Bangladesh economy progressing, but below potential

Bangladesh continues to make progress on human development and reducing extreme poverty. Political uncertainty and weak competitiveness are dragging acceleration of private investment and growth. To sustain growth in the near- and medium-term, private investment need to increase significantly along with improving the quality of public investment.

wbThe Bangladesh Development Update October 2014 notes that the economy is gradually recovering from prolonged disruptions, aided by political and macroeconomic stability. The challenge now is to consolidate this by accelerating economic growth in an inclusive and sustainable manner. Economic activities in FY14 suffered a setback due to political turmoil, declines in remittance and private investment. Bangladesh Bureau of Statistics (BBS) has estimated a 6.1 percent GDP growth for 2014, compared to 6 percent last year.

Progress in poverty reduction and shared prosperity is visible. The poverty incidence, based on national poverty line ($1.13 per capita per day), is projected to decline from 31.5 percent in 2010 to 24.47 percent by 2014. Employment and wage growth appears to have boosted shared prosperity — increased the income of the bottom 40 percent. The UN Human Development Report 2014 says, Bangladesh graduated from Low Human Development (LHD) category to Medium Human Development (MHD) category in 2013.

Overall macroeconomic stability maintained though inflation is still high. Inflation increased to 7.4 percent in FY14 from 6.8 percent in FY13, driven by food price increases. This was due in part to the supply disruptions caused by political unrest in 2013. Stable international oil prices and exchange rate as well as prudent monetary management reduced non-food inflation to 5.5 percent in FY14 from 9.2 percent in FY13.

Despite a lower trade deficit, the current account surplus narrowed in FY14 because of a decline in remittances and an increase in services account deficit. The surplus in balance of payment increased from US$5.1 billion in FY13 to US$5.5 billion, creating an excess supply of foreign exchange. Bangladesh Bank (BB)’s interventions in the foreign exchange market limited nominal appreciation of taka. The real exchange rate appreciated by 8.5% in FY14 relative to FY13 due to small (2.7 percent) nominal appreciation and higher domestic inflation relative to international inflation. Foreign reserve increased to US$21.6 billion in June 2014.

Monetary management was challenged by fast reserve accumulation. BB managed to keep reserve and broad money growth within target by stepping up sterilization operations. BB’s net domestic assets and reserve money targets were met. Private sector credit growth remained subdued at 12.3%. BB increased Cash reserve ratio (CRR) from 6% to 6.5% in June 2014.

Financial sector is not out of the woods yet. Credit and risk management status is unsatisfactory in banking sector. Asset quality in the state-owned commercial banks (SCB) deteriorated in FY14 due to political unrest, poor lending decisions and change in loan classification standards. BB has started implementing the new provisions related to lending and bank’s exposure to stock markets. This should prevent excessive risk taking by the banks.

Fiscal policy is affected by revenue collection and development budget implementation shortfalls. The overall fiscal deficit in FY14 was a modest 3.1 percent of GDP. Public debt as a share of GDP is declining. However, there is little improvement in the quality of the Annual Development Plan (ADP) expenditures. Yet, the size of ADP in FY15 is envisaged to increase by 34 percent relative to the FY14 revised ADP.

Overall pace of structural reforms is slow, but there has been significant progress in the garments industry towards improving working conditions for factory workers, amendments to the labor and the Export Processing Zone (EPZ) laws, government’s capacity in assessing factory safety and agreement on common standards to assess structural building safety. Speedier progress is needed in the implementation of the new VAT law, liberalization of exchange regulations, infrastructure management, and financial supervision.

Growth and inflation outlook is favorable for 2015. Political stability since January, increase in remittance inflows, expected recovery in exports following a weak start, and a buoyant consumption demand than last year, bode well for growth in FY15, which is projected at 6.2 percent. Macroeconomic stability, improved governance in banking system, market development for long term financing, trade liberalization, and stronger attention to efficient implementation of infrastructure investments remain key factors in this process. Underlying inflationary pressures are expected to maintain a downward trend on continued policy restraint. Achieving this will depend on international price trends, domestic supply conditions and macroeconomic policies.

What needs to be done in the near term to sustain growth?

Stronger attention is needed to complete the transition in garments including implementing wage increases and the new labor legislations, recruiting more factory inspectors and completing building inspections followed by remediation measures such as relocation of closed garments factories. Priority should be on completing the ongoing road development projects, i.e. Dhaka-Chittagong and Dhaka-Mymensingh highway; Double Tracking of Dhaka-Chittagong Railway; the Padma Bridge; Dhaka metro rail; and the two Bibiyana gas field based power plants. Immediate action should be taken to enact the Public Private Partnership (PPP) law, and awarding contracts for building Special Economic Zones (SEZs).