Bangladesh’s economy is plodding along well beneath its potential, says the World Bank, as infrastructure bottlenecks and political uncertainty keep it from performing at full capacity.
But data published in the World Bank’s (WB) Bangladesh Development Update Report, released yesterday at its Dhaka office, suggests that the country has a robust domestic demand and its people have significant purchasing power.
The WB report said the economy recorded domestic retail sales, to the tune of $12bn, during the last two Eid festivals, indicating both consumer confidence and significant purchasing power.
“The economy is progressing, but below its potential,” World Bank South Asia Finance and Poverty group lead economist Zahid Hussain told the Dhaka Tribune.
Short-term profit taking investment was taking place but long- and mid-term investment required for sustainable economic growth still lagged behind target, he said.
The Bangladesh economy has failed to find its pace because uncertainty persists, he added.
This is stunting competitiveness and deterring private investment, slowing down economic growth, Zahid said.
The festival retail figure was derived from retail shop owners’ estimates of Tk55,000 crore in sales during Eid-ul-Fitr and about Tk1 crore in sales of sacrificial animals during Eid-ul-Azha reported by news media, according to Zahid.
“This indicates that consumer confidence has increased,” he said. MasterCard Worldwide Index of Consumer Confidence increased from 40.4% in the second half of 2013 to 66.4% in the first half of 2014.
Business and institutional investment in the private sector did not match consumer confidence. He said quality growth was not possible without increases in private investment.
“But business confidence is yet to return as reflected in sluggish private sector credit growth,” the WB economist said.
According to Bangladesh Bank, private sector credit growth inched up a tenth of a percentage point to 11.4% in August compared with 11.3% in July this year.
The multilateral development bank revised its Bangladesh economic growth projection marginally upwards to 6.2% from its April forecast of 5.9%.
Political stability since early January, signs of an uptick in remittance inflows, continued strength in exports as well as buoyant domestic consumption bode well for GDP (gross domestic product) growth in the current fiscal year, the WB report said.
The WB projection fell far beneath the government’s growth target of 7.3% and slightly lower than the Asian Development Bank’s 6.4% forecast for fiscal year (FY) 2014-15.
“Employment generation is compensated by manpower exports abroad,” said Zahid.
“Bangladesh needs an investment boom to exceed 7% growth this year,” he said, adding: “This means investment growth must be raised to 34-35% from the current level of 28.7%. This cannot happen without a major rise in private investment.”
The report was surprised by service sector growth figures during the last fiscal year despite the political turmoil.
“The biggest surprise is the estimated growth rate for the services sector, which increased to 5.8% in FY14 from 5.5% in FY13,” the report said.
The report went on to say: “Political turmoil affects the services sector most badly, yet Bangladesh Bureau of Statistics estimates show a significant improvement in the performance of the sectors presumably more adversely affected by political unrest—land transport, wholesale and retail trade, hotels, restaurants, real estate, renting, and business activities.”
The World Bank warned that growth recovery could not be sustained without correcting the infrastructure deficit.
“Bangladesh should focus on improving infrastructure, particularly energy and transportation, to bolster its growth,” said Johannes Zutt, WB country director in Bangladesh.
The report said infrastructure investment increased from less than 1% of GDP in FY09 to about 2% in FY13, still considerably lower than the 7-10% the WB says is needed annually for the next ten years.
The report lauded Bangladesh’s progress in improving its competitiveness ratings, most visibly in the electricity supply.
Bangladesh needs to pay stronger attention to the efficient implementation of infrastructure investments along with necessary institutional changes relating to policy making and regulation, the report suggested.
The report said priority should be placed on completing ongoing road development projects including the Dhaka-Chittagong and Dhaka-Mymensingh highways, the double tracking of the Dhaka-Chittagong railway, the Padma Bridge, the Dhaka metro rail and the two Bibiyana gas field based power plants.
The report said immediate action should be taken to enact the Public Private Partnership (PPP) law, and award contracts to build Special Economic Zones (SEZs).
On inflationary trends, the WB said the widening gap between wholesale and retail rice and flour prices after January 2014 suggested that middlemen in the food distribution network may have raised their margins to make up for losses during the disruptions.
Stability in global oil prices helped contain the cost-push to non-food inflation, it said.
On sluggish public expenditure, the WB report said improving the quality of ADP (Annual Development Programme) implementation is difficult when the number of projects keep increasing.
Expressing concern over the financial sector, the report said the banking sector faces risks due to the low capital base in state-owned commercial banks which account for a quarter of the assets of the banking system.
“Bangladesh Bank’s supervisory and regulatory capacity is still weak – compliance- based instead of risk-based – and this needs to be strengthened to improve the efficiency and stability of the banking sector.”
The WB report praised Bangladesh’s progress in the human development index, in poverty reduction and in macroeconomic management.