The International Monetary Fund (IMF) recently published its Regional Economic Outlook 2023, a flagship publication of the global monetary regulator themed, “Navigating Global Divergences”. In the latest edition of the publication, reports indicate that the pandemic, Russia’s invasion of Ukraine, and the cost-of-living crises are still having a sluggish but steady impact on the world economy as its recovery has been slow. In retrospect, the resilience has been remarkable as the global economy has slowed but has not stopped despite the disruption in the food and energy markets brought on by the Russia-Ukraine war and the enormous tightening of global monetary conditions to battle decades-high inflation. However, in contrast to the most recent economic outlook, released in April, the world economy is contracting once again following a robust pandemic recovery and sustained resilience in the early months of 2023. This is because increased global inflation control measures have started having an effect and have started to interfere with economic activities where inflation appears to be persistent. The report also flags risks for the Bangladesh Economy, as it trims the GDP growth forecast for FY24 to 6%, which is a 0.5% drop from the 6.5% growth predicted in the April report.
Overview of the IMF’s Regional Economic Outlook
The outlook articulates that there are widening divergences among regions in terms of global economic recovery in post pandemic and Ukraine-Russia war— the recovery has been uneven and economic activity still falls short of its pre-pandemic path, especially in emerging markets and developing economies. In the first chapter, the outlook discusses the resolution of US debt ceiling tensions and Swiss, the EU and US authorities’ actions to contain financial turbulence along with China’s property sector crisis with warning that it could deepen with global spillovers. In the second chapter it explains how inflation reducing policies along with tight labor markets are shrinking economic domains in different countries and how climate and geopolitical shocks could cause additional food and energy price spikes all over the world. In the third and final chapter it explains how intensifying geoeconomic fragmentation could constrain the flow of commodities across markets, exemplifying through global value chain disruption in the pandemic and the Ukraine war, could cause additional price volatility and complicate the green transition, with policy recommendations for effective monetary policy and fiscal policy frameworks.
The outlook predicts that global growth would fall from 3.5 percent in 2022 to 3.0 percent in 2023 and 2.9 percent in 2024, which is much less than the 3.8 percent historical average (2000–19). It is anticipated that as policy tightening takes hold, advanced economies would drop from 2.6 percent in 2022 to 1.5 percent in 2023 and 1.4 percent in 2024. The growth of developing and emerging market economies is also expected to moderately fall from 4.1 percent in 2022 to 4.0 percent in 2023 and 2024. Global inflation is expected to gradually decrease as a result of tighter monetary policy supported by decreasing global commodity prices, from 8.7 percent in 2022 to 6.9 percent in 2023 and 5.8 percent in 2024. Although core inflation is predicted to decrease more gradually, inflation is not anticipated to return to the pre-pandemic level again until 2025.
Bangladesh in the Economic Outlook
In the latest outlook IMF downsized Bangladesh’s growth forecast for the current fiscal year to 6 percent, however, its April edition had projected it to be 6.5 percent. The downsized growth forecast for this fiscal year comes after the World Bank lowered Bangladesh’s growth projection to 5.6 percent amid sustained high inflation and external payment challenges. Although the IMF prediction is far less than Bangladesh government’s 7.5 percent GDP growth target, set in the budget for FY24, the country will still achieve the second highest GDP growth in South Asia, behind only India’s 6.3 percent.
The Consumer Price Index (CPI) inflation in Bangladesh, according to the outlook, would be 7.2 percent in FY24, down from 9.7 percent in FY23, although still way above the government’s target of 6 percent. This would be the second-highest inflation in the South Asia region, bested by Pakistan, where inflation is projected to hit 17.5 percent. Core inflation of food and energy prices will likely remain high according to the outlook, supported by data from the Bangladesh Bureau of Statistics (BBS) as inflation averaged 9.75 percent in Bangladesh in the first three months of the fiscal year. However, good news is, Headline inflation would continue to decelerate, from 9.2 percent in 2022 to 5.9 percent this year and 4.8 percent in 2024, and Core inflation, excluding food and energy prices, is also projected to decline, albeit more gradually than headline inflation, to 4.5 percent in 2024.
Analysis of Bangladesh’s Position in the Outlook
IMF defended its position to revise Bangladesh’s GDP growth in this fiscal year saying that it is based on various reasonable causes, with various ongoing challenges like elevated inflation, political instability, a slowdown in external demand, global monetary tightening, depreciating foreign currency reserve and foreign exchange fiasco. All these factors continue to weigh on Bangladesh’s growth. With the next general elections looming, political instability with volatile foreign reserve and exchange rate, the outlook suggests that failure to address these risks may put the economy under more pressure than the projection. Government critics however, argue few domestic areas tied to government policies as a source of Bangladesh’s depreciating economy and GDP growth, i.e. high cost of infrastructure projects or often described as mega projects, crisis in the banking sector due to widespread default of loans, high costs in the energy sector and widespread capital flight.
While these are not unexpected for a developing country like Bangladesh, the government has taken significant measures to address these macroeconomic challenges. The country has tightened its monetary policy stance to reduce inflation, restricted import of luxury goods, tightened dollar expenses and allowed more flexible exchange rates while unifying the exchange rate system. These steps have reduced import and simultaneously development and economic environment. However, another possible reason for the downgraded growth could be the government’s disregard to IMF’s suggestion, during its bailout loan package, to lift subsidies and drastically increase tax for revenue generation. Instead, the government has maintained its benevolence fiscal policy and prioritized spending to support the poor and vulnerable. That is also highlighted in the press conference of the outlook, as K. Srinivasan, IMF’s Director of the Asia and Pacific Department, specifically mentioned such government policies as logic behind IMF’s downgrading GDP forecast.
Undoubtedly the country is passing through economic crisis, just like all other countries in the world. Although the IMF’s suggestion for excluding the subsidies and benefits for the poor could have brought macro level economic stability and secure the growth objectives, the wrath of inflation surely would have crushed the economically marginalized population, had the government not continued its benevolent fiscal policies. Bangladesh’s economic realities do not fully comply with those of Western situations and prescriptions. The welfare orientation of Bangladesh economy must be taken into consideration for assessing development of the country. At this point of time, trimmed growth seems reasonable, because the country has significant growth potential with a favorable demographics. Once Bangladesh becomes resilient and overcomes the crisis it is well placed to graduate as a developing country as well as reach middle-income status in due time.
– Wahid Uzzaman Sifat is a Research Intern at the KRF Center for Bangladesh and Global Affairs (CBGA).