'The silver lining is that the worst is sort of behind us': Hamid Rashid, UN economist

On Wednesday, the World Economic Situation and Prospects (WESP) 2023 report was launched at a press conference. 

For nearly 76 years, the UN has been publishing WESP, making it one of the oldest publications of the UN system. It is considered the definitive report on the recent global economic outlook and immediate prospects of the world economy, according to economist Hamid Rashid, the head of the Global Economic Monitoring Branch (GEMB) unit.

GEMB leads the production and dissemination of this report, which is jointly produced by the Department of Economic and Social Affairs, the United Nations Conference on Trade and Development (UNCTAD), the five United Nations Regional Commissions and the United Nations World Tourism Organisation.

The Business Standard spoke to Hamid Rashid for his insights about the report. 

Would you kindly tell our readers what this [the report] is in a nutshell? I want to find out what the forecast is.

The global economic outlook is pretty bleak for 2023. 

In 2022, we already saw some downward adjustments. 2021 was a good year after the Covid-19 reopening, global growth in 2021 was 5.8% and then in 2022, it came down to 3%. Now we are looking at 2023, which has a 1.9% growth rate globally. This is a very low growth rate. Given all the challenges that we are facing, we are calling it sort of an economic crisis of some kind. 

The main factors behind such an outlook are the war in Ukraine and the high global inflation. 

Fighting inflation has been very costly for the central banks. Central banks raised interest rates very quickly.  Because of that, you also see significant spillover effects globally, and the outlook for 2023 is quite negative. We hope for some turnaround in 2024. But still, there are significant downside risks.

What would be the scenario of the subcontinent?

We have a country-specific forecast for two years, 2023 and 2024, for about 180 countries. And we have regional forecasts. Surprisingly, two regions are relatively bright spots – one is East Asia, and the other is South Asia. Both regions are doing better than other regions. In terms of developing regions, Latin America and the Caribbean will have significant economic risks. The former Soviet republics will see significant economic contraction gradually. 

But overall, South Asia and East Asia are bright spots. In East Asia, the main driver of economic growth is, of course, China. China will do better this year compared to last year. Last year, again, China's growth was about 3%, which is a very low growth rate by Chinese standards. This year, we are expecting China's growth to increase to 4.8%. We are seeing some slowdown in growth in India, but not anything significant that would create any concern. So we are seeing these two bright spots.

But what about Pakistan, Sri Lanka and Bangladesh too, countries in the subcontinent that are struggling?

We have to look at the whole picture. 

Again, if you take the case of India, India's growth is over 5.8%, which is roughly lower than what we have been expecting, [that is] a 6% growth rate. For Bangladesh too, we also expect a 6% growth rate. But this 6% growth rate can be misleading because if we just look at the growth number, we will miss some of the vulnerabilities. 

Exports will suffer a setback because we are seeing significant risks in Europe. In our projection, Europe will only grow 2% this year. The United Kingdom will go into recession – that's very likely. The US economy would grow by about 4%. Again, there are significant downside risks, meaning that Europe might go into recession. We're optimistic that a recession can be avoided in Europe because winter has not been very severe there. That means that with all the impacts of the war in Ukraine, it could have been far worse. Europe avoided that [forecast].

Overall, the export performance of South Asian economies would suffer some setbacks, including that of India and Bangladesh. Going to the bright side, domestic demand in India has remained strong, partly because in the case of India, inflation has been relatively under control. That is about 5.5% inflation. 

And India has reduced unemployment rates significantly, it fell to about 6.4% unemployment. And that means that they're employed right now. And they're demanding more goods and services. So domestic demand is strong. And that is helping the 6% growth rate that we're looking at right now.

That's for India. What about Bangladesh?

For Bangladesh, we are also expecting a growth rate of 6%. But as you mentioned, three countries in South Asia are facing some challenges. Sri Lanka already defaulted. Pakistan has significant debt vulnerability. These two countries, along with Bangladesh, have asked for IMF assistance. This shows some macroeconomic imbalances mostly on the balance of payments side. 

But the domestic demand is strong. Despite external demand being too weak, import demand is still very, very high. Though we have seen some softening of oil prices, which may help a little bit, still oil prices would average about $89 per barrel. In that case, the current account deficit will probably still be very large. That means there'll be some erosion in basically our reserve. Pressure will increase on the reserve. 

Another risk from external sources is that if the oil price decreases more – below our baseline projection – then this Middle East economy can also slow down. 

In the last two years, the economies in the Gulf region did very well because of the high rise in oil prices. If the oil price is moderated or keeps falling, there will be a shock in remittance. That means there will be further pressure on reserves. A 6% growth rate by any standard could be celebrated. But there are significant vulnerabilities and significant risks in the economy.

What you are saying is that reserves will be under pressure this year. The dollar crisis will persist throughout 2023. Do you think until the global economy improves, this vulnerability will persist in our economy?

Vulnerability will persist. To mitigate this, our exports need to pick up. For the exports to pick up, we obviously would expect Europe and the US economy to recover. As for the US and European economies, we're hoping in our forecast that they will turn the corner in 2024.

The main reason the US economy is slowing down is because of monetary tightening. In our report, the main focus was excessive monetary tightening. You have been following, the US Federal Reserve hiked credit seven times – seven consecutive rate hikes between March and December, their policy rate was between zero and 0.25%. And that is now between 4.25% to 4.5%. So, this is the fastest increase in interest rates since the early 1980s. 

The United States was very concerned about inflation. Inflation in the US peaked in June at 9.1%, now it has come down to 6.5%. The lag effect will be felt in 2023, meaning that there will be a further contraction in domestic demands. And that the US economy would go into a slump. 

And that would be bad for countries that export to the US. 

For Europe, in addition to monetary tightening, a big drag is the War in Ukraine and high energy prices. Again, the UK for example will be in recession and other European countries also may face a high risk of recession.

Unless the world economy escapes from this environment, Bangladesh's exports will not pick up. As most of the demands are from Europe and North America.  

Bangladesh Bank has a 9% interest rate ceiling for all types of loans. [BB has recently raised the lending rate cap on consumer loans to 12%]. Many bankers are saying that until this becomes flexible, the dollar crisis will not be solved.

It's very difficult to defend an interest rate that is not market driven. And there will be pressure on Taka. The real interest is 2%, which should be considered very low for the banks. And they may not want to lend at that rate. If they lend [at that rate], they may lose money. 

One matter of caution is that if the interest rate is hiked, it would have a negative effect. Although it can support the taka by reducing the pressure on the exchange rates, that will be costly because that would make borrowing very expensive and domestic investment would suffer. So it's a difficult choice. It's a significant trade-off.

On one hand, you need to support the exchange rate so that it doesn't get too undervalued. As far as I know, the Taka and US dollar exchange is unofficially Tk117-118 to a dollar. If you raise interest rates right now, obviously the pressure would come down, [and] the exchange rate would be Tk105. That may reduce the cost of import because a strong taka means less money you spent to import your goods and service. 

But the counter side is if you raise the interest rates, the money demand would fall, [and] investment would fall. So for a central bank of a country, it is a very difficult trade-off.

However, what is needed now – of course, the reserve is important, but the most important [thing] is economic growth. And sustaining the economy is the priority for the central bank right now.

What is the silver lining? Up to now, all we heard is negative. 

The silver lining and the optimism is that the worst is sort of behind us. 

In the first half of 2023, the Fed would not raise rates as aggressively as it did in the past. 

And that will give some break to the developing countries. Because the high price of dollars is not only because of what happened in Bangladesh. The dollar is expensive because of its high interest rate. 

So the dollar is more attractive globally right now. This has a negative spillover effect on the rest of the world. What the Fed did is good for the US economy; they are trying to bring down inflation, but they're also exporting inflation to the rest of the world.

For Bangladesh, there are some fundamental problems like reduced exports, [and] reduced demands, because of the rapid increase of interest rates in the US. 

So the silver lining, hopefully, would be that we won't see that kind of rate hike this year – probably a maximum of two rate hikes, [but] we won't see four or five rate hikes.