Financial sector vulnerability, loss of external competitiveness major risks in the economy
The country’s economy will grow at 7.2% in the current fiscal year driven by rising exports, remittance and domestic consumption, says the World Bank(WB).
The global multilateral lender made the projection in its latest report titled “Bangladesh Development Update 2019: Tertiary Education and Job Skills,” launched at its Dhaka office on Thursday.
The latest projection of the WB on economic expansion is much behind the estimate of the 8.2% growth by the government, and the 8% projection by the Asian Development Bank (ADB).
The report states that the growth is likely to continue at more than 7%, driven mainly by manufacturing. Macroeconomic stability is expected to be sustained with less than 6 percent inflation and modest increases in the twin deficits, it adds.
Increasing potential output through structural reforms will be critical for achieving Bangladesh’s development aspirations in the medium and long-term, says the global lender.
On top of that, downside risks include financial sector vulnerability, reforms reversals, fiscal pressures and loss of external competitiveness, it adds.
“Bangladesh’s economy is projected to maintain strong growth backed by sound macroeconomic fundamentals and progress in structural reforms,” says Mercy Miyang Tembon, World Bank Country Director for Bangladesh and Bhutan.
“To achieve its growth vision, Bangladesh will need a high-productivity economy. Human capital development that is responsive to labor market demand for higher-level skills and to rapid technological advancements will be crucial.” she adds.
With changing technologies and business environment, technical skills needed for jobs are increasingly elusive and unpredictable, she maintains.
Bangladesh needs to create quality jobs for about two million young people entering the labor force every year and to harness the benefits of this growing labor supply, investments in human capital is badly required, the report mentions.
The country needs to invest significantly in teaching, learning and ICT facilities, among other areas, to create a competitive workforce, says the report.
“Labor market surveys repeatedly show that employers struggle to fill high-skill positions such as technicians and managers,” says Bernard Haven, World Bank Senior Economist, and co-author of the report.
“To bridge the demand and supply gap, investments in skills training, equitable access for female and poor students, public funding mechanisms to develop market-relevant skills and an effective regulatory and accountability framework are needed,” adds Bernard
Growth in export oriented manufacturing, light engineering, ship building, agribusiness, ICT and Pharmaceuticals will need more skilled labor, says Bernard in his key note paper.
Tertiary educational institutions comprising of universities, colleges and polytechnics will have to meet this growing demand, he observes, adding skills at tertiary education institutes must be more relevant to the labor market.
“Tertiary graduates struggle to find jobs, indicating a major skills gap. Only 19 percent of college graduates are employed full-time or part-time. At the tertiary level, more than a third of graduates remain unemployed one or two years after graduation, while unemployment rates of female graduates are even higher,” says the report.
FDI is expected to be sustained, supported by regulatory reforms, infrastructure developments and stable political conditions, while reforms in the financial sector, closing the infrastructure gap, and implementation of the annual development plan are crucial for the country’s progress, the report adds.
On the other hand, reserve coverage is likely to remain adequate. Given the high share of concessional borrowing, the risk of external debt distress continues to be low, it warns.
In addition, a gradual increase in exchange rate flexibility will help sustain the foreign exchange reserves, buffer the economy against external shocks and increase monetary policy autonomy, it mentions.
What are the challenges ahead
As per the development update, there are some key challenges for Bangladesh, which need to be properly addressed for sustaining the growth momentum.
Governance in financial sector, weak government revenue collections, real effective exchange rate, which adversely impact exports, are key challenges,” says Bernard.
The real effective exchange rate rose by 5.6% in the FY19.
In addition, increased bank borrowing , less private credit growth than target, low deposit growth, rising non-performing loans and purchase of dollars by banks from the central banks are the other hindrances, he adds.
At the same time, a challenging global outlook may reduce aggregate demand in Bangladesh’s main export markets, putting export growth under pressure, he warns.
Similarly, the growth of remittance inflows may negatively impact if economic conditions deteriorate in Saudi Arabia, the UAE, and the United States, the report predicts.
Inflation is projected to rise modestly with increased natural gas prices, possible crop production losses due to the recent floods and the growing output gap, it adds.
Doing business ranking to improve significantly
"I want to acknowledge that Bangladesh has done very well and will continue to do. What is important to remember is the direction of growth and that direction is positive. Our overall assessment of growth projection is positive," says Mercy Miyang Tembon replying to a question on ease of doing business.
Recently, the global lender has named Bangladesh among the top 20 economies that saw progress in at least three out of ten areas on ease of doing business index.
As per Doing Business 2019 of WB, Bangladesh is ranked 176th out of 190 countries.