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Overcoming our growth challenges

  • Published at 12:00 am November 17th, 2019
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Moving forward through business dynamism, a diversified product market, and greater skills

The latest development update by the World Bank has identified several factors that need to be addressed by Bangladesh authorities to overcome the derailing of economic growth.

They have suggested that GDP growth for this fiscal year could end up at about 7.2%, the second highest in South Asia after Bhutan (7.4%). It has been suggested that banking sector vulnerabilities and uncertain global outlook will cast a shadow on the momentum generated in our economic paradigm.

They have pointed out that the economy looks set to grow at a robust pace in the medium term, but downside risks were primarily domestic in nature.

In this context, they have also acknowledged that private sector credit growth was weak, constrained by banking sector liquidity.

One of the reasons for this is liquidity remaining constrained is because of high default loans that have continued to rise. 

It may be mentioned that economists have pointed out that as of June, the default loan ratio stood at 11.7% of total outstanding loans, up from 10.4% a year earlier. In addition, the default loans are not evenly distributed, with the state banks accounting for almost half of the total -- a result of directed lending, poor risk management, and weak corporate governance and prudential oversight.

Bernard Haven, co-author of the World Bank report, has also observed that “weak governance in the banking sector could impair its capacity to extend credit and support growth if the economy slows down.”

This view has been based on the fact that for the banking sector, the overall and tier 1 capital to risk-weighted assets ratio (CRAR) marginally exceeds internationally accepted minimum requirements. 

The latest stress test by the Bangladesh Bank in December 2018 indicates that credit concentration risk has also become a threat to capital adequacy.

In support of this assumption, it has been observed that “the default of the top three large borrowers results in 22 out of 48 complying banks falling below the minimum regulatory CRAR.”

In addition, it appears that Bangladesh Bank has also made several concessions in the loan classification rules and write-off policies that are a departure from the global norms enacted in 2012 following the Basel III guidelines. This has resulted in affecting the confidence of foreign suppliers on the ability of domestic banks to honour letters of credit payment obligations. 

At the same time, we are having another awkward evolving situation not just because of the rising default loans but also because of the declining deposit growth.

This is also constraining the supply of loanable funds by banks. It is this scenario that has led economists to warn that “increased bank borrowing by the government in such a situation will increase the risk of crowding out the private sector with adverse effects on private investments.” 

They have also drawn attention to the fact that the external risks are also rising, although Bangladesh may look forward to benefitting from trade diversion in the short term.

Such a view is being supported through the contention that escalation of tariffs by the US against China may provide a temporary boost to exports in the short run for Bangladesh if it can capture some of the trade diversion. 

However, on the other hand, slower growth forecast in Bangladesh’s major export markets can also slow down the country’s momentum within this equation. This view is being supported by analysts claiming that euro area growth is projected to fall from 1.8% in 2018 to 1.4% in 2020, while growth in the US is forecast to decline from 2.9% in 2018 to 1.7% in 2020.

Anxiety has also been expressed by the World Bank regarding the possibility of a loss of competitiveness through exchange rate appreciation, because of Bangladesh Bank’s interventions in the foreign exchange market to stabilize the taka-dollar rate.

The World Bank report has also noted that Public Investment Management (PIM) remains a challenge as Bangladesh’s Annual Development Program (ADP) continues to be overloaded with many projects where time for project completion and cost overruns have become omnipresent.

This view on the part of the World Bank has persuaded them to justifiably call for closing the infrastructure gap and timely implementation of ADP.

A note of assurance in our economic growth has been found in the comment made by Mercy Miyang Tembon, country director of the World Bank for Bangladesh and Bhutan: “Bangladesh’s economy is projected to maintain strong growth backed by sound macroeconomic fundamentals and progress in structural reforms.” 

It would be appropriate at this point also to refer to another emerging positive element. Our trade deficit appears to be narrowing on falling imports.

Trade deficit has narrowed slightly in the first two months of this fiscal year, helped by a decrease in imports.

Between July and August, the trade deficit stood at $1.97 billion, down 6.24% year-on-year, according to data from Bangladesh Bank. 

Imports stood at US$8.62 billion, down 2.3% year-on-year. This decreasing trend has, however, been identified as an example of sluggishness within our macro-economic paradigm.

It has also been observed that the export earnings from the garment sector have slightly declined in July and August. This has raised an alarm. It has consequently been correctly suggested that the relevant authorities should explore new destinations more actively to give a boost to the RMG export.

This will be an example of economic diplomacy and should be taken forward by all our diplomatic missions abroad.

Despite all the anxiety, one needs to be able to call the glass half-full and not just half-empty. One needs to remember that despite all the anxiety, Bangladesh Bank data has revealed that the current account balance enjoyed a surplus of $313 million during the July-August period, up from a deficit of $7 million a year ago.

It appears that an increased flow of remittance has played a major role in registering the robust current account. This means that we have the potential for success. The path ahead is difficult.

However, we can overcome the existing challenges by bringing together regulators, policy-makers, trade associations, and development institutions to turn sustainable finance policies into action.

We might have slipped two positions in the latest WEF’s global competitiveness index, but we can move forward again through a more effective business dynamism, a diversified product market, and greater skills created through further investment in the ICT sector.

Muhammad Zamir, a former ambassador, is an analyst specialized in foreign affairs, right to information, and good governance. He can be reached at [email protected]