Published in The Daily Star on Wednesday 1 January 2020
Following a rather relatively quiet national elections in December 2018, the year 2019 began with the hope of doing better in economic fronts. As it has been the trend during the last couple of years, the economic performance of Bangladesh in terms of gross domestic product (GDP) has been impressive. In the fiscal year (FY) 2018-2019 too, the GDP growth reached 8.15 percent, making the country a superfast economy in the world. However, as the year progressed, a number of pressure points started to unfold. As the curtain of 2019 befalls, the economic strains in some important areas have become prominent. Among those, four significant concerns are highlighted here with suggestions to move forward.
First, the poor revenue mobilisation effort has been the lowest in the region. The deceleration of revenue-GDP ratio started in FYI 2012 which continues till today. Though the average tax-GDP ratio in the Least Developed Countries (LDCs) is about 15 percent (in 2017), in Bangladesh tax-GDP ratio was a mere 9.2 percent in FY 2018-2019. Revenue-GDP ratio was also low at 9.9 percent. This trend, in no way, can assure us that the targets of the Seventh Five Year Plan (7FYP) to achieve 16.1 percent revenue-GDP ratio and 14.1 percent tax-GDP ratio will be achieved by FY 2019-2020, unless a miracle happens. On the other hand, the revenue mobilisation effort is gradually becoming more dependent on indirect taxes. Though during FY 2009- 2015 the share of income tax in total revenue collection was rising, it started to decline since then. So, the tax system is becoming rather inequitable and discriminating towards the lower income groups. An important implication for revenue shortfall is that it limits the government’s ability to effectively allocate more resources for public services and social sectors, such as health, education, and social protection.
Second, the banking sector is now stuck in a quagmire of woes. All parameters of the banking sector indicate its persistent fragility with no sign of revival on the horizon. The most discussed issue in the banking sector is the sky-rocketing non-performing loans (NPLs). In June 2019, the total volume of NPL increased to BDT 112,430 which was 11.69 percent of total outstanding loans. Surprisingly, state-owned commercial banks had NPLs of over 30 percent of their total loans. But NPL is also a problem of private commercial banks. While the share of NPL in state owned commercial banks has been 49 percent in the fourth quarter of FY 2018-2019, the share was 46 percent in the private commercial banks. Along with high NPL, rescheduling and writing-off loans are also on the rise. This may clear the balance sheet, but ultimately it is still a huge burden for banks.
Despite high economic growth, domestic credit growth has remained stagnant since the last fiscal year. In fact, domestic credit growth of 13.46 percent is below the target of 14.5 percent set out in the Monetary Policy Statement of FY 2019-2020 of Bangladesh Bank. More worrying is the significant decline in private sector credit growth. Compared to 14.94 percent in August 2018, this has declined to 10.68 percent in August 2019. As opposed to this, government borrowing from banks has been on the rise due to a slowdown in the sales of National Savings Certificate and, most importantly due to low revenue generation by National Board of Revenue. The government has to resort to huge bank borrowing to finance the mega projects. But delays in such large-scale projects and weak accountability have escalated the cost by multiple times. Such borrowing may have serious implications on the government’s fiscal management.
As it is, the private sector has an inertia to make new investment. Private investment has been stagnant around 23 percent of GDP for the last couple of years. Now that the government has already borrowed 99.5 percent of its bank borrowing target by December 2019, how the private sector will access bank loans in case the government exceeds its targets, will be an issue to be worried about. Also, with low revenue mobilisation effort, government’s ability to repay bank loans is limited. Despite low credit growth, liquidity stress in bank has mounted as deposit grew at a slow rate. This is again due to nearly zero interest rate on deposits when interest rate is adjusted with inflation rate and a cap on deposit rate has been fixed at 6 percent.
Third, the external sector has been exhibiting disquieting trends. The balance of payment (BoP) situation was negative in FY 2018 for the first time since FY 2011. Both current account balance and overall balance during July-October 2019 have been negative. Against the growth target of export by 12.2 percent in FY 2019-2020 during July-November 2019, export sector saw a negative growth of (-) 7.6 percent. Growth of readymade garments (RMG) during this period was negative at (-) 7.7 percent and that of non-RMG was negative at (-) 6.9 percent. There has been declining share of RMG products in the US market. In the non-traditional markets, that is, beyond the USA and the European Union, export has been very low. Both product and market diversifications have been emphasised time and time again. The issue of depreciation of Bangladeshi Taka against US Dollar has been strongly advocated in view of other competing countries’ currency depreciation. However, as an import dependent country, policy makers also have to do forex management prudently as we also have to import. More important issue here is increasing productivity through efficiency. Incentives to the RMG sector cannot be a never-ending practice, especially when the sector has improved and matured so much. Other export sectors should also be given opportunity if we want export diversification.
Imports have also seen a decline in 2019. This has led to a wider trade gap. Imports of capital machinery, industrial raw material, and fuel oil have declined. One of the implications of reduced imports of capital machinery by (-) 18.4 percent during July-October 2019 is less investment made by the private sector.
Fourth, the high growth has not been inclusive and job creating. Consumption and wealth inequality are high and job opportunities are limited for youth and women. While growth without investment could not generate employment for the educated youth, the employers also do not find those youth suitable for available jobs. The mismatch between the supply and demand of the young labour force should be minimised by a thorough review of the curriculum and providing more focus on needs of the job market.
Of course, amid many negative signs of the economy, growth of remittance by Bangladeshis working abroad has been a happy one. Without high remittances BoP deficit would have been higher. A worrying sign, however, is the reduction in the number of workers going abroad. While the government needs to explore new markets proactively, skills upgradation of workers is a must.
In sum, despite high growth and better remittances, Bangladesh economy in 2019 has passed through a number of stresses. The fiscal space has shrunk with limited efforts of domestic resource mobilisation and excessive bank borrowing. Financial discipline has been broken through cost escalation of mega projects and ailing banking system. The outlook for the economy in 2020 will depend on whether and how structural and institutional reforms will be undertaken by the government. Can the government do away with the inefficient system and continue to take stern measures against corruption? These will be important political decisions. As the country steps into a larger landscape of a developing country and an upper middle-income country, these issues will continue to haunt the economy every day. If these fundamental issues remain unaddressed for long, the economy will lose its sheen today or tomorrow; because high growth means nothing if it does not change the lives of each and every member of the society.
Dr Fahmida Khatun is the Executive Director at the Centre for Policy Dialogue.