During the past year, the Bangladesh economy has performed exceptionally well:
- GDP growth in 2017/18 accelerated to 7.8% based on a strong manufacturing performance and expanding government investment.
- Poverty is declining steadily and nutritional status is improving. Of course, there is a long way to go, but great progress continues to be made.
- Conditions in rural Bangladesh flourished with strong, growing commercial agriculture, high level of remittances, greater mechanization, increased electrification, and better transport connections.
- The inflation rate slowed.
- The balance of payments improved. The current account improved from a deficit during the first five months of 2017-18 of $4.7 billion to a deficit of $2.6bn in the same months of 2018-19. This arose from an unexpected large growth of exports (14%) and remittances (8%). The deficit in the balance of payments over those five months increased to a manageable $837m from $479min the same period the previous year.
- Unemployment remained low. Continuing growth of RMG and agriculture will have to be based more on rising productivity than labour force increases. Despite this, educated youth are having trouble finding the kind of jobs they want.
- The RMG sector performed strongly. The value of RMG exports in the July-December 2018 period increased by $2bn and prospects for more exports from orders shifting to Bangladesh from China are bright.
- Government revenues performed poorly; the data for the first four months of the current financial year showed an increase of 6% over the same months from the last financial year. Last financial year, the increase was 22%. This is only four months of data, but we are almost through seven months of collections and reports, and the situation is not much better.
- The slow-down in collections was across all categories -- customs, VAT, and income tax. The government deficit will probably increase to 4.5% of GDP in the current financial year from 3.9% in the last financial year. The new finance minister is strongly focused on this problem and he should achieve significant improvements in the next three years.
- The banking sector continued to show weaknesses with a rising level of non-performing loans -- 11.5% of loans were classified at the end of November 2018. The new finance minister has promised to tackle this problem.
- The banks’ efforts at loan recovery suffer from weak support from the courts, a growing volume of scams arising from weak bank internal controls, and sweetheart deals among bank directors. There are some examples of borrowers managing to shift their loans from one bank to another so that even if the loan is never repaid it is never classified.
- It is unlikely, based on the experience of the past 25 years, that the banks will be able to improve their loan collections without political backing to overcome the difficulties.
- The capital market continued to perform weakly. The DSE index was 6128 on January 16, 2018 and fell to 5839 on January 16, 2019. A disappointing performance when the real economy is performing so well. Serious governance problems in the share market reduce the role that equity should play in economic development leading to excessive reliance on bank finance.
- Foreign Direct Investment continued to stagnate at a net inflow of about $1.8bn-2.3bn per annum. There are, however, some signs of greater inflows in 2019.
Prospects
Future prospects for 2019 and 2020 in Bangladesh are bright. Export and remittance growth appear to be strengthening. That will allow expansionary fiscal and monetary policies. The country should achieve 8% growth in the current financial year. Inflation will remain moderate more or less at current levels. The balance of payments will show a deficit of $1bn-2bn which is easily managed with the existing level of reserves.
Over the next five years, rapid economic growth depends on rapid expansion of exports above 10% per annum. The country is capable of that if the international economy continues as it has the past five years.
Rapid growth also requires corrections in the banking system, reducing the level of bad loans, stopping the scams, and enforcing the central bank’s capital requirements for commercial banks. Such change can certainly be achieved, but there will be screams of anguish as it happens.
The prospects for the capital market are less promising. Should the authorities manage to improve audit standards, then there would be much more interest from international portfolio investors. This would buoy up the capital market and lead to greater participation from locals and make the mutual funds stronger.
Over the years there has been much effort to attract foreign direct investment. This effort has not been very successful. A major reason is that the Bangladesh private sector does not really want this investment when it is competitive with what local entrepreneurs are trying to do.
One type of foreign investor is engaged in infrastructure. Such companies bring technologies and management skills that are not available in Bangladesh. Gas exploration, large gas-fired power plants, mobile telephone systems, large coal-fired power plants, LNG terminals -- these are all examples that need foreign investors.
Another type is an investor trying to serve the domestic market -- many of these are joint ventures. Such undertakings are very often unsuccessful and this leads to a bad reputation for Bangladesh.
Finally, and most important, is the foreign investor who wants to export. Most such investors prefer the Export Processing Zone as the site for investment -- for some mysterious reason the government some years ago stopped the expansion of the EPZs.
Finally, successful growth requires more rapid growth of government revenues calling for reforms of the income tax system, reductions in company taxes, putting in place the new VAT system, reductions in under invoicing, and collecting more taxes due from the wealthy who continue to avoid tax payments.
Government revenues are badly needed for:
- Completion of the mega projects that are underway
- Greater spending on the education system; all levels are in urgent need of improved quality of teaching to achieve higher academic performance of students
- Improvement in the water supply in both urban and rural areas where contamination is a serious and growing health problem
- Finally, to take actions to improve the environment in Dhaka, a city with a rapidly growing deficit in public services, and suffering from growing environmental dangers. l
Forrest Cookson is an American economist.