Published in East Asia Forum on Wednesday 29 January 2020
Bangladesh began 2019 with a renewed hope that its newly elected government would bring in political and economic changes as promised in its election manifesto. Although the economy has maintained high GDP growth, electoral promises remain unfulfilled in several critical areas. Many old woes continue to hamper the economy: a weak fiscal balance, a fragile banking sector and a shaky external sector.
Apart from high economic growth, the other silver lining of the Bangladesh economy is robust growth in remittance income. This helps maintain Bangladesh’s low current account deficit. But exports and imports performed poorly last year, with export growth negative from June to November.
The textile sector — the main driver of exports in Bangladesh — experienced a larger decline than non-textile products, causing an overall dip in total exports. Amid the US–China trade war, Bangladesh’s textile sector could not capitalise on the opportunity to increase exports to the United States, mainly due to a lack of supply side capacity and product diversification. Currency devaluation in competing countries such as India and Vietnam also contributed to Bangladesh’s poor export performance.
But as an importing country, Bangladesh’s policymakers are cautious about devaluing the Bangladeshi taka against the US dollar because they want to avoid imports becoming too expensive. Imports declined in 2019 and capital machinery imports were negative, indicating low investment. Private investment has been stagnant at around 23 per cent of GDP for the past few years. As a result, new job creation is limited and youth unemployment is 10.6 per cent. High economic growth also failed to reduce inequality, instead consumption and wealth inequality have widened.
Bangladesh has the lowest tax-to-GDP ratio among South Asian countries at 9.2 percent in the 2018-2019 fiscal year. The high target of resource mobilisation set for the National Board of Revenue (NBR) remains unfulfilled. Not only is the tax net narrow, tax avoidance is also high. NBR automation, human resource development and, above all, institutional autonomy and transparency are crucial for high revenue mobilisation efforts. The tax system has shifted towards indirect tax instead of a direct, progressive tax system.
Due to limited resource mobilisation, the government depends on bank borrowing to finance its development programmes. Several mega infrastructure projects are underway, including the Padma multi-purpose bridge, a mass rapid transit system, an LNG terminal and several power plants and deep sea ports. But delays in the implementation of these high-value projects have hugely increased their cost. By December 2019—only halfway through the fiscal year—the government had almost reached its planned bank borrowing target. So, the government will face major fiscal challenges in managing expenditures and continuing development initiatives.
The most significant challenge for the economy is the weakening of the banking sector. Presently, banks are facing a liquidity crunch. This is mostly due to banks holding large amounts of non-performing loans (NPLs). NPLs accounted for 11.69 percent of total outstanding loans last June, and many of these are due to wilful defaulters.
Making things worse, policymakers have granted leeway to the defaulters. The central bank has lost its independence, and now functioning under the direction of external political forces, provided perverse incentives to loan defaulters. One example is the rescheduling facility. Last May, the central bank announced that it would allow loan defaulters to pay only a 2 percent down payment to reschedule their loans, extending the repayment period to 10 years, with a one-year grace period. Such undue benefits, granted to incentivise defaulters, also discriminate against good borrowers.
The government tried to rescue state-owned banks by recapitalising them every year for the last decade. But this has not improved the performance of state-owned commercial banks, where NPLs account for over 30 percent of their total loans. Private commercial banks have also been afflicted by a loan default culture and experienced various scams.
But instead of letting the poorly performing banks die a natural death, the government provides them with funding. The internal governance of banks is also sometimes weak and needs to be strengthened through monitoring and technological adaptation.
Bangladesh’s 2020 economic outlook will largely be determined by its performance in 2019 and the policies that its government pursues. A short-lived drive against corruption last year created a ray of hope for citizens. Such clampdowns on corruption must be continued and encouraged. Until now, policymakers have largely been averse to structural and institutional reforms needed to improve the economy.
What has been ignored and denied is that Bangladesh’s growth story cannot take the country far unless it is translated into sustainable development. Cracks in the economy became prominent in 2019 and will remain in place unless they are addressed.
This year, Bangladesh will celebrate the centennial birthday of its founding father, Bangabandhu Sheikh Mujibur Rahman. The greatest respect can be paid to him through fulfilling his dream of establishing a just and equitable society.
Dr Fahmida Khatun is Executive Director of the Centre for Policy Dialogue.
This article is part of an East Asia Forum special feature series on 2019 and the year ahead.