Risks to the economic outlook

Jyoti Rahman

Published in the Daily Star on 14 June 2009.

THE much anticipated and widely leaked budget has finally been declared. This piece will focus on the key macroeconomic forecasts that underpin the budget. The budget rests on a forecast GDP growth of 5.5% and an inflation of 6.5% in 2009-10. These forecasts feature possible impacts of the global recession, including impacts on remittance and exports. The fiscal deficit is forecast to remain within 5% of GDP next year, of which 2 percentage points are expected to be financed from external sources.

Are these forecasts sensible?

Let’s start with GDP growth. The 5.5% forecast growth for 2009-10 is broadly consistent with international agencies — for example, the Asian Development Bank forecasts a growth of 5.2% next year.

But how confident can we be that this forecast will be realised?

Yogi Berra, an American baseball player, is said to have cleverly remarked: “Prediction is very hard, especially about the future.” Macroeconomists would nod in agreement, particularly now. The speed and ferocity with which the recession ravaged through the global economy caught everyone by surprise, and forecasts were marked down heavily and frequently. The IMF marked down its forecast for 2009 world growth five times since the collapse of Lehman Brothers last September. It is self-evident that there is a considerable amount of uncertainty around any forecast, and the budget forecasts are no exception.

And yet, there is very little discussion on any risks to the outlook in the finance minister’s budget speech or official documents.

Given the global recession, risks would appear to be heavily weighted towards the downside. To be sure, the forecast growth is a slowdown from this year’s 5.9% (and 6.25% average in recent years). However, compared with our neighbours, the forecast slowdown is very modest. And a range of plausible developments — export slowdown leading to manufacturing stagnation, sharp slowdown in services coming from remittance drop — could slow growth to 4% or less.

What would such a sharp slowdown mean?

Of course, it would mean less employment and income through to faltering poverty alleviation. And for the government, it would mean less revenue and higher deficit. How that deficit is financed could have implications for the inflation forecast.

The budget forecast of 6.5% inflation for next year is identical to that of the ADB. With bumper harvest, falling world prices, and the taka’s appreciation against the Indian rupee, food prices have been on the ease, helping disinflation. However, if budget deficit ends up being higher than expected (and/or if the 2% of GDP external finances are unavailable), then Bangladesh Bank might come under pressure to finance the deficit. And this could put added pressure on the inflation.

However, not all risks are negative. Nature could well be kind to us, resulting in yet stronger harvest. Plus, remittances — which have proved surprisingly resilient — could accelerate. The price of crude oil has ticked up in recent months and this could revive the Gulf labour market, and fuel remittance growth.

But a remittance boom could also be a mixed blessing. Take away other opportunities and remittance growth could fuel a real estate bubble, instead of productive investment. And at the same time, higher oil prices could mean higher inflation.

Former US President Harry Truman bemoaned the lack of one-handed economists. Bangladesh’s budgets seem to be drafted by one-handed economists, because they seldom discuss risks in details.

This budget could have been different. There are many ways the forecasts underpinning the budget could be missed. A discussion of some scenariosa bumper harvest and buoyant remittance on the upside, export slump and lack of foreign financing on the downside — would have only enhanced the finance minister’s credibility.

The government will likely reap political benefits if the future turns out to be brighter than what is predicted in the budget speech, just as it stands to face political headwinds if things turn out to be worse.

However, a proper discussion on the risks would have spared us the political theatrics. And more importantly, it would have given all stakeholders a much better understanding of the economic conditions and outlooks that will shape the budget’s outcome.

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