Bangladesh economy in 2017 and the way forward

By Fahmida Khatun
Published in The Daily Star on January 02, 2018

For Bangladesh 2017 has been a mixed year of achievements and challenges. Though some macro indicators reflect the positive trends, the overall strength of the economy is weakening due to a number of developments toward the second half of the year. One of the major achievements of the economy has been a 7.28 percent economic growth in FY 2016-17 breaking the six percent cycle that continued for a decade or so. Like previous years, major boost of growth has come from the industrial sector followed by the services sector. Though average inflation has been around 5.5 percent, food inflation is showing an increasing rate in recent months, mainly because of agricultural loss due to two rounds of flood.

Investment is a major impetus to Bangladesh’s growth. Target was set to increase investment to 32.7 percent of GDP in FY 2016-17, keeping in mind the need for a growing economy. In FY 2016-17, investment as a share of GDP went up to 30.5 percent, a marginal increase from 29 percent in FY 2015-16. However, the private sector’s investment has been almost stagnant since FY 2015-16 hovering around 23 percent. The major boost has come from the public sector that saw an increase to 7.4 percent in FY 2016-17 from 6.7 percent in FY 2015-16.

Domestic savings-GDP ratio increased by only 0.3 percent in FY 2016-17 while national savings-GDP ratio declined by 1.2 percentage point to 20.6 percent in FY 2016-17 from 30.8 percent in FY 2015-16 in the backdrop of the large current account deficit. This has narrowed the gap between national savings and total investment as a share of GDP for the first time in recent years, which otherwise displayed a gap implying that resources are not fully utilised.

The external sector has been a source of strength for the Bangladesh economy for several years. This has changed in recent periods. Export growth in FY 2016-17 was only 1.7 percent as opposed to the target of 8 percent. A glimmer of hope is in the horizon with both RMG and total exports picking up during July-December of FY 2017-18. However, imports growing at a higher rate than exports led to a negative current account balance that continued during July-October of FY 2017-18. In FY 2016-17 remittance earning growth experienced a negative growth of (-)15.9 percent despite increase of manpower export. One important reason for low remittances despite high growth of manpower exports is the flow of remittances through informal channels. Strong Bangladeshi Taka against the US Dollar also played a role for low export and remittances growth to some extent. Though remittances have started to pick up in recent months it is not significant since it was negative during the last fiscal year.

In 2017, the banking sector exposed further weaknesses through major indicators such as rise of non-performing loans, lower capital adequacy and the overall lack of governance in the sector. Though the period of BASEL III implementation is approaching in 2019, most banks are not prepared. The government has been recapitalising the state-owned banks for their loss every year without any fruition. This has been an unfortunate example of using public money towards compensating for the greed of bank defaulters. The proposed law allowing more members of the same family to be directors of the privately-owned banks and extension of their tenure are apprehended to further deteriorate the governance in private banks. Despite the central bank’s attempt to improve performance of the banking sector, improvements are not visible yet. The independence of the central has been gradually diminishing due to political influence. If reform measures are not taken, the crisis of the banking sector will have serious implications for the economy.

Another setback in FY 2016-17 was that the government backed out from passing the value added tax (VAT) law which was all set to be launched in FY 2017-18. Meeting the target for domestic resource mobilisation has thus become challenging.

From a geo-political point, 2017 has been most challenging for Bangladesh as the Rohingyas from the Rakhine state of Myanmar started to flee to Bangladesh from August 25, 2017 onwards following a fresh round of torture and killings by the Myanmar army. Rohingyas moved into Bangladesh in thousands every day, bringing their number in Bangladesh to one million in total if the previous influx of the seventies and the nineties are taken into account. Though they are supported by the international community, some fiscal burden will befall the government of Bangladesh which will have budgetary implications.

The year 2018 will be a turning point for Bangladesh in many ways. Bangladesh will prepare to graduate from the least developed country status in 2018. It will also continue its efforts toward becoming a middle-income country. Additionally, it will continue to implement the sustainable development goals (SDGs). These will hinge on a number of factors such as accelerated resource mobilisation, higher investment, efficiency in infrastructure implementation, skilled human resources and strong institutional set up.

Lastly, Bangladesh has placed significant emphasis on the growth rate of its gross domestic product while the quality and distributional aspects of GDP growth have been overlooked. Incremental benefit from such growth has accrued to the rich rather than the poor. It is disturbing to note that top 10 percent possess 38 percent of Bangladesh’s total income while the bottom 10 percent only has one percent of the total income of the country. High growth is yet to be translated into generation of enough income for the poor, creation of employment, access to quality education and better healthcare for all, and above all, reducing income inequality. In the coming years, policymakers must make broader development goals their objectives instead of being overwhelmed by narrow growth targets.