The World Investment Report 2019 has described the deceleration of the global economy. More specifically, the report talks about the slowing down of Foreign Direct Investment (FDI) by 13% in the year 2018 from $1.5 trillion to $1.3 trillion. This translated to global Gross Domestic Product (GDP) slowing from an average figure of 3 percent in 2018 to 2.4 percent in the second quarter of 2019. While South Asia might not be as integrated into the world market as the other regions, it is not isolated from global development. Thus it is safe to say, the impact of the global downward trend will also be faced in Bangladesh.
GROSS DETAILS ABOUT GROSS DOMESTIC PRODUCT (GDP)
GDP is one of the most widely used measures of an economy’s output or production. The International Monetary Fund (IMF) defined GDP counts as the output generated within the borders of a country, within a specific time period — monthly, quarterly or annually. GDP is composed of goods and services produced for sale in the market and also includes some nonmarket production, such as defense or education services provided by the government. It is an accurate indication of an economy’s size and is probably the single best indicator of economic growth. Moreover, GDP per capita has a close correlation with the trend in living standards over time.
THINGS ARE KIND OF GOING SOUTH IN SOUTH ASIA
Falling in line with the global trend, the South Asian economies also seem to be moderating. While the economic outlook for South Asia is most positive, it is highly divergent across countries. There are some economies, including Bangladesh, Bhutan, and India, where economic conditions are largely positive, with GDP growth projected to remain robust in the near term. In contrast, the outlook in the Islamic Republic of Iran and Pakistan has visibly deteriorated. Consequently, regional GDP growth slowed down markedly in 2018. Yet, given the large size of the Indian economy, on the aggregate, the regional outlook is still moderately favorable, especially in comparison to other developing regions. Regional GDP is expected to expand by 5.4 percent in 2019 and 5.9 percent in 2020, after an estimated expansion of 5.6 percent in 2018. This is shown below.
STARTED FROM THE BOTTOM, NOW WE HERE!
Bangladesh boasts the second highest Gross Domestic Product (GDP) growth rate in South Asia. The country has successfully maintained GDP growth rates which are over 7 percent consistently over the last 3 years. The World Bank has predicted the GDP growth rate to be 7.2 percent for the year 2019 and expects the numbers to rise to 7.3 percent the following year.
In fact, according to the latest edition of the “South Asia Economic Focus, Making (De) Centralization Work”, a report produced by the World Bank, Bangladesh’s economy is forecasted to grow faster than all countries in South Asia, except for Bhutan, in the current fiscal year.
The rising GDP growth has been attributed to increased net exports, remittances and increased consumption. The ready-made garments industry is still the main driving force behind the rising export with the diversion of export orders from China adding to the growing demand for Bangladeshi garments. Similarly, the country is banking on the record number remittance it has received in 2019- $16.4 billion. This, in turn, boosted consumption and thus largely contributed to the GDP scores.
EXPORTING GOODS TO EARN SOME DOLLARS
Bangladesh has achieved the second-highest export growth globally over the past decade (2008-2018) and the highest among South Asian nations thanks to the increasing apparel shipment, according to World Statistics Review 2019. Vietnam, which is also one of the top garment exporters worldwide, topped the list with a 14.6 percent export growth while Bangladesh gained 9.8 percent, according to the World Trade Organization report.
“Bangladesh’s exports of apparel and clothing more than trebled between 2008 and 2018,” the WTO report said. Bangladesh maintained the title of the second-largest garment exporter worldwide grabbing 6.4 percent of the global trade.
With the high achievement of export receipts last fiscal year, the government was prompted to set a new export target for the current fiscal year at $54 billion, of which $45.50 billion is expected from merchandise export and $8.50 billion from services exports. The overall export growth has been fixed 15.20 percent higher than the achievements in the year of 2018.
While the above-listed information is something to celebrate, it is important to keep an eye on the trade deficit figures. The trade deficit is when a country’s imports exceed its exports. Overall Bangladesh incurred a $10.8 billion trade deficit during 2018, increasing by 9.6% from $9.8 billion one year earlier.
The notion that trade deficits are bad in and of themselves is overwhelmingly rejected by trade experts and economists. According to the IMF, extreme trade deficits can cause a balance of payments problem, which can affect foreign exchange shortages and hurt countries. Thus while Bangladesh does have a trade deficit, the number is not alarmingly high.
REMITTANCE: STANDING ON THE SHOULDER OF GIANTS
Remittances are funds transferred from migrants to their home countries. They are the private savings of workers and families that are spent in the home country for food, clothing and other expenditures, and which drive the home economy. For many developing nations, remittances from citizens working abroad provide an import source of much-needed funds.
In Bangladesh, remittance is one of the main drivers of the country’s economic growth, accounting for 5.4 percent of the gross domestic product in the year. Bangladesh received $15.5 billion in remittance in the year 2018, up more than 15 percent year-on-year, according to the World Bank. Bangladesh has the third-highest recipient of remittance in South Asia in 2018, after India and Pakistan and 11th highest recipient globally.
But perhaps the most surprising news was when in the month of May, a record amount of remittance flow for a single month as expatriate Bangladeshis sent $1.75 billion to ensure that their loved ones back home can celebrate Eid-ul-Fitr with more festivities.
Economists and bankers believe the government’s announcement to award 2 percent incentives on remittances, increase in manpower export and rise in fuel oil prices in the global market have caused the surge in Bangladesh’s remittance inflow. And the country witnessed a 16.58 percent remittance inflow surge between the months of July-September in the year 2019.
REAPING WHAT WE SOWED
A foreign direct investment (FDI) is an investment made by a firm or individual in one country into business interests located in another country. Foreign direct investment is critical for developing and emerging market countries. Their companies need the multinationals’ funding and expertise to expand their international sales. Their countries need private investment in infrastructure, energy, and water to increase jobs and wages.
The World Investment Report states that FDI in Bangladesh went up by 67.94% in 2018. Bangladesh reached the highest ever level of FDI in the country’s history at $3.61 billion. While China became the leading investor in the country with $1.03 billion, the United States, traditionally the top investor, dropped to fourth with only $0.17 billion in FDI for 2018 in Bangladesh, as per the report. The Netherlands stood as the second-largest investor with $0.69 billion, and the United Kingdom was the third-highest investor with $0.37 billion.
The government of Bangladesh over the past few years has taken various initiatives, such as policy reforms, removing infrastructural deficiencies and creating a positive business environment to encourage more investment, and that has paid off.
The increase in FDI is a result of policy reforms and the introduction of a one-stop service (OSS) for investors, which is already in operation. Currently, a total of 22 services are being provided by the OSS. The government, as part of its reforms, enacted the One-Stop Service Act 2017 to facilitate services and reduce the cost of doing business for both foreign and domestic investors.
Beyond these, political stability, and expanded domestic market and a booming economy linked to global economies have played a role. The government has also taken on mega projects such as Padma Bridge, Rooppur Nuclear Power Plant, and LNG terminals, to improve the ‘doing business’ ranking.
YET DAUNTING CHALLENGES REMAIN
Global industrial production cycles are strongly correlated with GDP. The strong and positive correlation shows that when industrial production grew fast, GDP tended to grow fast as well (and the other way around). The correlation between global industrial production and GDP growth from 2009 to 2018 was 0.97. The correlation between industrial production and GDP is strong as well, especially in India and Bangladesh. In Sri Lanka and Pakistan, this correlation is somewhat weaker.
For Bangladesh, in the coming years, the outlook is clouded by rising financial sector vulnerability. However, the economy is likely to sustain a 7 percent growth supported by a robust macroeconomic framework, political stability, and strong public investments. The challenges of the financial sector have been added to by increased NPLs and government borrowing from private banks which could crowd out the private sector.
NOT THE NPLS AGAIN!
Non-performing loans (NPL) are a troublesome issue for Bangladesh. NPL accounts for 10.41 percent of the total loans given. The figure was 9.31 percent in December of 2018. The rising trend of the NPL is bound to have a long-lasting negative impact on the country’s financial sector. If loanable funds are blocked as NPL, banks will not have enough reserve for issuing future loans, which will affect the economy in multiple ways. For example, it will hinder employment generation. The scarcity of loanable funds for the private sector will widen the rich-poor gap in society. The rising trend of NPL will also have a negative impact on the banks’ profitability.
The banking sector needs more stringent loan-issuing policies and their enforcement, in order to tackle the problem of NPLs. Bangladesh Bank should be given more authority and power so that it can take prompt initiatives to address the NPL crisis. And finally, loan defaulters should be brought to book and their businesses should be curtailed.
OUT WITH THE OLD AND IN WITH THE NEW
Lack of progress in modernizing tax administration may result in revenue shortfalls while higher spending and donor fatigue in response to the Rohingya crisis could add to fiscal pressures.
Tax revenues remained modest, at 10.3 percent of GDP due to a narrow tax base and limited implementation of administrative reforms. After a seven-year delay, the implementation of a new VAT law began in July 2019 but with multiple rates for different types of goods and services, the complexity of the VAT regime has increased.
Bangladesh has one of the lowest tax-to-GDP ratios in the region. According to the National Board of Revenue (NBR) data, as of June 2018, there is about 3.5 million tax identification number (TIN) holders, of which about 1.95 million submitted tax returns.
Tax collection by the National Board of Revenue is also a challenge. For instance, NBR collected Tk38,453 crore in VAT, during the first half of the ongoing 2018-19 fiscal year, against a set target of Tk50,025 crore, according to the board’s data, revenue collection lagged behind by Tk11,572 crore. Unrealistic targets and failure to collect VAT from the gas sector are the most popularly cited reasons.
ALL’S WELL THAT ENDS WELL
Despite all the trials and risks, Bangladesh has defied all odds to emerge as one of the fastest-growing countries not only in South Asia but globally as well. Sustained efforts by the government to forward the development agenda of the country will ensure that Bangladesh attains sustainable and inclusive development.