Excerpts from the Citi Na report, “Annual Market Update 2016”
Elevated GDP Growth
Bangladesh managed to grow at an impressive rate of 7.11% in FY 16 signifying strong macroeconomic fundamentals. There were promising signs as private investment’s share in GDP increased to 23% in FY 16 from 22.1% in FY 15 along with stable public investment.
For FY 2017, the government has set the GDP growth target at 7.20%. However, World Bank has projected the growth at 6.80% citing domestic security challenges, weak external demand, stable private investment and weak remittances dampening private consumption. Some progress has been made by the government in helping to ease doing business, however there is still some way to go if the country is to attract large investment from local and foreign investors. The government is working on creating 100 special economic zones in the country and has also classified a number of mega development projects into fast-track category to ensure rapid completion. Easing business setup and investment regulations and rapid execution of infrastructure projects will be the driving factors that will decide whether Bangladesh can increase foreign direct investment to $9.6 billion by 2020 from $2.2 billion at present and GDP growth rate to 8% in line with Planning Commission’s 7th Five Year Plan.
Figure 1: Contibution to GDP Growth (%)
Source: Bangladesh Bureau of Statistics
Figure 2: World GDP Growth (%)
Source: Global Economic Prospects Report
*Estimated/Projected Figures
The figures for Bangladesh and India are for respective fiscal years
While public investment is crucial for building private investment, revenue mobilization is the most important aspect that will drive public investment in coming years. At present, the Revenue-GDP ratio is only 9.90% and the government has a target to increase the ratio to 16.10% by 2020. Broadening the taxpayer’s base and revenue sources as well as focusing on income from service providers and the self-employed are the primary challenges in attaining the target. The successful rollout of the new Value Added Tax (VAT) and Supplementary Duty (SD) Act 2012, implementation date of which has been set at July 2017, will introduce an integrated online system for VAT registration, return submission, refund and payment and will determine the success of revenue mobilization to a large extent.
Inflation Hits 4 Year Low
Average annual inflation has decreased to 5.52% at the end of 2016 down from 6.19% in 2015. The point-to-point inflation also dropped to 5.03% in December from 6.10% a year earlier. Drop in both food and non-food inflation and political calmness have helped to keep the inflation rate within government’s and central bank’s target of 5.80%. Food inflation has come down marginally to 5.38% in December 2016 from 5.48% in December 2015 whereas, non-food inflation slid to 4.49% from 7.05% during the same period.
Figure 3: Point-to-Point and Annual Average Inflation
Figure 4: Food and Non-Food components of Inflation
Source: Bangladesh Bank
Trade Deficit Widens
During July-November, 2016, the country’s trade deficit swelled to $3.88 billion, up 22.86% from $3.15 billion during July-November, 2015. During the same period, the current account deficit widened to $726 million compared to $1.34 billion surplus last year due to rising trade deficit and weak remittances. Growth in imports is partly attributed to increased imports for expediting different infrastructure projects of the government as well as capital machinery and raw materials imports, which could be a boon for the country’s economic progress.
Figure 5: Monthly Export Earnings (USD MM)
Figure 6: Monthly Import Payments (USD MM)
Source: Bangladesh Bank
Remittance Inflows Suffer
Wage earner’s remittance saw a steep decline during H1 FY 17, dropping by 17.63% to $6.17 billion from $7.49 billion in the last fiscal. In FY 16, the overall remittance dropped 2.52% to $14.93 billion. These uninspiring numbers were registered at a time when the country’s manpower export was 36.31% higher in 2016 than previous year with more than 0.75 million workers getting jobs abroad.
As slowdown in remittance can have undesirable implications concerning FX reserve and financing development projects, addressing of the issue is of utmost importance. Immediate measures are required to bring the overseas remitters into the formal channel.
Robust FX Reserve Growth
The country’s FX Reserves has continued to grow handsomely in 2016 reaching $32.09 billion from $27.49 billion at the end of 2015, up by 16.73%. Although, the current account slipped into negative territory on the back of falling remittances and rising imports, the overall balance of payment is in surplus due to surplus in financial account. During the July-November period, the balance of payment surplus stood at $1.9 billion compared to $2.04 billion in the corresponding period last fiscal.
Figure 7: FX Reserves and Import Coverage (USD MM)
Figure 8: Monthwise Remittance Inflows (USD MM)
Key Policies and Reforms
In 2016, the government and other regulatory agencies announced a number of essential reforms aiming at tax revenue mobilization, fiscal management and investment facilitation. During the first half of the year, noteworthy reforms included the introduction of Industrial Policy 2016 giving special focus on a list of high priority industries and creative industries for next five years, approving the draft of “The Bangladesh EPZ Labor Law, 2016” and the Asian Infrastructure Bank (AIIB) Bill 2016 to join AIIB as a founding member.
During the first half of FY 17 and the national budget session, the government has taken the initiative to bring structural changes on many fronts. The government has formed a permanent committee to review and re-fix interest rates on savings instruments, and help tighten extensive government borrowing through savings certificates. On the government revenue front, an increase in the source tax rate to 0.7% from 0.6% on export receipts was announced. The initial budget proposal had the rate set at 1.5%. Through the Finance Act, the government has also reduced the investment ceiling for tax rebates for the individual taxpayers from 30% to 25%. The government had also announced November 30 as ‘Tax Day’ to help publicize tax payment deadlines, in line with international best practice. In addition, The National Board of Revenue introduced an online portal to digitize the submission of online individual tax returns and also announced introduction of online Business Identification Number (BIN) to facilitate online submission of VAT returns. However, the implementation of the much debated Value Added Tax and Supplementary Duty Act 2012 has been pushed back to July 2017 which will impose a flat 15% VAT for all sectors and emphasize on proper account keeping of transactions at every stage of supply of goods and services by both manufacturers and service providers.
Furthermore, the cabinet has approved the inter-governmental state credit agreement between Bangladesh and Russia for constructing the Rooppur Nuclear Power Plant. Under the $12.65 billion deal, the Russian government will lend $11.39 billion and the rest will be raised by the Government of Bangladesh. In addition, a new policy for petroleum imports has been formulated, which allows for imports through both government-to-government contracts and open tenders to save on oil import cost under low oil price scenario. The cabinet also approved the draft of ‘The National Telecommunications Policy, 2016’ to boost tele-density and internet penetration, as well as expanding broadband access.
