World Bank keeps Bangladesh growth forecast unchanged at 6.2% for FY24

The global lender expects Bangladesh’s inflationary pressure to ease in the upcoming fiscal year

News Deskbdnews24.com
Published : 6 June 2023, 05:18 PM
Updated : 6 June 2023, 05:18 PM

The World Bank has kept Bangladesh’s economic growth forecast for FY24 unchanged at 6.2 percent, saying inflationary pressure will ease in the upcoming fiscal year beginning on July 1.

The global lender expects Bangladesh to accelerate reform implementation, and complete transportation and energy infrastructure megaprojects in the next financial year starting on Jul 1.

These factors will help the country’s growth to accelerate, according to the World Bank’s latest Global Economic Prospects report released on Tuesday.

It also kept the forecast for the outgoing financial year unchanged after cutting it further by a 0.9 percentage point to 5.2 percent six months ago.

Bangladesh’s gains in market share in key export markets are expected to sustain export growth, offsetting the effects of weaker growth in advanced economies, the report said.

But elevated inflation, policy uncertainty, and weakening external demand are expected to slow growth in FY23 from 7.1 percent in the previous fiscal year,

In its budget proposed for the upcoming financial year, the government has set an “ambitious” 7.5 percent growth target although economists doubt if the government took into account the risks of volatility in the global economy while setting the goal.

After Bangladesh posted 7.1 percent GDP growth in 2021-22 by tackling the effects of the coronavirus pandemic, the government set a target of 7.5 percent for FY23.

As the Russia-Ukraine war hit the global economy hard, the government revised the target down to 6.5 percent.

But even that target became difficult to achieve. The national statistical agency in March projected 6.03 percent growth for the outgoing fiscal year.

SOUTH ASIA

In South Asia, excluding India, growth is expected to slow to 2.9 percent in 2023 before rebounding to 4.3 percent in 2024, according to the World Bank.

Import restrictions imposed by several economies in the region, including Bangladesh, which adversely affected economic activity, have been relaxed as external imbalances have improved and exchange rate pressures have eased.

Food export bans, however, are expected to remain in place in Bangladesh, India, and Pakistan through 2023 despite falling global prices.

In Bangladesh, continued import suppression measures and energy shortages have weighed on both industrial production and the services sector. Real household earnings are yet to recover to pre-pandemic levels despite an improvement in employment, the World Bank said.

Monetary policy tightening in the region has continued, with average real interest rates in the first half of 2023 turning positive on a GDP-weighted basis.

In Bangladesh, while the central bank raised policy rates, transmission to the broader economy has been impaired by a cap on lending interest rates.

Expected inflation one year ahead has risen sharply in the region since early 2022 in response to broad-based price increases. Additionally, in several economies, economic crises have further contributed to this inflationary pressure.

Medium-term inflation expectations appear thus far to have remained subdued; however, if higher inflation expectations became entrenched, additional monetary policy tightening would be required and could affect financial stability as well as economic activity in the region.

Financial sector risks remain elevated in several economies, with high levels of non-performing loans, weak capital buffers, and weak bank govern- ance. Ratios of non-performing loans to total loans are elevated and have recently been rising in Bangladesh and Sri Lanka. In Bangladesh, weak corporate governance and capital buffers also increase the risk of stress in the financial sector.

High government and external debt, low foreign exchange reserves, and socio-economic tensions heighten the risk of financial crises in several economies in the region. Such crises could significantly reduce potential as well as actual output growth.

Rising interest payments on debt, and the need to consolidate government expenditure following pandemic-related stimulus, may undermine efforts to support vulnerable communities and economic activity in the face of global headwinds.

With limited ability to access international financial markets and elevated fiscal needs, many governments have been looking to borrow domestically, which could increase linkages between the banking sector and government and complicate any debt resolution.

One-third of banking sector assets, on average, were claims on governments in late 2022 – up from one-fourth in the decade before the pandemic. Increased government borrowing risks crowding out private sector investment and could lead to fiscal dominance, where interest rates are set too low for economic needs, to make it cheaper for the government to service its debt.

Economies in South Asia are among the most vulnerable to climate change. More than half of South Asians have been affected by one or more climate-related disasters over the past two decades, with the 2022 floods in Pakistan leaving one-third of the country under water and causing damage estimated at 4.8 percent of GDP.

The region has been facing intensifying heatwaves, cyclones, droughts, and floods. With climate change increasing risks to economic activity and development, there is an urgent need to increase resilience, the World Bank said.

Failure to act could see climate change-related events imposing rising costs, the report said. In Nepal, for example, the economic impact from flooding could triple and the number of people affected more than double by 2030.

GLOBAL GROWTH OUTLOOK ‘GLOOMY’

Real global GDP is set to climb 2.1 percent this year, the World Bank said in the report. That is up from a 1.7 percent forecast issued in January but well below the 2022 growth rate of 3.1 percent.

The development lender cut its 2024 global growth forecast to 2.4 percent from 2.7 percent in January, citing the lagged effects of central bank monetary tightening and more restrictive credit conditions that were reducing business and residential investment.

These factors will slow growth further in the second half of 2023 and into 2024, but the bank released a new 2025 global growth forecast of 3 percent.

World Bank Chief Economist Indermit Gill put a gloomy spin on the new forecasts, saying that 2023 would still mark one of the slowest growth years for advanced economies in the last five decades.

Two thirds of developing economies will see lower growth than in 2022, dealing a major setback to pandemic recovery and poverty reduction and increasing sovereign debt distress, he added.

"Even by the end of next year, a third of the developing world will not beat the per-capita income levels that they had at the end of 2019," Gill told reporters. "That's five lost years for nearly a third of the world's countries."

In January, the World Bank had warned that global GDP was slowing to the brink of recession, but since then, strength in the labour market and consumption in the US had exceeded expectations as has China's recovery from COVID-19 lockdowns.

Recent banking sector stress is also contributing to tighter financial conditions that will continue into 2024, the lender said.

The bank said inflation is expected to gradually edge down as growth decelerates and labour demand in many economies softens and commodity prices remain stable. But it added that core inflation is expected to remain above central bank targets in many countries throughout 2024.