Fitch Solutions cuts growth forecast to 6.5pc

Fitch Solutions Group Ltd, an affiliate of Fitch Ratings, has cut Bangladesh's growth forecast to 6.5 per cent for the next fiscal year owing to the multiple challenges facing the economy for the Russia-Ukraine war and higher commodity prices.

The projection is 1.2 percentage points lower than its previous forecast of 7.7 per cent and 1 percentage point lower than the government's growth target of 7.5 per cent for the fiscal year starting from July 1.

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"Growth is likely to slow due to the myriad headwinds facing the economy," said Fitch Solutions. 

"However, the ongoing normalisation of economic activities should provide some support."

The revision from Fitch Solutions came after the Bangladesh Bureau of Statistics (BBS) released its latest data on the gross domestic product (GDP), which was rebased to FY2015-16 and provided new provisional figures for FY2021-22.

The BBS said the economy would expand by 7.2 per cent in the current fiscal year ending in June, up from a rebased 6.9 per cent in FY21. Fitch Solutions had previously expected growth to come in at 5.8 per cent in FY22.

Although growth will be supported by the continued easing of Covid-19 restrictions over the coming quarters, high base effects and the myriad headwinds facing the economy suggest that the growth on balance will likely slow in FY23.

Fitch Solutions sees three headwinds for the economy over the coming quarters.

First, commodity prices have surged since late-February owing to the outbreak of the Russian-Ukraine war. Prices are expected to stay elevated through end-2022 before moderating slightly in 2023. This has put upside pressure on inflation globally and eroded consumer purchasing power.

The impact is more acute in Bangladesh than in developed markets since food and energy account for around 62 per cent of the CPI (Consumer Price Index) basket, the second-highest in the region after Thailand.

"Given Bangladesh's low level of GDP per capita, this will likely significantly weigh on discretionary spending and therefore, private consumption in the economy," said Fitch Solutions. 

Inflation in Bangladesh climbed to 6.3 per cent in April, the highest since October of 2020.

Second, investment in Bangladesh is expected slow due to high commodity prices.

This is because Bangladesh is a net importer of energy and commodities. Higher commodity prices will lead to higher import bills and weigh on savings and therefore investment.

Import payments $61.52 billion between July and March, up 44 per cent year-on-year, data from the Bangladesh Bank showed, as the economy is rebounding from the pandemic-induced slowdown. 

Higher inflation induced by higher commodity prices has pushed central banks around the world to tighten their monetary policy. 

"Although Bangladesh Bank has so far maintained an accommodative monetary policy stance, external credit conditions have still tightened and this will likely lead to a slowdown in foreign direct investment," said Fitch Solutions.

The persisting higher inflation forced the BB to raise its key interest rate by 25 basis points to 5 per cent on Sunday, the first hike in a decade. 

Lastly, Fitch Solutions believes, the slowing global economic backdrop will also weigh on Bangladesh's economy, though the impact on growth is less significant than on other export-oriented economies such as Thailand and Vietnam, given that merchandise shipment only accounted for about 14 per cent of GDP in FY2018-19.

Besides, the emergence of a more transmissible, deadlier, and vaccine-resistant Covid variant could cause the government to re-impose restrictions to prevent the healthcare system from being overwhelmed.

"In addition, a further escalation of the Russia-Ukraine war and/or wider lockdowns in China could further disrupt the supply chain and weigh on Bangladesh's export-oriented manufacturing sector," said Fitch Solutions.

On the upside, a strong recovery in remittances on the back of the faster growth in the Gulf Cooperation Council (GCC) group of countries could be supportive of Bangladesh's growth, it said.

Remittance inflows accounted for 6 per cent of GDP in FY21, with around 55 per cent coming from the GCC countries.

Remittance receipts, however, dropped 13.15 per cent year-on-year to $1.88 billion in May as expatriate Bangladeshis now prefer informal channels to send their hard-earned money since their beneficiaries receive better rates owing to the significant devaluation of the local currency against the US dollar.

Migrant workers sent $19.19 billion in the first 11 months of the ongoing fiscal year, again down 15.95 per cent year-on-year, BB data showed yesterday.