© bdnews24.com/md asaduzzaman pramanik
With the next general elections just two years away, the key challenge for the ruling Awami League government is to make good on its promises to deliver the 2021 targets. The much-vaunted Vision 2021 that propelled the party to power through the December 2008 elections has a lot to do with the how the country fares on the economic front.
The level of investments has always been a cause for concern, but the economic managers have done quite well and stayed on course with regard to growth and inflation. Brexit troubles have yet to strike and the ‘success’ of counter-terrorism efforts have minimised the impact of militancy on development.
Economists believe the winds are in Bangladesh’s favour and several notable world leaders, including Japanese Prime Minister Shinzo Abe, Chinese President Xi Jinping and World Bank President Jim Yong Kim, have praised the country’s advances.
“We are moving ahead…” asserts Finance Minister Abul Maal Abdul Muhith. “Institutions such as the IMF (International Monetary Fund) and World Bank, [major developed] countries, [multilateral] agencies and institutions now see Bangladesh in a different light.”
The minister fondly refers to the remarks of Kim during a recent visit to Dhaka: “The future of Bangladesh looks bright.”
Muhith admits the investment problem persists, but insists the country is “moving past” them. “Investors and industrialists are regaining business confidence and investing more in the economy. The government has also pursued one major project after another.”
After two years of economic uncertainty that preceded the 2008 elections, the Awami League president, Sheikh Hasina, focused mostly on the Vision 2021 during the campaign – the year being the 50th anniversary of Bangladesh’s victorious war of independence.
In the eight years since a resounding victory in one of the most credible elections ever, that outline has served as the basis for its policy. The ‘Vision 2021’ eventually became the government’s ‘Perspective Plan 2021’. The outline was also reflected in the government’s 2016-2021 Five-Year Plan.
The most discussed element of the plan was its goal of turning Bangladesh into a middle-income country by 2021. Last July, estimates of the country’s per capita annual income reached $1,465, which qualified Bangladesh as a lower middle-income country according to a World Bank definition. Just 10 years ago the country’s per capita income was $598.
However, in order to enter the category of upper middle-income countries, Bangladesh’s per capita annual income would need to rise to $4,126. Not even the Awami League administration believes it will reach that mark by the golden jubilee year of 2021.
The 2021 ‘perspective plan’ sets the per capita annual income target at $2000 – which would still require major advances in the years to come.
Signs from 2016
- GDP growth rate has finally exceeded 7 percent after hovering around the 6 percent mark for several years
- Foreign exchange reserves have steadily increased and have now passed $32 billion
- Inflation stands at 5.03 percent, which the government believes to be acceptable
- Bangladesh’s export earnings in Fiscal Year 2015-16 were $34.24 billion. Export earnings have continued to increase in the current FY
- Foreign loans have also increased. The figure was $3 billion last FY and grew 10 per cent in July-December of the current FY
- Tax revenues are also up. In FY 2015-16, the collection was Tk 1.56 trillion, an annual increase of 15 percent. The first six months of the current fiscal registers another 15 percent growth on the previous corresponding period
- The poverty rate is down to 22 percent according to FY15-16 statistics, which was previously unthinkable according to Finance Minister Muhith
- Construction of the Padma Bridge, the country’s largest infrastructure project, is half-complete and the bridge is scheduled to open by 2018
- Four-lane highways have opened between Dhaka and Chittagong, and Dhaka and Mymensingh. Construction has begun on a mass rapid transit system in Dhaka. Special Economic Zones (SEZs) are being set up
Bangladesh’s import spending has been within manageable limits, helped by low global prices of food and oil in the past two years. However, this situation began to change at the end of 2016 as oil producers moved to restrict output. Both the value and volume of capital machinery imports also rose.
Bangladesh’s Balance of Payments had a significant surplus during FY 2015-16, but the rising oil prices threaten to cut into, and possibly reverse, the surplus.
“Investors and industrialists are regaining business confidence and investing more in the economy. The government has also pursued one major project after another.”
The most noticeable worry is the slump in remittances, which fell 2.52 percent in FY 2015-16. And the first seven months of FY 2016-17 show a 17 percent drop from the previous corresponding period.
Revitalising investment has been a major challenge. The government has responded by creating Bangladesh Investment Development Authority, merging the Board of Investment and the Privatisation Commission. But no visible signs indicate the banking sector is on more stable footing.
Barring any major upsets on the political landscape, Bangladesh is poised for its next general elections in early 2019. That makes 2017 the last year for the government to pursue any painful reform agenda. The Awami League has already described it as an ‘important year’ in its effort to secure a third consecutive victory.
The last budget, FY 2018-19, will obviously be more focused on pleasing the voting public. The minister makes no secret of that, revealing FY 2017-18 will take electoral concerns into consideration.
“Our new budget is being formulated in line with our plans for the FY 2018-19,” said Finance Minister Muhith. “We have already decided to have a budget of Tk 50 billion for our final year. All of the work we do now will revolve around our plans for the 2018-19 year.”
The finance minister has hinted that the 2017-18 budget may amount to Tk 40 billion. The budget for FY 2016-17 was set at Tk 34.51 billion.
Steps to growth
The 2021 perspective plan drafted in 2010 eyes a growth rate of 10 percent in 2021. However, the Seventh Five-Year Plan targeted an average growth rate of 7.4 percent between FY 2015-16 and 2020-21.
Now that Bangladesh has broken the six percent barrier, crossing the 7 percent mark in FY 2015-16, it is probably time for more ambition. The target for FY 2016-17 is set at 7.2 percent.
“We expect to pass our targets again this year,” the octogenarian finance minister says in youthful exuberance. “We have reached such a level that our growth will not dip below 7 percent.”
The government’s goal was to reduce the poverty rate from 24.5 in 2015 to 18.6 in a year, and bring down extreme poverty to 8.9 percent by 2020.
An October 2016 World Bank report estimates ‘extreme poverty’ at 12.9 percent of the country’s population. This means their purchasing power parity remains below $1.90 (Tk 115). One consolation for Bangladesh: the figures are better than those of South Asian neighbours such as India, Pakistan and Bhutan.
World Bank Economist Zahid Hossain says Bangladesh would need to attain a growth rate of 8.8 percent to reach the UN Sustainable Development Goal of ‘zero’ poverty – the poverty rate is considered zero if it is below two percent. Minister Muhith says Bangladesh aims to hit the target by 2024.
Reining in inflation
For quite some time now, Bangladesh has fared well. On a point-to-point (monthly) basis, the inflation rate stood at 5.03 percent last November. The average inflation rate for the 12-month period on the same basis was 5.52 percent.
The government’s stated objective was to keep it below 6 percent in FY 2015-16, which it achieved with 5.92 percent. For FY 2016-17, the government target is 5.8 percent.
The finance minister attributes the low inflation to bumper crops and the relatively low price of food and oil on the world market. He hopes the trend will continue.
$32 billion in forex
Bangladesh has traditionally benefitted from a generous flow of remittances … such inflows composed nearly 13 percent of gross national income in 2015, but of late, there has been a slowdown
Reserves kept rising steadily through the year, rewriting the record book on Nov 4, 2016 as it crossed $32 billion – good enough to cover the cost of imports for nine months.
Reserves fell, for obvious reasons, as the central bank made payments through the Asian Clearing Union (ACU) in the first week of November. By early February, the reserves stood at $31.70 billion.
In 2001, Bangladesh was for the first time forced to default on payments to the ACU as forex reserves plunged to below $1 billion. In the 16 years since, Bangladesh’s reserves have increased consistently and dramatically.
Bangladesh has traditionally benefitted from a generous flow of remittances– money sent home by Bangladeshis working abroad. Such inflows composed nearly 13 percent of gross national income in 2015. Of late, there has been a slowdown.
Bangladesh Bank data for July-January of FY 2016-17 show a decline in receipts, to $8.64 billion – a 17 percent loss. Top researcher Dr Zaid Bakht fears the fall in remittances will lead to a slower growth. The slowdown is blamed on factors beyond Bangladesh’s control, in some cases austerity and low spending by the employing countries.
Another reason is cited for low formal receipts. Money sent through hundis or other illegal channels is not registered in the central bank books. One can only guess how much is ‘lost’ in such transactions. Many migrants would rather use hundis to protect themselves from currency devaluations.
A recent government report estimates that 78 percent of the 8.6 million Bangladeshi migrant workers send remittances through banks, while 12 percent use hundis.
Three major challenges for the economy: Political stability, private sector investment and Brexit fallout
The World Bank’s Zahid Hossain foresees three major challenges for the economy: political stability, private sector investment and Brexit fallout.
He says Bangladesh is in a relatively comfortable position as a low-middle income country. However, to pursue further development, 33 to 34 percent of GDP needs to come through investment. According to government estimates, investment is currently 29 percent of its GDP.
“The government has to pay more attention to labour productivity,” adds Dr Hossain. “The government must, in particular, work on women’s employment. In terms of employment, men are still significantly further ahead than women.”
The key concerns therefore include the failure to prod people to invest rather than save, a trend attributed to an unfriendly investment climate. The result is the growing gap between private and public investment and the country’s inability to exploit its comfortable reserves.
The World Bank official also identifies a lack of structural and institutional reform, and money laundering as other major concerns. Adding to these problems is the lingering distrust of the banking sector thanks to the scandalous handling of Hall-Mark by state-run Sonali Bank and the scale of the Basic Bank embezzlement.
Banks are reportedly sitting on nearly Tk 1 trillion in idle money, which has led to a fall in interest rates on deposits. A high percentage of defaulters has added to the burden. Loan write-offs in the banking sector have exceeded tens of billions of taka.
A restructuring process aimed at giving ‘undue’ advantages to large industrial groups has also sparked controversy, raising complaints that small borrowers end up suffering.
The general consensus is that a peaceful political climate – as well as the ability to rein in militancy – can help achieve much of what Bangladesh wants in 2017.