What are the opportunities and challenges ahead?
Bangladesh is the one of the fastest growing economies in the world currently and projections suggest that it will be the 28th and 23rd largest economy by 2030 and 2050, respectively, from its 43rd position currently.
The country has achieved an impressive average annual GDP growth rate of 6.3% between 2007 and 2017. The GDP of Bangladesh is poised to increase by 7% on an average between 2018 and 2033, according to a forecast prepared by Centre for Economics and Business Research (CEBR).
There has been significant reduction in extreme poverty to 12.9% (in 2016) from 44.2% (in 1991). With rising per capita purchasing power and growing household income levels, Bangladesh is poised to become a middle-income country by 2021.
In addition, Bangladesh is making substantial efforts to maintain macroeconomic stability, strengthen revenue mobilization, tackle energy and infrastructure deficits, support an expanding financial sector and external trade reforms, and improve existing labour skills. The country is also working on economic governance, urban management, and adapting to climate change.
Opportunities arising out of structural changes
The composition of the economy is shifting from being largely informal and agrarian to a manufacturing based one. Bangladesh has a young population with more than 40% in the working age group (24 to 54 years) and another 47% under 24 years of age. Coupled with the sustained economic growth in recent years that has generated higher demand for electricity, transport, and telecommunication services, and a growing labour force, Bangladesh presents enormous opportunities for investment.
Strong consumption and public investment, recovery of ready-made garments (RMG) export and high remittance growth were identified as the main propellers of economic growth.
Real public investments increased by 10.5% and merchandise imports by 25.2% as well. All these factors have been contributing to the growth of the country, and in turn are resulting in a sharp increase in domestic consumer demand. This is also an indication of prosperity as Bangladesh citizens begin to show an obvious preference for better quality goods and in greater volumes.
As of 2017, Bangladesh secured the position of being the 42nd and 58th largest economy globally in terms of purchasing power parity and in nominal terms respectively. This is reflected in the fact that the market for consumer durables and other value-added products is also on the rise, bolstered by the rising per capita income and growth of the middle-class population.
Moreover, Bangladesh is pursing stronger multilateral ties with India, Bhutan and Nepal while collaborating with China on the regional Asian Highway and “One Belt-One Road” initiative. Bangladesh’s initiative to establish international ties will facilitate more investment and global collaboration.
Post-RMG export-led growth
Bangladesh has had remarkable success in exporting ready-made garments (RMG). In 2017, exports earnings accounted for 15.03% of national GDP, and the RMG sector contributed to 83.5% of export earnings. However, the growth rate of RMG exports has decelerated over the last three years dropping to 7.8% from 8.2% the previous year. Furthermore, the sector’s potential to create new jobs is also waning. The Job Diagnostics 2016 report states that jobs in the RMG sector grew by only 6% every year, between 2010 and 2013, even as the export output from RMG grew at an annual rate of 15% during the same period.
This slowdown has resulted in a renewed focus on export diversification into other high potential sectors such as footwear, leather goods and products, pharmaceuticals, software and IT-enabled services, jute, agro-products including agro-processed products, and plastics.
Leveraging the opportunities presented in Bangladesh is not without its challenges. The main issues can broadly be broken down into constraints around workforce quality, access to finance and logistics and transportation. A brief treatment of each follows.
Bangladesh is a beneficiary of the demographic dividend but skills mismatch holds the productivity levels back. The country has a large pool of unskilled workforce migrating from agriculture to labour-intensive industries.
Skilling of workforce is a major challenge as is providing adequate in-house and on the job training. Most manufacturers have to hire unskilled workers and train them on the job under the supervision of a skilled worker. The attrition rates are also high among trained workers, given the high demand for skilled workers.
The institutional arrangement and infrastructure available for training and skill development is not sufficient to meet the current and future demands of Bangladesh economy. Public and private sector partnerships can play a major role in upgrading skills in the country.
Bangladesh Industrial Technical Assistance Centre (BITAC), the existing training institution, needs to be upgraded to offer quality courses. Further, technical and vocational education and training (TVET) offered by government and non-governmental organizations (NGOs) has grown over the last two decades, but the share of women enrolments has remained low. A robust skills development ecosystem with participation from industries and well-funded training programs is needed to address the shortage of skilled assembly line workforce.
Access to finance
The 2020 Ease of Doing Business index revealed that Bangladesh ranked 119 out of 190 countries in getting credit. Financial institutions are often found to be more interested in short-term financing because of liquidity risk arising from funding of long-term loans with typically shorter-term deposits.
Moreover, the interest rates are high and the terms and conditions are often onerous. Trade credit is another important source for working capital firms, which are also not available at affordable rates. Moreover, the collateral requirement for bank loans is relatively high in Bangladesh as compared to other low-income countries. However there have been improvements recently, specifically expanded coverage by the credit information bureau which has the expanded credit information space.
Logistics and transportation
Shipping transit times to and from major ports in Bangladesh are not competitive because of poor navigability. In addition, an inefficient rail network and an overburdened road network leads to high logistic costs. Multimodal connections between the ports and the hinterland, including rail services, air shipment capacity and reliable highway road networks, are not fully developed. Bangladesh ranks 100 out of 160 countries in the World Bank Logistics Performance Index.
However, these challenges are being steadily addressed in and of themselves present opportunities for growth and development.
Mamun Rashid is a Partner at PwC Bangladesh. This is the excerpt of a panel discussion at Credit Suisse Entrepreneurs Conference held in Dhaka.