Despite a low average annual GDP growth of around five percent and persistently high inflation (averaging eight to nine percent) in the first half of the 2020s, if key economic reforms are properly executed, Bangladesh can still target a stronger performance in the upcoming years.
As is now clear, the growth performance during the first half of this decade has not been as promising as it could have been post the pandemic. We missed the opportunity due to several factors. Besides severe mismanagement of private sector bank loans and macroeconomic instability, the Bangladesh Bank also failed to maintain adequate foreign exchange reserves, resulting in devaluation of the taka and increased import prices affecting both investment and consumption expenditure. Non-performing loans (NPL) shot up during the first half of the 2020s as the central bank’s governance faltered and real private investment nosedived. Market confidence in the sector also withered in the face of uncertainty and corruption. Per the data released recently by the central bank, the total NPL in the banking sector reached Tk 588,704 crore, as high as 32.26 percent of the total disbursed loans amounting to Tk 1,824,668 crore.
The main growth drivers in the country have been expanding the service sector, agriculture, manufacturing, and exports. Growth follows a process—from investment, employment, consumption, savings, and then to higher levels of investment. However, this process needs to be effective as the Bangladesh Bank’s operational efficiency is critical in ensuring investment. Employment depends on investor confidence, which in turn is dependent on a variety of factors such as availability of capital, availability of reasonably priced fuel and electricity, level of education and training of human resources, transport and communication infrastructure, effective macroeconomic management, tax rates and structures, human security, urban facilities, external shock management, political stability, forward and backward linkages, investment-friendly commercial and legal systems, profitability, and insurance regime. So, there are a host of critical factors that should all be favourable to ensure a high rate of private investment. These are mainly supply-side factors, and if any of these factors are not in favour of investors, it can alter the decision to invest. For example, in recent years, due to chronic natural gas and electricity shortages, some factory owners were forced to switch to costly alternative power sources like diesel and LPG, while others suspended operations, leading to significant job losses.
Last month, the central bank announced a Tk 60,000 crore stimulus package to revive ailing private sector manufacturing and service industries, thereby generating over 25 lakh jobs. This fund, if successfully handled, is likely to spur GDP growth. In the face of stagnant private sector investment from the last five years, a subsidised credit opportunity such as this will be conducive to energising the private sector. However, targeting only private sector entities is unlikely to fully yield the desired results. All the factors mentioned above also need to be carefully considered and necessary reform undertaken to effectively facilitate private investment.
It has been found in the experiences of many countries that education and health expenditure in the national budget play a very significant role in the achievement of higher growth rates by equipping the youth for productive employment. Unfortunately, public spending on health and education is very low in Bangladesh. When modern technology is introduced in higher education and when affordable healthcare is delivered, labour productivity rises. In the short term, however, technical and vocational education must be prioritised. A portion of the just announced stimulus package may be made available to this end. It is essential to invest in human capital development in order to reap the benefits of our demographic dividend.
While it is important to prioritise export-oriented sectors, it is even more crucial to focus on diversification of production in an effort to move some emphasis away from readymade garments, which currently account for over 80 percent of total exports out of Bangladesh. Our export potential lies mainly in labour-intensive industries such as leather and footwear, light engineering, furniture, food processing, jute products, pharmaceuticals, electronics, rubber, and porcelain items. The country also has a comparative advantage in these areas as these industries have the potential to absorb the existing supply of low-cost labour. A faster rate of urbanisation, spurred by rural-to-urban migration, is an opportunity that should be utilised to enhance the benefits of urban agglomeration. Converting urban informal sector workers to productive labour will have a positive impact on GDP growth, arresting the slowdown of the rate of poverty reduction and boosting exports. The importance of increasing export earnings cannot be overstated, since nearly $30 billion might be necessary for debt servicing (principal and interest) in FY2025-26 alone. We cannot afford to fall into a debt trap.
Investors are considered the pillars of an economy. They are capable of creating jobs, paying taxes, indirectly boosting savings, and ensuring growth. By building on the structural and financial reforms initiated in the 1980s and carried forward through the 2010s, Bangladesh Bank’s new stimulus package could empower a new generation of entrepreneurs to absorb excess labour. Although resisted initially, those reforms ultimately helped transform the economy through policies that promoted deregulation, market competition, and export-led growth, and proved beneficial in the long run as the rates of savings, investment, productivity, and trade rose while the poverty rate fell. Indeed, the average GDP growth increased from 3.8 percent in the 1980s, to 4.7 percent in the 1990s, to 5.6 percent in the 2000s, and to 6.4 percent in the 2010s. For higher GDP growth, what we need is an environment conducive to private investment such as market-determined interest rate fixation, independence of the Bangladesh Bank in policymaking, a favourable rate of tariff to encourage local industries to remain globally competitive, and for bank lending to follow strict government regulations.
Dr Nawshad Ahmed, a retired UN official, is an economist and urban planner. He can be reached at [email protected].
Views expressed in this article are the author's own.
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