by Fahmida Khatun, Executive Director, CPD
While Bangladesh’s macroeconomic indicators have shown positive trends in the 2016–17 fiscal year, its economy appears to be facing a number of challenges. This is of particular concern as Bangladesh prepares to leave the ‘least developed country’ category in 2018.
One of Bangladesh’s major economic accomplishments was achieving a growth rate of 7.28 per cent in 2016–17 and thereby breaking the cycle of 6 per cent growth that has persisted for the last decade or so. Like in previous years, the major boost for growth came from the industrial and service sectors. Another positive was that inflation remained steady at around 5.5 per cent (although food inflation increased towards the end of the year due to damage from flooding).
Other indicators show room for improvement. Bangladesh’s investment target was an increase to 32.7 per cent of GDP in 2016–17. It fell just shy and increased to 30.5 per cent of GDP — a marginal increase from the 29 per cent recorded in 2016–17. More concerning is that the country’s private sector investment has been almost stagnant since 2016 at around 23 per cent of GDP.
The domestic savings-to-GDP ratio increased by a marginal 0.3 per cent in 2016–17, while the national savings-to-GDP ratio declined by 1.2 percentage points to 20.6 per cent. This occurred against the backdrop of a large current account deficit. The decline in the national savings-to-GDP ratio has in turn narrowed the gap between national savings and total investment as a share of GDP for the first time in recent years, which implies that more resources are being utilised.
Low export growth and negative remittance growth in recent times are concerning for Bangladesh’s economy. Export growth in 2016–17 was 1.7 per cent, which is well below the target of 8 per cent. While both textile exports and total exports picked up in the latter half of 2017, higher import growth led to a current account deficit of US$1.48 billion in 2016–17.
Remittances (the other major contributor to Bangladesh’s foreign exchange reserve) are showing fluctuations. In 2016–17, remittances experienced negative earnings growth of –15.9 per cent despite an increase in labour exports. One important reason for this trend is the flow of remittances through informal channels (particularly through the Middle East, Singapore and Malaysia). The strength of the Bangladeshi taka against the US dollar also played a role in these fluctuations.
In 2017, the banking sector exposed further weaknesses: a rise in the volume of non-performing loans, a lower capital adequacy ratio and an overall lack of governance in the sector. The implementation of Basel III — a voluntary regulatory framework aimed at strengthening regulation of the banking sector — is approaching in 2019, and most banks are not prepared. For several consecutive years, the Bangladeshi government has recapitalised its state-owned banks for their losses — an unfortunate example of the government using public money to compensate for the greed of bank defaulters. New laws that allow for more members of the same family to be directors of privately-owned banks and for additional extensions of their tenures are likely to further deteriorate governance in private banks.
The government’s decision to issue licenses to new banks in a market that is already overcrowded with unhealthy banks does not bode well either. This decision is at odds with the central bank’s attempts to improve the performance of the banking sector. The independence of the central bank has gradually diminished due to political influence. If the government does not undertake reform measures, a crisis in the banking sector will become increasingly likely in the coming years.
Another setback in 2016–17 was the government’s inability to implement a value-added tax (VAT) in the face of pressure from the business community. The VAT law was set to be launched in 2017–18, and the government’s backing out will deprive the country of valuable tax revenue.
2017 was a challenge for Bangladesh in terms of geopolitics. Members of Myanmar’s Rohingya minority have fled Rakhine State into Bangladesh in huge numbers since August 2017. This follows a fresh round of torture and killings by Myanmar’s military. About 655,000 Rohingyas have arrived in Bangladesh between 25 August 2017 and 7 January 2018. The humanitarian support currently provided by international organisations may not continue indefinitely. The burden will eventually fall to the Bangladeshi government, which will have serious budgetary implications.
2018 is set to be a turning point for Bangladesh. It is preparing to graduate from least developed country status in 2018 and will set its sights on becoming a higher middle-income country. Achieving these goals will hinge on factors such as accelerating resource mobilisation, achieving higher investment, creating greater efficiency in infrastructure development, investing in skilled labour and strengthening institutions.
Bangladesh has placed significant emphasis on its GDP growth rate. As the country’s policymakers look beyond 2018, they should take greater heed of the quality and distributional aspects of such growth. The incremental benefits from recent growth have accrued to the country’s rich rather than its poor. Higher income inequality is reflected in recent official data that reveal the top 10 per cent possess 38 per cent of Bangladesh’s total income while the bottom 10 per cent have only 1 per cent. Broader development objectives — not narrow growth ones — need to be higher on the economic priority list in the coming years.
Disclaimer: This blog was earlier published in East Asia Forum on Wednesday, 24 January 2018
This article is part of an EAF special feature series on 2017 in review and the year ahead.