external demand. Inflation rose significantly, and the current account deficit narrowed," said ADB in its outlook.

"Despite macroeconomic headwinds, GDP expansion is expected to accelerate gradually this year and next with resilient exports and the government committed to structural reform," it added.

ADB said inflation will gradually moderate while the current account turns into small surpluses. It stated that implementing reforms to bolster Bangladesh's competitiveness will be crucial for the country's seamless transition from its status as a least-developed country.

Despite weaker global demand, exports of Bangladesh's traditional low-end garments will continue to grow as exporters use local yarn and fabrics amid the lingering dollar crisis, the ADB said.

The government has targeted to limit the average inflation to 7.5 percent by June. The Consumer Price Index surged to a 12-year high of 9.02 percent in the previous financial year, both for external and internal factors.

Still not out of the woods

Bangladesh's economy made a strong turnaround from the COVID-19 pandemic, but the post-pandemic recovery continues to be disrupted by high inflation, a persistent balance of payments deficit, financial sector vulnerabilities, and global economic uncertainty, the World Bank also said this month, separately in its twice-yearly-update.

Its latest Bangladesh Development Update says that urgent monetary reform and a single exchange rate regime will be critical to improve foreign exchange reserves and ease inflation. Greater exchange rate flexibility would help restore balance between demand and supply in the foreign exchange market. Structural reforms will be key to diversify the economy and build resilience over the medium and long term, including measures to raise government revenues to support investments in infrastructure and human capital.

Persistent inflation eroded consumer purchasing power, while investment was dampened by tight liquidity conditions, rising interest rates, import restrictions, and increased input costs stemming from upward revisions in administered energy prices.

Private sector credit growth slowed further in FY24, reflecting a broader slowdown in investment. The non-performing loan (NPL) ratio in the banking sector remains high and understates banking sector stress due to lax definitions and reporting standards, forbearance measures, and weak regulatory enforcement. The Balance of Payments deficit moderated over the first half of FY24 driven by a surplus in the current account."Bangladesh's strong macro-economic fundamentals have helped the country overcome many past challenges," said Abdoulaye Seck, World Bank Country Director for Bangladesh and Bhutan. "Faster and bolder fiscal, financial sector, and monetary reforms can help Bangladesh to maintain macroeconomic stability and reaccelerate growth."

The report's companion piece, the latest South Asia Development Update - Jobs for Resilience, says South Asia is expected to remain the fastest-growing region in the world for the next two years, with growth projected to be 6.0% in 2024 and 6.1% in 2025. Growth in South Asia is expected to be driven mainly by robust growth in India and Bangladesh, and recoveries in Pakistan and Sri Lanka.

But this strong outlook is deceptive, says the report. For most countries, growth is still below pre-pandemic levels and is reliant on public spending. Persistent structural challenges threaten to undermine sustained growth, hindering the region's ability to create jobs and respond to climate shocks. Private investment growth has slowed sharply in all South Asian countries and the region is not creating enough jobs to keep pace with its rapidly increasing working-age population.

"South Asia's growth prospects remain bright in the short run, but fragile fiscal positions and increasing climate shocks are dark clouds on the horizon," said Martin Raiser, World Bank Vice President for South Asia. "To make growth more resilient, countries need to adopt policies to boost private investment and strengthen employment growth."

South Asia's working-age population growth has exceeded that in other developing country regions. The share of the employed working-age population has been declining since 2000 and is low. In 2023, the employment ratio for South Asia was 59%, compared to 70% in other emerging market and developing economy regions. It is the only region where the share of working-age men who are employed fell over the past two decades, and the region with the lowest share of working-age women who are employed.

"South Asia is failing right now to fully capitalise on its demographic dividend. This is a missed opportunity," said Franziska Ohnsorge, World Bank Chief Economist for South Asia. "If the region employed as large a share of the working-age population as other emerging markets and developing economies, its output could be 16% higher."