What lies ahead for Bangladesh economy?

Bangladesh was well on the recovery path after the Covid-19 pandemic, which forced economies across the world into prolonged shutdowns and brought them to a grinding halt.

Bangladesh economy was resilient, with agriculture giving a strong protection against food insecurity. 

Timely government steps helped this resilience. On 4 April 2020, Prime Minister Sheikh Hasina unveiled a Tk72,750 crore stimulus package to address the economic impacts of the coronavirus outbreak.

Now, after some volatility, the forex exchange rate has been stable for the past six to eight months.

Yet, the economy continues to face headwinds with inflation stubbornly high and forex reserves still remaining at a low level. Imports, ranging from capital machinery to raw materials and industrial goods, have experienced a decline for the second consecutive year, largely attributed to the ongoing dollar crisis.

Both GDP growth and job creation show signs of decline and private investment remains stagnant and inequality and poverty are on an increase. Against this backdrop of economic sluggishness, the pressing question looms: What lies ahead for the economy?

Reflecting on the stark deterioration of the economy, which has shifted from a period of stable, high growth with low inflation to its current state, Prof. Mustafizur Rahman, a distinguished fellow at the Centre for Policy Dialogue (CPD), told TBS that despite successfully navigating the challenges posed by the Covid-19 pandemic, the economy has now encountered significant setbacks.

According to Prof. Mustafiz, the recent turmoil can be attributed to the internal fault lines that have long remained unaddressed. Vulnerabilities were exposed following the Russia-Ukraine conflict which escalated commodity prices, freight costs, and disrupted global supply chains.

He pointed out several fault lines including the deterioration of the banking sector, the influx of remittances through informal channels, issues with governance and institutional capacity, low revenue collection, and escalating debt.

"Now our economy's capacity to absorb shocks has weakened significantly," Prof. Mustafiz noted. Persistent high inflation for around two years has reduced the purchasing power of the poor and their living standards as their income did not increase.

According to the World Bank's Macro Poverty Outlook for Bangladesh released last month, it is projected that nearly five lakh Bangladeshis will fall into extreme poverty between FY23 and FY24. This demographic is expected to survive on less than $2.15 per day, with weak private consumption growth and high inflation identified as key drivers of this alarming trend.

4 crore people food-insecure

Quoting the World Food Programme (WFP) report, released in August 2023, Prof Mustafiz said about 24% of Bangladesh's population, equivalent to 4 crore people, were identified as food-insecure. This trend has been observed to steadily increase since May 2023, said the WFP report.

The tightening of imports has had repercussions on production with its spillover effects being felt in investment and employment generation, according to the CPD's distinguished fellow.

Imports continue to decline

Bangladesh Bank data shows a continuous decline in overall imports for two consecutive years. Imports based on FOB decreased by nearly 16% in FY2022-23, and during July-February of the current fiscal year, it saw a further decrease of 15.36% compared to the corresponding period a year ago.

A more alarming concern is the decline in the opening of LCs for imports of capital machinery, which dropped by over 19% during July-February of the current fiscal year compared to the same period of the previous year. Also, imports of industrial raw materials and intermediate goods experienced declines of 4.09% and nearly 17% respectively.

Stagnant private investment a concern

Mustafa K. Mujeri, former Director General of BIDS, a state-sponsored think-tank, told TBS that stagnant private investment, which has historically been the primary driver of Bangladesh's impressive economic growth for over a decade, barring the Covid-19 pandemic year, remains a significant concern.

He asserted that without a substantial increase in both local and foreign private investments, Bangladesh will struggle to sustain economic growth and generate much-needed employment opportunities for the approximately 25 lakh youths entering the workforce each year.

"Also, we have not succeeded in building a dynamic private sector. Instead of being utilised for productive purposes, bank loans are being laundered," remarked Mujeri, also a former chief economist of Bangladesh's central bank.

Regarding FDI, he said that it remains significantly lower – 0.7% of GDP - compared to peer countries like Vietnam (5-6% of GDP), largely due to an unfriendly business environment characterised by bureaucratic red tape and corruption.

Professor Selim Raihan, executive director of Sanem, a private think-tank, told TBS that persistently high inflation is eroding people's purchasing power and savings capacity, as their real income has not increased to match these levels.

On the FDI, he said fresh investments are very insignificant. Those who are already present, they are reinvesting, he said.

"The primary issue with FDI in Bangladesh is that investors encounter challenges when repatriating their profits. Also, a complicated tax regime adds to the hurdles," said Selim Raihan, who also teaches economics at Dhaka University.

Stagnant private investments:

Investment as a percentage of GDP has remained stagnant at around 31-32% over the past one decade. This suggests that despite efforts to promote investment, the level of investment relative to the size of the economy has not increased.

Private investment dominates, accounting for around 23-24% of GDP. The recent decline in private investment to 23.64% in FY2022-23 from its peak of 25.25% in 2018-19 is concerning as it may indicate a slowdown in private sector confidence or investment opportunities.

The economists said the stagnant investment levels could potentially limit the country's ability to achieve higher economic growth rates and improve living standards in the long run.

Now our economy's capacity to absorb shocks has weakened significantly.

Professor Mustafizur Rahman, distinguished fellow at the Centre for Policy Dialogue (CPD)

Savings on a decline:

Both domestic and national savings have decreased over the years. Domestic savings as a percentage of GDP declined from 27.27% eight years ago to 26% in FY2022-23, while national savings declined from 32.11% to 30.22%.

Economists said the decrease in savings reflects challenges faced by households in setting aside funds for emergencies.

Industrial growth on a slow lane:

As a result of the Covid-19 pandemic, industrial production experienced a significant decline in FY20, with growth in the industrial sector slowing to 3.61% from 11.63% in the preceding fiscal year. However, in FY21, the sector experienced a turnaround, with growth increasing to 10.29%. Subsequently, due to the Russia-Ukraine crisis, industrial growth again declined to 9.86% in FY22, followed by a further decrease to 8.18% in FY23.

The decline in private sector credit growth, from 12.62% in January last year to 9.95% in January this year, is indicative of a slowdown in lending to businesses and individuals by banks. Also, industries accounted for over 80% of the country's total bank loans, suggesting a significant reliance on credit for industrial activities.

Increasing ICOR also a concern:

Further accentuating worries, the higher incremental capital output ratio (ICOR) – standing at 5.4 at the end of the last fiscal year – pointed to the country's lower efficiency and productivity. The surge in ICOR signifies that Tk5.4 is required to produce an additional product worth Tk1, a considerable increase from the Tk3.87 recorded in 2018-19.

Targets in five-year plans and reality

Mustafa K. Mujeri pointed out the disparities between the aspirations outlined in five-year plans and the actual achievements.

For instance, he said Bangladesh has set an ambitious target of 8.51% GDP growth for the 8th Five-Year Plan ending on June 30, 2025. Achieving this growth rate requires boosting gross investment to 36.59% of GDP, up from the current 31%.

"But we are way behind achieving the targets, such as GDP growth and investments," he said.

Giving another example, Prof Mustafiz of CPD said in the 7th five-year plan the government set a target to take the revenue collection to 14.5% of GDP from then 9% and foreign direct investment to $33 billion. But the 7th five-year plan ended in June 2020. Now after nearly four years and with just one year remaining of the 8th five-year plan, the country's revenue collection stood at around 8% only, one of the lowest in the world and the annual FDI remains well below $3 billion a year.

GDP growth trend and forecasts:

The Bangladesh economy has encountered numerous challenges stemming from both internal and external factors. After soaring with a 7.88% GDP growth in FY19, the subsequent year witnessed the impact of Covid-19, causing GDP growth to plummet to 3.45%. However, Bangladesh swiftly rebounded, achieving growth of 6.94% and 7.1% in the subsequent two years. Yet, the eruption of the Russia-Ukraine war has presented a greater upheaval to the economy than even the pandemic did two years ago.

The most recent quarterly data from the BBS revealed that Bangladesh's GDP grew by merely 3.78% in the October-December quarter of the current fiscal year. Also, both the World Bank and IMF have projected that the country's GDP growth will linger below 6% for FY24, the ongoing fiscal year.

What is the way out?

In the face of these challenges, economists emphasise the need for policy interventions to invigorate private sector investment, foster savings, and increase investor confidence to propel economic growth and job creation. Without such measures, Bangladesh's ambition to ascend to middle- and higher-income status could remain out of reach, they said.

"The only way to boost GDP and foster growth is by ramping up investments and enhancing productivity," said Prof. Mustafizur Rahman. But that will not happen smoothly as stimulating investments require stable interest rate and macroeconomic stability.

According to Prof. Selim Raihan, without a surge in private investment, Bangladesh cannot sustain long-term economic growth or generate much-needed employment opportunities.

"To stimulate private investments, the government must adopt a comprehensive approach encompassing trade, fiscal, and monetary policies," he stated. "Also, regulatory policies burdened by excessive bureaucracy must be redesigned to be more investment-friendly."

"We know where our problems are and what they are. However, we are not trying to address them," remarked Mujeri.

Prof. Selim Raihan offers a solution to the longstanding challenges facing the Bangladesh economy: "All we require is a robust political will," he said.