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The Enigma of Bangladesh’s Economic Success

Bangladesh has been marred by tragedy including: the 1971 Liberation War, poverty, natural disasters—and now—one of the world’s largest refugee crises after receiving an influx of 750,000 Rohingya Muslims who fled persecution in neighboring Myanmar.

However, with remarkably little international attention, Bangladesh has also become one of the world’s economic success stories.

From mass starvation in 1974, the country has achieved near self-sufficiency in food production for its more than 166 million people. Per capita income has risen nearly threefold since 2009, reaching $1,750 last year.

Meanwhile, the number of people living in extreme poverty—classified as under $1.25 per day—has shrunk from about 19 percent of the population, to less than 9 percent, over the same period, according to the World Bank.

While all of these projected a sunny and shiny side of Bangladesh’s economic progress, there are other sides of the coin.

The economy of this South Asian nation is also counting enormous opportunity costs from a slide in revenue collection, growing soured loans and the tanking capital market. And the situation is only compounding because of a weak export performance.

For example, if Bangladesh could meet its revenue target in the last fiscal year, it could finance three more Padma bridges in a single year. Or alternatively, it could have a super health system four times stronger than today’s, or could double the money in education or social protection.

To add up to the lost opportunity, the banks’ piling default loans could build seven power plants like the 1,300MW Rampal plant. Or build five metro rails in Dhaka or even three power plants like the 1,200MW Matarbari project.

And the falling capital market has failed to become an alternative funding source for companies, putting more and more pressure on banks.

This is how the Centre for Policy Dialogue (CPD), an independent think-tank, highlighted the need for urgent reforms in the four areas that have been showing signs of great stress in fiscal year 2019-2020.

“The story of Bangladesh’s economic growth has become like a kite not attached to its string and spool,” DrDebapriya Bhattacharya, distinguished fellow of the CPD, said at the launching of the centre’s report titled “The State of the Bangladesh Economy” on November 3.

“The data on GDP growth show no connection with the reality,” he said at the event.

CPD analysis also said a lack of good governance and reforms has put the Bangladesh economy under the most severe strain it has faced in the last decade.

The fault lines in the economy are getting deeper and need to be fixed; otherwise the country’s economic growth cannot be sustained in the coming years, the think tank said.

A problematic banking sector

CPD executive director Dr Fahmida Khatun said there were no visible steps taken by the government to get the country’s banks out of their current difficulties.

In recent times, she said, the number of private loans had dropped, liquidity crisis had deepened, and a cap on the deposit and lending rates had not produced the desired results.

She also said the amount of default was increasing alarmingly along with an increasing tendency to write off loans and loan scheduling.

Khatun said increasing non-performing loans (NPLs) were eroding people’s confidence in the banking sector.

The NPLs stood at Tk 112,430 crore, which was 11.69 percent of total loans, as of June this year. Quoting the International Monetary Fund’s recent report, she said such stressed assets of the banking sector would be more than Tk 2 lakh if written-off loans and the amount pending with the court cases are taken into account.

Besides, low interest rates are putting off depositors. The interest rate on deposits is almost zero percent if adjusted for inflation, she said.

Citing research done by the think-tank, Khatun said there were “serious capital inadequacies” in the banks.

Bangladesh Bank’s guideline on a risk-based capital inadequacy states that banks must maintain a minimum total capital ratio of 10 per cent. However, most commercial banks, she pointed out, had failed to maintain the minimum requirements of capital inadequacy.

Khatun said capital inadequacy would not improve unless non-performing loans were reduced, resulting in a capital shortfall.

She also said rescuing banks through recapitalization had been futile. “Recurrent recapitalization of state-owned banks by the government has emerged as an issue of grave concern, as the performance of the banks is not improving,” she noted.

The CPD said it was estimated that the government had spent Tk. 15,705 crore in recapitalizing the banks during the FY 2009-2017 period. “This amount would be sufficient for building four deep sea ports like Payra,” Khatun said.

She also said the government had come forward to rescue the Farmers Bank Limited (now Padma Bank) with a package of Tk. 1,100 crore.

“This has set a bad example and will encourage banks involved in irregularities,” she added. “These problems suggest that an overall reform of the banking sector is urgently needed,” she noted.

A stagnated revenue mobilization

Towfiqul Islam Khan, a senior research fellow at the CPD, said revenue mobilization in Bangladesh had not been commensurate with its rapid economic growth.

“Income tax evasion is high in Bangladesh—thus undermines income equality and development finance,” he observed.

He also said neither the revenue collection target nor the expenditure goal would be achieved in the next fiscal year as both the goals were much higher than those for the current fiscal year.

Towfiqul said that in keeping with the Seventh Five Year Plan target, the government would collect 14 per cent of the GDP as taxes cannot be implemented. “In a developing country, at least 15 per cent of the GDP is collected through taxes. But that’s only 9.9 per cent here,” he added.

He also said people did not yet have a clear idea of how the government would implement the new VAT law and how VAT would be calculated.

He further said without the automation process, the NBR would not be able to substantially raise revenue income from value added tax.

“The tax target should be realistic to ensure the fiscal balance,” he added.

A tanking capital market

The country’s capital market is mainly suffering from a lack of governance – not a shortage in the supply of money, said the CPD.

At the briefing, CPD Research Director Dr Khondaker Golam Moazzem said, “The majority of the stakeholders have a tendency to label the crisis in the capital market from a ‘liquidity shortfall’ point of view.”

“The government has tried to address the challenges here through a number of fiscal and budgetary measures. But the situation has proven that the market did not respond to such measures, like injection of capital, undertaken since January 2019,” he added.

DSEX, the key benchmark at the Dhaka Stock Exchange came down to a three-year low in October, despite a series of government initiatives to bolster investor confidence.

In fact, the stock market is suffering because of a weakness in institutions and weak governance in the market, said Moazzem.

The CPD also pointed out that poor quality of initial public offerings (IPO), anomalies in financial reports, lack of transparency in Beneficiary Owners (BO) accounts, suspicious trading in the secondary market, and the questionable role of institutional investors, are contributing to the crisis in the share market.

Referring to the fall in recent quarters, Moazzem said that “increased market volatility has further aggravated the crisis.”

Volatility refers to sporadic price swings that destabilize a market, and investors during such phases lose confidence in investing more, or hold on to what they own.

The CPD says that market volatility in July-October 2018 was at 100.5, and this increased to 163.3 during the same quarter this year. The higher it reads, the more the market is destabilized.

For the ongoing volatility in the capital market, the CPD blamed lower level of dividends offered by listed companies this year, abnormal rise of prices of junk shares, forced sale of shares from BO accounts with margin loan, institutional investors’ dormant role during volatility, and no visible impact of the DSE’s strategic partnership with the Chinese consortium.

Alarming trend in export-import

Identifying another area of concern, Mustafizur Rahman, a distinguished fellow of the CPD said the country’s foreign exchange reserve to cover the import bills had been declining for the last few months, which was not a good sign.

Bangladesh is falling behind its major competitors in the key market of the US, he said.

The country’s export growth in the US in the first two months of the fiscal year was 3.1 percent, whereas Cambodia posted a growth of 8.20 percent, China 4.90 percent, Turkey 10.30 percent and Vietnam 11.70 percent. The government should take steps to strengthen the capacity of exporters by depreciating local currency, Rahman said.

He also said for the first time since FY10 the growth of exports in the first quarter has been negative in the current fiscal year.

Except for foreign remittance, no other external indicator is positive while the share of the sector is about 40 percent of the economy, Rahman added.

If this trend continues over the rest of FY20, the overall balance, forex resources, and exchange rate will come under increasing pressure, he added.

“In view of this, maintaining a competitive exchange rate, reversing the negative export trend and ensuring a robust flow of remittances and replenishing the forex resources will be required to maintain a robust balance of payment and ensure overall macroeconomic stability,” according to the CPD analysis.

Rahman also said the continuation of current remittance inflow is challenging as labor market has been going through volatility worldwide.

“Although remittance earning has been slightly positive, many workers are returning from the traditional labour markets,” Rahman added.

The CPD identified that the declining forex reserve will constrain the central bank’s capacity in trade and exchange rate management. The forex reserves, following rapid rise between FY11 and FY17 remained stagnant.

As of September in FY20, it has come down by about $1 billion compared to the corresponding time of FY19, according to its analysis.

Finance Minister criticizing the CPD analysis

Finance Minister AHM Mustafa Kamal has criticized Centre Policy Dialogue (CPD) for its remarks that the ratio of private investment to GDP has been hovering around 23 per cent for the last few years.

“It is proved whether the GDP growth is improved if we see the poverty reduction rate over the last some years. Once upon a time, the rate was 56 per cent but now it is 20 per cent,” he said.

GDP growth would not have increased, if the rate of poverty was not come down, the minister said while talking to reporters at his office in Dhaka on November 4.

Over the country’s current export growth, Kamal said the growth rate in export has reduced not only in Bangladesh but also in all countries all over the world.

“We are trying to increase the volume of export growth,” the finance minister said.

When the growth in export will start rising in any country in the world, it will also increase in Bangladesh, he said.

The minister said the CPD always criticizes the country’s bad side instead of highlighting its good side.

If CPD gives a negative message about the country, other competitive countries of Bangladesh will cash it, said Mustafa Kamal, adding that they should highlight the country’s achievement.

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