Lack of energy infrastructure, uncertainties in property ownership and lack of export diversification are significant barriers to productive economic growth in Bangladesh, says a new ADB study.
In its study report on Bangladesh Consolidating Export-led Growth: Country Diagnostics Study released recently, ADB said Bangladesh has transformed its economy over the last two decades, graduating to middle-income status, as the average annual growth remained strong at 5%–6%. But the country’s goal to become an upper middle-income country by 2021 will require even stronger annual growth of 7.5%–8%.
The study argues that some of the policies that allowed Bangladesh to prosper in the last few years will become less effective, and the economy will need to “switch gears” to consolidate the growth momentum over the medium term.
It finds that the most critical constraints to growth are insufficient reliable energy supply, policies that indirectly stunt development of economic activities unrelated to ready-made garment exports, and insufficient security about property and land rights due in part to inadequate registry systems. If policies are designed to urgently tackle these constraints, Bangladesh will be free to harness its potential for inclusive and sustainable growth.
“The energy supply–demand gap in Bangladesh remains among the main constraints to sustained economic growth,” the study said, adding that unless the current energy supply gap can be bridged, Bangladesh’s long-term economic growth rate will continue to underperform.
The supply–demand gap problem has its genesis in four deficiencies – limited participation of private investors in energy projects, inefficient operation of the state-owned oil and gas production company and minimal competition in generation, limited international oil company investment in exploration and low subsidized tariff rates, ADB said.
“The success of the RMG sector has inadvertently come at the expense of poor growth and limited prospects for diversifying into other sectors. The anti-export bias faced by non-RMG sectors limits competition and product diversification.”
The study suggested that Bangladesh should retool its main economic sectors in the medium term if it wishes to increase its participation in global value chains.
Such newcomers are software and information and communication technology (ICT), pharmaceuticals, leather products and footwear, and shipbuilding.
The study said access to credit is still limited in Bangladesh. Banks are not perceived as adequately servicing the loan needs of small and medium-size enterprises (SMEs), and interested borrowers find credit requirements too cumbersome to fulfill.
“Interestingly, this seems to be a problem both for large and small firms, and also varies only slightly across sectors.”
The ADB said the poor land registry system means that some cannot prove land ownership, and this in turn makes banks more risk-averse and more likely to require more collateral from loan applicants.
“Limited access to finance curbs SME growth, and thereby, their potential for creating jobs and income.”