Who we are & where we stand
By Irad Mustafa and Asaduzzaman
Our country started its journey on the 16th of December in 1971 and is now a matured state with 44 years under its belt. With around $35 billion dollars of exports, Bangladesh now has three or more burgeoning sectors which can lead it into prosperity.
On the way to implementing its development agenda, Bangladesh will face several challenges. Turning its demographic mayhem into demographic development is a must and training skilled labor will further help that cause. Other areas which will require scrutiny are connectivity corridors with neighboring nations, energy security and infrastructural development.
Renowned economist, Mohiuddin Alamgir forwarded the notion that shifting growth trends since the 1970s and recent growth performances were achieved against numerous odds. Having already come such a long way, we can be optimistic about future growth targets. The Bangladeshi economy is capable of crossing the lower middle income threshold by 2021 and achieving the upper middle income status by 2030 on the way to becoming a developed country by 2040 and beyond provided we can hurdle all the barriers which come along the way.
He has also put forward a set of imperatives or pillars that Bangladesh will have to concentrate on if we are to meet our desired development goals:
1. Financial market integration
2. Microfinance for vulnerable groups
3. Meso-finance for SMEs
4. Capital market development with built in regulations and stabilizers
5. Greater harmony between fiscal and monetary policy
6. Complete independence of Bangladesh Bank in conducting the monetary policy
7. Capital amount convertibility with oversight
8. Continuous strengthening of the banking supervision capacity of the Bangladesh Bank as all financial institutions are brought under its direct super vision and control
9. Privatization of all state owned banks except one for payments purposes
10. Discontinue lending for political purposes.
Progress on boosting shared prosperity of the country needs to be further enhanced in the near-term by sustaining GDP and remittances growth, creating jobs, limiting inflation, and improving the quality of public service delivery. Private investments need to increase significantly to achieve the government’s 7% growth target for Fiscal Year 16 (FY16). As the country takes its first steps into another fiscal year and away from Fiscal Year 2015 (FY15), stronger attention is needed in key areas – (i) Safety and labor rights compliances in the garments industry must be upheld, (ii) completion of the critical ongoing road, electricity and gas development projects, (iii) implementation of Public Private Partnership law, (iv) improvements in the efficiency and solvency of the banking sector through better supervision and oversight by the Bangladesh Bank along with corporate governance reforms in public banks, and (v) easier access to serviced land to local and foreign investors through the Special Economic Zones (SEZs).
Where We Stand:
Growth momentum regained with the return of political stability.
Most analysts expected the economic growth in FY15 to be around 5.5-6% in view of political unrest and the lack of improvement in structural constraints. As in Fiscal Year 2014 (FY14), the Bangladesh economy in FY15 weathered severe disruptions in production, transport and service delivery once again due to prolonged political turmoil in the third quarter. However, the fourth quarter was remarkably stable just like the first two. Political uncertainties were still present, albeit on a much smaller scale, resulting in a deceleration in private investment growth that constrained the country’s efforts to attain higher economic growth. Amidst all this, growth was driven by rise in industrial growth from 8.2% in FY14 to 9.6% in FY15. On the demand side, consumption growth dominated while real private investment growth declined somewhat.
Figure 1: GDP Growth
Of the 6.5% overall provisional growth estimate for FY15, agriculture contributed 0.5% points (compared to 0.7% points in FY14), the estimated industry contribution is 2.7% (compared to 2.3% point in FY14 and 2.6 in FY13), and the contribution of the services sector is estimated to be 3% points, compared to 2.9 in FY14.
Over the last six years GDP growth was on average 6.2%. This was better than the average growth in other Asian nations like Pakistan, Indonesia and Vietnam but well behind the average growth in larger economies like China, India and Sri Lanka. Differences in investment rates appear to be a key to explaining the differences in growth performance.
Poverty reduction has continued at its historic pace.
Poverty headcount based on US$ 1.25 per day PPP was projected to fall from 43.5% in 2010 to 38.4% in 2015. This steady drop can mainly be attributable towards improvements in the farm income of rural households. The main contributor to poverty reduction between 2005 and 2010 has indeed been labor income, largely driven by increases in farm income.
World Food Program’s wage data suggests that agricultural workers’ terms-of-trade in some high poverty areas like Barisal, Khulna, and Rajshahi improved substantially in the first quarter of 2015 in comparison to the same period in FY14. In addition, the estimated patterns in poverty reduction are reinforced by the decline in food price inflation from 8.6% in FY14 to 6.7% in FY15.
Overall consumer inflation decreased to 6.4% in FY15 from 7.3% the previous year, driven by decrease in food inflation. Non-food inflation increased due to supply disruptions caused by the political unrest in the first quarter of FY15. Declining global commodity prices, a stable nominal taka-dollar rate and restrained monetary growth help achieve this. However, non-food inflation has been on the rise. Annual average food inflation decreased from 8.6% in 2014 to 6.7% in 2015 while non-food inflation increased from 5.5% to 6% during the same period.
Foreign exchange reserve accumulation continued despite current account deficit.
Due to a rise in the trade deficit from $6.8 billion in FY14 to $9.9 billion in FY15, which reflects a fall in export growth coupled with a rise in growth of imports, the current account balance turned into a $1.65 billion deficit, compared with the previous year’s surplus of $1.4 billion. Nevertheless, the overall Balance of Payments continued to record a surplus, albeit down from about $5.5 billion in FY14 to $4.4 billion in FY15, thus sustaining the appreciation pressure on the nominal exchange rate.
The growth of export earnings was only 3.4% in FY15 (in nominal dollar terms), compared with 11.7% growth in FY14. Woven RMG growth was 5% while knitwear grew to 3.1%. Exports declined by 3.1% in real terms. The growth of exports in Bangladesh’s competitors was significantly higher in recent years. These included Cambodia, China, India, Nepal, Philippines, Sri Lanka and Thailand. The drastic fall in export performances reflected the impact of a violent and unpredictable political environment, uncertain developments in major export destinations, falling global commodity prices and the volatile exchange rate of the Euro.
In both the US and EU markets, several of Bangladesh’s export competitors of RMG products performed considerably better than Bangladesh. RMG exports from Pakistan, Vietnam and Cambodia to the EU market and from Vietnam, India, Honduras and Sri Lanka to the US market increased at much faster rates.
Table 2: Real Export Growth
Prolonged slower growth in advanced and emerging markets may have adverse impacts on garment exports, thus widening the trade deficit. However, the relatively low-income elasticity of demand for garment exports and Bangladesh’s significant cost competitiveness would act as mitigating factors.
Also, unresolved political uncertainty can hamper growth prospects by hindering confidence rebuilding and leading to a stagnation of private investment. Balance of Payments pressures could emerge from lost export production and slowdown in remittances. Fiscal consolidation efforts could be lost. To safeguard against these problems, automatic fiscal stabilizers should be allowed to operate and reserve buffers may be used through sterilized intervention to cushion the shock and smooth exchange rate volatility.
The banking sector still faces challenges.
The expected improvements in the financial sector’s dynamics fell well short of the mark. Average earnings were estimated to have declined by 7% in FY15, compared with 7.5% growth in FY14. Slower credit growth over the last 4 years has also further highlighted the accumulated effects of substandard credit practices and governance issues. State-owned banks’ performance was much worse than the private commercial banks, mainly due to the poor quality of the board and management.
The Bangladesh Bank has been in the process of implementing Basel III since January 2015. It is also high time for them to institutionalize good governance in the banking sector. Without this confidence in the sector will remain shaky.
Restricted access to credit means that only 31% of adults in Bangladesh have access to a bank account. In addition, financial inclusion levels still remain low for certain groups including women, small and medium enterprises (SMEs), and farmers. However, the Bangladesh Bank has taken some significant initiatives in recent years to widen financial inclusion. These include changing of urban: rural branch opening rules, requiring banks to allow farmers to open bank accounts with minimum Tk. 10 initial deposit; issuing branch licenses to all SME/Agricultural service centers, mandatory participation in agriculture/rural credit for all banks including private and foreign, refinancing schemes for women entrepreneurs and so on. The expansion of mobile banking financial services has also helped widen financial inclusion.
The recovery of remittances.
Following a 1.6% decline in FY14, remittance growth leapt to 7.7% in FY15, reaching $15.3 billion.
Outflow of workers abroad increased by 12.9% in FY15, compared to the 7.3% decline in FY14. With the reopening of the Saudi and Malaysian markets in 2015 there may be a renewal of employment opportunities for Bangladeshi workers in the near future.
Figure 4: Remittances Growth
The near term political outlook is currently stable as is the outlook for international commodity prices. However, achieving the 7% GDP growth target set by the Government while reducing inflation to 6.2% during FY16 will be challenging. All evidence suggests Bangladesh’s potential GDP growth rate will be around 6.5% given its demographics, infrastructural shortcomings and lingering political uncertainties. The 6.5% growth will be driven by stronger consumption and export growth. Whatever the case may be, contingency plans need to be set up by the Government to tackle macro slippages such as large current account deficits, exchange rate volatility and rising inflation; urgent attention must also be given to stemming financial sector insolvency and prioritizing the completion of ongoing reform initiatives.