Reviving economic activities and restoring investor confidence after the national election held on January 5 is the major economic challenge for Bangladesh, says Asian Development Bank.
However, economic outlook for FY2014 remains subdued due to decline in remittances and weak domestic demand affected by prolonged unrest in the run up to the election.
Bangladesh’s short and medium-term growth prospects hinge on how the country addresses the short and medium-term risks and challenges, said the bank in its Quarterly Economic Update on Bangladesh released yesterday.
“Reviving economic activities and restoring consumer and investor confidence after the national election is the major economic challenge.”
Re-emergence of unrest will directly affect investment, growth and poverty reduction. Inflation may resurge due to supply disruptions and cost–push factors, including wage increases, it apprehended.
The ADB warned that a decrease in growth will affect employment creation for the annual incremental labor force of 18 lakh, which in turn will exacerbate economic and social problems. Fiscal space will be reduced causing higher bank borrowing to finance the fiscal deficit.
An emerging major challenge centers on the transition of the country’s RMG industry, especially after the Savar tragedy, to meet demands for internationally accepted safety and labor standards, it said.
Following the Savar tragedy, the government increased the minimum wage, and took initiatives to improve safety standards in partnership with the international business community and development partners.
The transition will increase operating costs, which may reduce the industry’s traditional price competitiveness. Coping with the transition process will be challenging for enterprises and the industry.
“The immediate challenge is to restore buyer confidence, which has been seriously undermined by recurrent industrial accidents during the past two years, causing a shift of some buyers to invest in comparator countries like Cambodia, India, Sri Lanka, and Viet Nam.”
Notwithstanding the limited effects of the United States withdrawal of the Generalized System of Preferences (GSP) facility, the withdrawal of the EU will significantly affect exports from the RMG industry and impact Bangladesh’s macroeconomic stability, economic growth, and poverty reduction.
About growth prospect, the ADB said in FY2014 economic growth will mostly rely on exports and domestic absorption. For the sectors, agriculture growth is expected to rise because of the lower base in the past two years.
The brisk industry sector growth in the fiscal year is expected to moderate because of work stoppages and supply disruptions caused by political unrest.
This decrease in industrial activity will likely slow service sector growth.
Domestic absorption will mostly rely on private consumption and investment performance. Consumers and investors have adopted a cautious approach given the unrest during the past months.
Notwithstanding the decline in remittance inflows, consumption will be partly stabilised by higher minimum wages for industrial workers announced in November 2013 and a 20% rise in civil servants’ allowances.
Private investment is expected to stagnate due to confidence effect stemmed from pre-election unrest. The slowdown in private sector credit, decrease in industrial term loans, lower import of capital machinery, and rise in excess liquidity in the banking system points to lower private investment performance in FY2014.
The donor agencies, however, termed macroeconomic policies broadly prudent and said the restrained monetary policy stance since late 2011 is succeeding in decreasing the inflation rate, which rose in recent months due to the wage push and supply disruptions.
Notwithstanding the elevated target by Bangladesh Bank for private credit growth in its latest monetary policy statement, excess liquidity in the banking system has increased because of lower investment demand created by pre-election unrest.
