Stagflation or not, Bangladesh economy slips into slow growth track

Two distressing news hogged the headlines a week before – economic growth has slowed down, and inflation is rising again. Both the news make us concerned about the near-term future of the economy and business.

The latest figures from the Bangladesh Bureau of Statistics (BBS) reveal, Bangladesh's economic growth has slowed to a mere 3.78% in the second quarter of FY24, the slowest pace in the last three quarters. This slowdown is largely driven by the negative growth of the manufacturing sector, the backbone of the Bangladesh economy, which contributed the most to its GDP.

One of the primary factors exacerbating the manufacturing sector's woes is the escalating utility costs, particularly those associated with electricity and gas. These soaring expenses are not only squeezing profit margins but also acting as formidable barriers to boosting production. More worrisome is the continued weakening of demand fuelled by the erosion of people's purchasing power amidst high inflation.

Additionally, import limitations implemented to conserve forex reserves have restricted access to crucial raw materials disrupting supply chains and worsened production bottlenecks. The Bangladesh Bank Quarterly report underscores the severity of the situation revealing a steep 27% decline in import payments for capital machinery and capital goods in Q2FY24 to $2.7 billion compared to the corresponding period in the previous fiscal year's $3.7 billion.

Making matters worse, inflation has remained stubbornly high, hovering above 9% for the past 13 months. In March 2024, it stood at a concerning 9.81%.

Essential commodities are becoming increasingly expensive, disproportionately impacting low-income households who struggle to make ends meet. With the World Bank warning of an additional five lakh extreme poor due to high inflation, the severity of the situation is escalating.

Wage grows, but far from covering inflation

The jobless rate in Bangladesh for individuals aged 15 years or above saw a slight uptick to 3.20% in the October-December period of 2023, compared to 3.15% in the same period a year earlier, as revealed by the BBS survey. However, this figure marks a decline from the rates observed in earlier quarters, with 3.31% in July-September, 3.41% in April-June, and 3.51% in January-May of 2023.

According to the "World Employment and Social Outlook 2024" report by the International Labour Organization, the global unemployment rate in 2023 stood at 5.1%.

Considering the global benchmark, Bangladesh's unemployment rate looks low, even better than the global average. But this might not be the full picture. How can an economy thrive with low joblessness amid slow economic growth?

Bangladesh has a huge workforce, and with slowing economic growth, some people might be forced to accept low-paying jobs that do not fully utilise their skills even if they're officially "employed".

Although wage growth in Bangladesh has been slowly rising since February 2022, it remained below the inflation rate for the past 26 months consecutively. The wages of low paid skilled and unskilled labour grew 7.80% year-on-year in March 2024, which was a whopping 2 percentage points below the inflation that month.

Is stagflation coming next?

Bangladesh, once lauded for its impressive economic growth, is now facing a challenge – stagflation. This is a dreaded economic phenomenon that combines three unpleasant ingredients: slow economic growth, high inflation, and high unemployment.

Dr Sayema Haque Bidisha, Research Director at the South Asian Network on Economic Modeling (SANEM), says it is too early to say that Bangladesh is heading towards a stagflation

"If you want to measure stagflation, you have to observe a few more quarters. Our GDP growth was always a bit high, so even if it falls a bit, I would not consider it to be alarming," she told The Business Standard on Thursday.

"Our prime focus currently is not GDP but inflation and foreign exchange reserve," she added.

She said the manufacturing sector has shrunk due to various contractionary measures taken by the government to save dollars.

The government should now give incentives to the private sector so that they can provide benefits such as rations, bonuses or even extra overtime bills so the workers can earn an extra bit of money as their real wage is very low, she suggested.

Professor Bidisha, who teaches Economics at the University of Dhaka, pointed out that the country's market system and supply chain management are very faulty leading to market price distortions.

Businesses argue that prices are high because they have to cover the unexplained costs in the form of informal payment. The economist said the government can check such 'informal payments' to lessen both the cost of business and burden on consumers.

"We also need to work on reducing transportation costs for commodities like fruits and vegetables to Dhaka. This might motivate the businesses to lower their cost."

She suggested an arrangement for farmers to sell their products directly in designated market places and transport to cities at cheaper cost. "Such micro strategies can help both growers and consumers."

Ominous clouds gathering

Meanwhile, the International Monetary Fund (IMF) lowered its forecast for Bangladesh's GDP growth to 5.7% for the current FY24, which might keep the inflation stick around at above 9%. Earlier this month, the World Bank projected GDP growth would slow to 5.6% and inflation to rage, weighing on consumption while energy shortage and high interests might dampen investor sentiment.

However, Finance Minister AH Mahmood Ali, who was attending the WB-IMF spring meeting in Washington, played down the IMF's latest forecast, saying there is nothing to worry as the country's recovery is satisfactory.

Ominous clouds are gathering on the horizon with Israel-Iran fresh conflict fueled Middle East crisis further. Ocean trade continues to stay risky along the Red Sea due to Houthi attacks and a Bangladeshi ship was just rescued last week after paying a handsome ransom to Somali pirates.

Businesses and economists have expressed concerns that if the Middle East conflict escalates, it could have various repercussions, starting with oil market volatility.

Prime Minister Sheikh Hasina also shared her worries about the looming adversities. On Wednesday, she asked her cabinet colleagues to keep an eye on how the Iran-Israel situation unfolds and be prepared to tackle any fallouts such as sudden increase in global fuel price.

While Bangladesh might not be in a full-blown stagflationary crisis yet, the warning signs are undeniable. Policymakers need to act swiftly and decisively to avert a deeper economic downturn.