The World Bank has forecast 6.2 percent economic growth this fiscal year, up from last year’s 6.1 percent, supported by continued robust remittances and recovery in private consumption.
But the outlook is way below the government’s target of 7.3 percent for the current fiscal year.
The growth forecast is based on the assumption of continued political stability, as witnessed throughout 2014, the multilateral lender said in the latest edition of its Global Economic Prospects report, released worldwide yesterday. But the return of political instability on the first day of 2015 has “watered down” the prospects, said Zahid Hussain, lead economist of the WB’s Dhaka office.
Non-stop blockades mixed with local and nationwide hartals have badly hit farm incomes, disrupted inter-district road and rail transport, weakened buyers’ confidence on the exporters’ ability to deliver on time and halted the rebuilding of investor and consumer confidence, he said.
Consequently, achieving the projected growth may be very challenging, Hussain said. However, if the instability is short-lived, the target can still be met — given the economy’s often demonstrated resilience. “The latter may be inadequate if the instability prolongs like it did in the second half of 2013,” Hussain said.
Economic activities began to normalise in 2014 as social unrest abated from a spike in the run-up to national elections. Consumer confidence appeared to be returning to their normal levels, Hussain said.
As a result, private consumption demand recovered from its somewhat depressed level the previous year, supported by good agricultural harvests, rebound in remittances and a smooth functioning of the services sector, particularly transport and trade.
Exports started badly in the first quarter, but showed encouraging signs of recovery in the second quarter.
Private investment, which was stagnant the past three years, also appeared to be regaining some momentum, as witnessed by rising private sector credit growth towards the end of 2014, the WB economist said.
Sustained remittance inflow in 2014, which is a sizeable share of GDP, helped offset large trade deficits, the report said.
However, weak bank balance sheets continue to impede financing for an upturn the investment cycle, WB said.
Stressed bank loans including restructured loans exceed 10 percent of loans in Bangladesh, Bhutan, India and Pakistan.
Restructured and problem loans need to be recognised as nonperforming, even though this would impair capital (with possible need for fiscal support), according to the report.
Banking system reforms, particularly aimed at strengthening human resources, improving nonperforming loan management and raising capital ratios, would help improve financial intermediation.
The fiscal cost of food and fuel subsidies is also heavy. Energy subsidies alone amount to 6-10 percent of revenues in India and Bangladesh.
However, the decline in international oil prices has opened the prospects of saving the budgetary provisions made for energy subsidies, Hussain said.
India has taken advantage of the window of opportunity to reduce and reform subsidies and other governments in the region should follow suit, as per the report.
Furthermore, the oil price slide has strengthened the prospects of sustaining balance of payment surplus and the declining trend in inflation, according to Hussain.
The share of manufacturing in GDP has gradually increased, reflecting the impact of a programme of reforms, begun over a decade ago, which have enabled a successful integration into global supply chains, WB said.
Supply-side bottlenecks continue to hold back growth in the baseline forecast, particularly in Sri Lanka and Bangladesh, where economies are operating at close to capacity.
With power generation unlikely to keep pace with growing demand in the region, shortages are expected to persist in the near term, including in Bangladesh, India, Nepal, and Pakistan, according to the report.
Regional growth in South Asia is expected to steadily accelerate toward 6.8 percent by 2017, supported by a recovery in domestic demand, especially investment.
Global growth is expected to rise moderately, to 3 percent in 2015, and average about 3.3 percent through 2017.