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Factoring: The Barometer of GDP

(an International viewpoint)

Gross Domestic Product (GDP) is the measure of the market value of all final goods and services - cars, rock concerts, donkey rides, and so on - produced in a country during a year. Usually, it is expressed as a comparison to the previous quarter or year. For instance, if the year-to-year GDP is up 3%, this means that the economy has grown by 3% over the last year. It represents the size of an economy. It impacts nearly every part of a country's economy. A growing GDP is usually accompanied by wage increases, low unemployment, and increasing corporate profits. It serves as the carefully monitored pulse of a nation's economy.

Factoring may serve as the read of an economy or GDP. If all the goods and services are invoiced in monetary value, it may give a signal of total GDP of a country; the health of the economy can be gauged. In this regard, it is to be noted that all economic activities do not go through factoring modality. But it is a proposition of measuring GDP via factoring. At the same time, there must be a robust system in the economy of registering and/or maintaining invoices factored as it happens in the developed and matured factoring markets like the UK, USA, etc.

Under this model of GDP measurement, factoring may also work as the indicator of economic growth: if the factoring volume increases, economic growth heightens and vice versa. Historically, it is observed that factoring has grown in a country when its economy has grown over the years, as it is happening in the Bangladesh economy.

Through a factoring index it can also be known in which product or service, or in which industry, a country is efficient. The production of an item which generates maximum invoices in an economy tells that the economy is proficient in that economic item and/or business activity. For instance, in Bangladesh, the modal invoices in all Factors are of poultry feeds, meaning that the economy is agrioriented

Similarly, whether the economy is service-oriented or manufac- turing (manufacturer of physical goods) oriented can also be known from the invoices generated. For example, Singapore's economy is a more service-oriented economy compared to Bangladesh's economy, which is a mostly labor-intensive economy (e.g., ready-made garment products).

The seasonality effect or the economic ups and downs are grasped with the movement of invoice generation. Invoice becomes the parameter of economic heyday or sluggishness. The investors can make decisions regarding which sectors' shares or bonds they will purchase, and accordingly they can design, redesign, shape, and reshape their portfolio. Whether they will concentrate their investment in high-tech industry, or agriculture, etc.; all of these things investors can know with the help of a factored invoices' database. Factoring is also an indicator of financial securities' portfolio management.

Factoring may work as a study of macroeconomy. It helps in measuring the value of economic activities done in a year. The living standard of people, per capita income, etc. are also linked with invoice generation and thereby the factoring activity. Generally, the greater the generation of invoices, the greater the economic activity, and the higher the income of the people, resulting in a higher living standard (as seen in comparison between the UK economy and Bangladesh economy). The generation of invoices in the UK is higher than that of Bangladesh, meaning that the living standard in the UK is higher than that in Bangladesh.The consumption pattern of people can also be attributed to the concentration of invoices factored.

The employment status of a country may also be related to the factoring industry. The economy which generates more invoices has a higher capacity to generate new employ- ment opportunities in increased numbers; higher invoices precede the higher volume of business and/ or economic activity, demanding a higher number of people to be employed.

Even seeing the total invoices generated and factored, it can also be seen which industry in a country is growing and which one is shrinking, and thereby, it helps policymakers in formulating national economic, as well as industrial, plans. At the same time, the extent to which the industrialization has accelerated may also be known through factorization.

The wave of economy may be assessed with the invoices generated from the activities in the economy. Seeing the growth of GDP, the growth of factoring can be predicted and vice versa. For instance, if the present GDP growth rate of Bangladesh is around 6 percent, the growth of the factoring industry in Bangladesh may be predicted at at least 6 percent. GDP may be wrapped up with factoring. The total GDP is a crystal of invoices; the total economy is the accumulation of all invoices generated in a given year, against all the economic activities, against all the products and services produced. o

By Moniruz Zaman is Assistant Vice President and Head of Factoring & Commercial Business Unit at LankaBangla Finance Ltd