George Bernard Shaw, the famous Irish playwright, once memorably quipped: "If all economists were laid end to end, they would not reach a conclusion." It is very often the case that two experienced, knowledgeable economists study and analyse the same data sets relating to an economy, and each comes up with a different forecast for the nation's economic future.
The time may have come by now to extend Shaw’s insight to institutions - specifically, the kind spawned in Bretton Woods, New Hampshire during the closing stages of the Second World War. Namely, the International Monetary Fund and the World Bank. While the IMF’s main purpose may still be focused on Europe (even as it morphs into some new role under the leadership of Christine Lagarde, the first woman to lead the IMF as its managing director), the World Bank continues to inspire some copycats, the latest being the Beijing-led AIIB.
Much earlier than them, and so naturally as things stand today far more experienced, professional and authoritative in this field , is the Asian Development Bank, which started operations in 1966. Modelled on the World Bank as a development financier (but with a regional focus as the name suggests), it is Japanese-led, although based out of Manila, the capital of the Philippines. As important as the hundreds of billions of dollars that have been disbursed to finance various development projects in scores of countries over the years, has been the trove of economic data - in the form of periodic forecasts, reviews and evaluations - that they have generated on the countries they operate in. On this, none of the other institutions of similar shape and purpose, be it the AIIB, or the Islamic Development Bank, or the EBRD, none has been able to match the ADB or the Washington Consensus (as the IMF and WB are collectively known sometimes, for obvious reasons) for credibility, depth or volume. This year, interestingly, the economists in their research divisions seem to differ quite sharply on prospects for the year ahead in Bangladesh.
Out of Manila
An important annual ADB report released in late September said Bangladesh's economy will continue to expand in the 2019-20 fiscal with stronger performance by internal and external sectors. ADB's flagship annual economic publication, the Asian Development Outlook, said that buoyant exports, robust private consumption, higher remittances, accommodative monetary policy, ongoing reforms to improve the business climate and higher infrastructure spending have helped Bangladesh attain high growth.
On the supply side, the Manila-based lender's report said sustained strong growth in industry and agriculture are expected to be the main drivers of growth in fiscal 2020.
The Bangladeshi economy is in good shape and is likely to continue to grow, ADB's Country Director for Bangladesh Manmohan Parkash told a press conference to present the findings on the Asian Development Outlook Update (ADOU).
"At 8 percent growth in fiscal year 2020, ADB's outlook indicates that Bangladesh is likely to continue as the fastest growing economy in Asia and the Pacific," Parkash said. He said the Bangladeshi government should continue its support in removing infrastructure constraints, promoting skills development and improving the cost of doing business.
"All these measures will help the government achieve its long-term vision."
At the press conference, Soon Chan Hong, ADB senior economist, presented the summary of the economic performance and prospects of the countries in the Asia-Pacific region, and observations on the ADOU update's Bangladesh country chapter.
For 2020, he said this update anticipates sustained high GDP growth for Bangladesh despite some deterioration in global growth and trade conditions, slightly higher inflation and a continued moderate current account deficit of the country.
According to the bank's ADOU, the growth in developing Asia is moderating but remains robust.
Compared with a projection of 5.7 percent GDP growth earlier, it said the revised estimate for the region is 5.4 percent for fiscal year 2019 and 5.5 percent from 5.6 percent for fiscal 2020.
"This is largely due to the slowing down of the global trade and weakening investment," the report said. In any case, economic growth at 8 percent for a country of over 160 million people is nothing to scoff at.
In the space of a few weeks though, in the space of a few days of each other, the two Washington-based institutes each came out with their own sharply different (from the ADB) forecasts. In the IMF’s case, its forecast growth figure was 0.6 percent lower on ADB’s. Of course, half-a-percent or slightly above it can never set the alarm bells ringing, but when it comes to the economy, one of the world’s 40 large economies, you are actually moving millions. Billions. The World Bank differed even more sharply - it forecast the Bangladesh economy’s growth at an almost leisurely 7.2 percent, the kind of pace the country grew at back in 2016, maybe 2017.
The IMF projected that the GDP growth of Bangladesh would fall to 7.4 percent in the current fiscal, compared to the 8.1 percent growth the country already achieved (you can say what you like, it’s in the books) in FY 2019.
The IMF’s projected GDP growth for the current FY is also much lower than the government’s target of 8.2 percent, which jives with the Asian Development Bank’s projection of 8 percent, and slightly higher than the World Bank’s projection of 7.2 percent. The global lender made the projection in its latest World Economic Outlook released in Washington in mid-October.
Although the government estimated that the Bangladesh economy grew by 8.2 percent in the FY19 (ended June, 2019), the IMF in its WEO 2019 projected that it grew only by 7.9 percent. The factors behind IMF’s lower GDP projection for Bangladesh could not be known as it did not release any analysis on the country’s growth. Usually it is the norm to use the government’s final figure for any end-of-year statistic.
The World Bank had days earlier projected 7.2 percent-GDP growth in the year (2019-20 or FY20) for Bangladesh.
According to the IMF, the county’s point-to-point inflation would reach at 5.5 per cent in FY 2020. It said that the current account deficit would be 2.1 percent of GDP in FY 2019, higher than its previous projection rate at 2 percent declared last April. In the medium-term, the deficit would reach 2 percent of GDP, it projected. These numbers would seem much more closely aligned with the ADB’s calculations though, than just their ‘value addition’ in a production line.
Dude, where’s my loan?
A recurring theme throughout 2019 was the seemingly uncontrollable NPA (non-performing assets, although really it’s just become part of the common parlance these days, having been on the news so much) situation in the country’s banking sector. Perhaps the oldest nuisance in civilisation - someone borrows your money and then it’s not that they won’t pay you back - but that they may even vanish into thin air.
Some were aware of the scenario as it unfolded some months ago, when NPAs as a proportion of total loans in the banking sector of Bangladesh surpassed that in all its neighbours. As it rose to 11.7 percent, every other country in Saarc could point to a better record in this important aspect of the economy. And many others throughout the Asia Pacific region could do the same.
India’s proportion was worse than Bangladesh’s till 2017. It is really in the last two years that Bangladesh out-galloped even its big neighbour.
The cross-country comparisons really alert you to the sheer scale and what is more, sheer incompetence, unprofessionalism and downright corruption that afflicts the finance sector in the country. The following is from ADB:
“The NPL ratio for banks in India steadily increased from 2.3% in 2008 to 10.0% in 2017, while the ratio is low in the People’s Republic of China (PRC), around 1.7% of total loans from 2.4%. The NPL ratio in Sri Lanka steadily declined to 2.5% in 2017 from 5.6% in 2013. The NPL ratio showed a decreasing trend in Thailand, down to 2.3% until 2013 from 5.6% in 2008, but increased to 3.1% by 2017. In Malaysia, the NPL ratio fell gradually from 4.8% in 2008 to 1.5% in 2017. The NPL ratio in Viet Nam increased from 2.2% in 2008 to 3.4% in 2012, and thereafter declined and remained stable at 2.3% in 2015-2017. NPLs that engulfed the financial system in the Republic of Korea during the Asian financial crisis has recovered significantly and remained stable at the range of 0.5%–0.6%.”
India’s NPA ratio had peaked at 11.5 percent in March 2018 and then declined to 9.3 percent in March 2019. Now riding on higher recoveries and slowdown in fresh bad loans, it is likely to reduce NPAs on banks’ balance sheets to nearly 8 percent by March 2020 - which means this most insidious of vices can be reined in as well. As the New Year commences, it is perhaps this path more than any other that Bangladesh’s banking sector - the backbone of any modern economy - must try and seek out, to start the long road back to recovery and security.
Mere words cannot suffice. The finance minister we have arrived at in the Awami League’s third term, A.H.M. Mustafa ‘Lotus’ Kamal, has had a very ordinary first year in office. He came in with the attitude of a ‘do-er’, perhaps intentionally to set himself apart from his predecessors from both sides of the political divide, who tended to command the respect of their peers as more cerebral individuals. Towards the end of 2019, we saw him get busy with getting the banks to finally comply in delivering one of his earliest promises, albeit in bits-and-pieces form. The ‘single-digit’ interest rate on loans, a bit of a gimmicky prop for businesses, will now only kick in from April 1 for all bank customers. Despite numerous concessions, the finance minister only succeeded in convincing bank bosses to first extend the facility for industrial loans only. That too with some help from the prime minister.
Will the Lotus bloom?
In the first five months of the current fiscal, that is till the end of November, net government borrowing from the banking system was Tk40,163 crore, which is 85 percent of the amount projected in the annual budget for the entire year. This has also set alarm bells ringing, although the government has been unapologetic and seemingly unruffled. It insists the figure can be pulled back on the strength of later borrowing through the national savings certificates, that can prop up its revenue.
Nevertheless the issue of what economists call ‘crowding out’ is undeniably starting to emerge now, stifling private sector investment growth as banks are drained of liquidity by the huge amounts they must lend to the government. Year-on-year credit growth dipped to 9.87 percent in November, breaking the previous month's lowest rate of 10 percent in recent history - indeed, the two lowest months in the entire period since the Awami League government took office in 2009.
According to Ahsan H Mansour, a former IMF executive for over 20 years who now acts as executive director of the Policy Research Institute, a leading think-tank in the capital, "Decreasing the bank's debt distribution means that investment is declining. As a result, our exports are also decreasing. The situation in the banking sector is very bad. The debt situation (NPAs) is going from bad to worse."
Dr Mansur believes there is “enough uncertainty” to sow serious doubts over whether growth does actually touch 8 percent again this year, or slows significantly to something more in the region of 6 percent.
In this context, Lotus Kamal will have to show the legislative wherewithal to go with any ability to bring people around on the need to deal with NPAs. According to most experts, The existing Bankruptcy Act, 1997, a legal framework for dealing with NPAs, should be strengthened. The other option is to enact a bankruptcy and insolvency law, which can be a “one-stop solution” consolidating all existing insolvency related laws in attaining liquidation, protecting the interests of small investors, and making the process of doing business less cumbersome. The government’s foreign advisers and technical consultants have insisted it is “crucial” to ensure that a revised Bankruptcy Act sets “timebound procedures” for the Money Loan Courts to expedite the resolution of cases. Otherwise the courts are rendered toothless. Can the finance minister command the authority and respect within his party and its financiers - many of them board members, owners and shareholders in the more than 50 private sector banks that have proliferated in Bangladesh - to convince them that this is a moment, when the country’s interests must take precedence, over theirs? Otherwise, the roof we have built may fall in on our heads.