Published in The Daily Star on Thursday, 1 January 2015.
Bangladesh economy: Looking back and looking forward
Dr. Fahmida Khatun
The year 2014 saw some stability in Bangladesh both economically and politically following the general elections in January. This phenomenon along with a couple of global developments has influenced the economic landscape of Bangladesh. The present write up provides a brief overview of some of the important features of Bangladesh economy during the bygone year and prospects and challenges for 2015.
During January-June 2014, the last half of fiscal year 2014, the growth engine exhibited slight progress whereby gross domestic product (GDP) rose from 6 percent in FY2013 to 6.1 percent in FY2014. The main impetus for higher growth was a rise in public investment that rose from 6.6 percent of GDP in FY 2013 to 7.3 percent in FY2014. However, due to prolonged political disruptions during the last part of calendar year 2013, private investment declined to 21.4 percent of GDP in FY2014 from 21.8 percent in the previous year. Private consumption, another important component of GDP, has declined by 1.5 percent due to lower remittance inflow. Export earnings increased at a higher rate than imports and export-GDP ratio increased in FY2014 while import-GDP ratio declined. National savings and domestic investment showed the same trend, that is, savings were much higher than domestic investment indicating lower utilisation capacity of the economy. In terms of sectoral contribution to growth, industry played the main role though the share of industry in GDP declined this year compared to last year. However, both agriculture and services have also buoyed the GDP growth with better performances.
During July-November of FY2015 exports declined by 5.23 percent as the performance of major export items including ready-made garments (RMG) was disappointing. Such slow growth of exports implies that exports have to grow at a higher rate than the targeted 10 percent for FY2015. RMG exports achieved a negative growth during July-October 2015 against the target of 9.8 percent in FY2015. It is expected that in the coming month RMG exports will pick up with new orders placed by international buyers. However, prices of RMG have declined due to low cotton prices and Rana Plaza incident. Remittances are the silver lining in the external sector. This is likely to boost domestic consumption. Implementation of Annual Development Programme (ADP) during July-September of FY2015 has been 8.7 percent of total allocation compared to 10.6 percent during the same period in FY2014. Net foreign direct investment (FDI) looks slightly brighter during July-September of FY2015 compared to last fiscal year. However, net foreign aid has been significantly lower during July-September FY2015 than the same period in the previous year.
Though in June 2014 inflation rate came down to lower than 6 percent, the overall inflation during FY2014 went up to 7.5 percent against a target of 7 percent in the Monetary Policy Statement (MPS) of Bangladesh Bank announced in January 2014. High food inflation led to a higher inflation. This was mainly due to disruption of food supply during the period of political turmoil. The MPS of June 2014 set 6.5 percent as the target inflation rate in FY2015. In October 2014, point to point inflation came down to 6.6 percent and average inflation also came down to 7.18 percent, mainly driven by low non-food inflation. Though domestic production, particularly that of rice influences output and price stability, inflation in Bangladesh is also largely determined by international prices since the country has to depend on a number of essential commodities including petroleum products. Hence lower prices of food and oil at the international market at present has been a prominent factor for low inflation rate.
Revenue mobilisation effort fell short of the target in FY2014 and continues to get slower during July-October of FY2015. The National Board of Revenue (NBR) targeted 24.2 percent growth in revenue collection against which the achieved growth is 15.9 percent during July-September of FY2015 implying that revenue collection effort by NBR has to grow by 26.4 percent during the remaining period of the fiscal year. Growth in revenue collection through income tax is set even at a higher rate, but the collection is only 15.3 percent during the aforesaid period against a target of 31.8 percent for FY2015. This again requires vigorous effort during the rest of the year to grow by 35.2 percent to cover the shortfall. The contribution of Value Added Tax (VAT), particularly from domestic sources is also not promising since there are loopholes for evasion. The new VAT and Supplementary Duty Act 2012 aimed to make changes for a more comprehensive and user-friendly way of VAT collection was supposed to be effective from July 2015. However, in view of concerns expressed by a number of stakeholders its implementation has been delayed. The implementation of the new VAT Act of course will require capacity building and training of human resources so that tax can be collected more efficiently through increased automation.
Follow up of Rana Plaza incident:
The tragedy of Rana Plaza disaster due to the collapse of a building used as RMG factories has been attempted to be appeased through various measures that aim to improving safety standards of building and working condition and establishing worker rights in the RMG industry. A National Tripartite Plan of Action and other initiatives such as Alliance by buyers and retailers of North American countries and Bangladesh Accord comprising retailers and buyers of the European Union markets have been looking into fire and building safety and workers’ safety. Bangladesh Accord inspected more than one thousand factories and found that there were improvements in terms of working conditions of factories from where they buy clothes. Less than 2 percent of the inspected factories were found to be risky and suggested to be closed temporarily. Alliance for Bangladesh Worker Safety and National Fire Protection Agency (NFPA) inspected all factories from where its members purchase clothes.
Its activities include providing training on safety to more than one million factory managers, workers and security personnel, compensation to displaced workers due to remediation of half of the their factories.
Resources for compensating the victims have been committed from various sources including the government, RMG manufacturers, buyers and donors. The Rana Plaza Donors Trust Fund managed by the International Labour Organization mobilized little less than half of the estimated requirement of USD 40 million to compensate a total 2,849 claims from families of victims and the injured survivors. While the first batch of claimants received compensation in October 2014, the rest remain worried for receiving their share.
Bangladesh is eying at earning USD 50 billion through RMG exports by 2021. Given the potential of the sector and the past growth trend, this is quite a possibility for the country. Along with meeting up compliance requirements, this ambition will have to be backed by improved power supply, and infrastructural facilities. Technological upgradation, skills development and market search are also a continuous process for the growth of the sector.
Another worrying year for the banking sector:
The banking sector continues to cast shadow on the overall economic scenario through malpractices and inefficiencies. Low pick up of investment led to low credit growth in the banking sector. Till June 2014 domestic credit grew by only 11.6 percent against the target of 17.8 percent in MPS. Actual growth of domestic credit up to September 2014 was 12.3 percent while the target for December 2014 is 13.8 percent. Both credit to the public and private sectors has been sluggish during those periods. In September 2014 interest rate spread was 5.1 percent, a decline from 5.3 percent in June 2014. Despite demands for lower interest rate, banks in Bangladesh charge high lending rates. Similarly, the deposit rate is also high in Bangladesh due to which banks are reluctant to lower lending rates. The central bank has directed commercial banks to keep the interest rate spread within 5 percent, which is not followed quite often. Commercial banks claim that it is difficult to lower interest rate due to high cost of capital which is the result of inefficiency, high risks and low profitability of the sector.
Lower growth in credit coupled with increasing trend of non-performing loans (NPL) has worsened the performance of the banking sector. During January-September 2014 both classified loans and NPL have increased. Low capital adequacy and poor asset quality of banks are also worries of the State Owned Commercial Banks (SCBs). Primarily due to rise in default loans, capital adequacy ratio of SCBs fell by around 9 percent against their risk-weighted assets as opposed to the required level of 10 percent as of June 2014.
With the objective to improve their capital base, in addition to recapitalization of SCBs by injecting Taka 50 billion in FY2014, the government has also made budgetary allocation of Taka 55 billion in FY2015. However, the core problem of the banking sector lies in inefficiency, weak monitoring, political influence and above all, lack of governance. These are manifested through rescheduling of loans and extension of repayment period for the powerful ones. Rescheduling of these loans may do temporary window dressing to show lower NPL, but the fragility of the sector continue to exist. Hence, allocation for the loss making banks by the government is tantamount to subsidizing the sector for their malpractices and fraudulent at the cost of the common people.
Capital market, the forgotten woe:
Though capital market has been relatively stable during FY2014, it has not recovered from the wounds that it suffered in 2010. A number of regulatory measures have been taken by policymakers including the amendment of the Securities and Exchange Commission (SEC) Act that took away the subordination of SEC to the Ministry of Finance and preparation of corporate governance guidelines. The Asian Development Bank implemented capital market development programme during 2011-14 for undertaking reforms for the sector. It may be a little premature to observe any visible impact of such measures, but capital market needs greater transparency and accountability to reduce its vulnerability. Unfortunately, we are yet to realize the fact that in order to mobilize resources for an emerging economy such as Bangladesh and gain the capacity to absorb any domestic and global shocks, diversification of financial instruments is a must.
Global oil market and Bangladesh:
Global oil prices have gone record low during the last several months. Lower oil price in the global market is a blessing for Bangladesh as it can save foreign exchange which in turn can be used for other imports. While Bangladesh is in the process of rationalising oil prices through phasing out subsidies and hiking its prices commensurate with the global price, a subdued global petroleum market would imply lesser subsidy requirement. Savings from lower subsidies could otherwise be used for infrastructure development and social protection. A depressed fuel price also provides leverage for the government to keep domestic fuel prices low which in turn will give some respite to consumers, particularly the low and fixed income groups who can then spend their savings for other purposes. Low petroleum prices also help domestic inflation to be low since a significant amount is spent on petroleum products by consumers in Bangladesh.
Globally, such low oil prices have been pushing down inflation below the target. This has affected the manufacturing prices causing deflation in many countries. During such period exporting countries could face low demand which may cause lowering of export prices. Bangladesh depends on RMG exports and remittances through temporary migrants abroad for high foreign exchange reserves. If oil rich countries plan to cut down their apparel imports and reduce employing foreign labour, it will seriously hurt countries such as Bangladesh. Thus the country will need to be cautious and strategise its position to face any such sputtering situation. Proactive role to gain duty free market access to developed and advanced developing countries, diversification of products and markets and skills development of workers are some of the measures that should be undertaken by the government.
The brief overview indicates that the economy could not pick up the steam in 2014 due to a number of challenges. Maintaining macroeconomic stability, increasing efficiency in project implementation, particularly that of the infrastructure and improving governance are some of these challenges. While the upcoming year will not see many changes in case of these challenges, the economy is expected to show a glimmer of hope in terms of higher GDP growth given the relative economic and political stability. However, achievement of the targeted growth of 7.3 percent as spelt out in the budget of FY2015 will require vigorous efforts for boosting investment through gaining business confidence and increased commitments towards reforms, among others.
The writer is the research Director at the Centre for Policy Dialogue (CPD).