Bangladesh: A Prospective Economy with Sustained Growth

Bangladesh 2015

Bangladesh Bank believes that financial inclusion not only stimulates growth by expanding the activity base, but also contributes to growth stability through desired diversification of financial assets

Following the years after independence in 1971, Bangladesh turned into a case of survival. Western economists viewed the country as a test case of development. Many found its separation from Pakistan as imprudent, and many expected to see the country slide into the crowd of the failed states for years to come. But Bangladesh emerged from the ashes and disproved all the myths and dismal predictions. Now the country is known as a role model of sustained growth and inclusive development, justifying the dreams of the Father of the Nation Bangabandhu Sheikh Mujibur Rahman and the sacrifices of the millions. The nation also justifies the support of our wartime allies including India in particular – the neighbouring country whose resolute stance in 1971 in favour of Bangladesh’s freedom was the strongest strategic support for an embattled nation like us in the international arena.

The initial years of a war-ravaged Bangladesh was bumpy and stressful as expected. After 1975, the country entered a period of policy anomalies that contributed to enormous macroeconomic fluctuations until the early 1990s. By that time, both China and India had embarked on liberalisation and we were not too late to catch the train. Privatisation and pro-market reforms in the early 1990s placed Bangladesh into a new trajectory of economic dynamism, which got a new boost since the mid-1990s. This new era of liberalisation and gradual inception of market reforms fuelled the Bangladesh economy to accelerate and we followed a new path of higher growth momentum.

Attaining high economic growth without an inclusion strategy is not possible for an emerging economy like Bangladesh. Herein, lies the essence of financial inclusion that is instrumental to formulating monetary policy by Bangladesh Bank. The main objective of financial inclusion is to ensure access to finance for all segments of people in the society, and therefore to make growth sustainable by engaging the poor.

Bangladesh Bank believes that financial inclusion not only stimulates growth by expanding the activity base, but also contributes to growth stability through desired diversification of financial assets. Thus, the main task of Bangladesh Bank is to promote higher economic growth along with macro stability and moderate inflation. As the diagram shows, Bangladesh’s growth has been the second highest in the region over the last 20 years while its growth volatility is the lowest:

For some years now, Bangladesh Bank has engaged the business sector in inclusive and environmentally sustainable financing of output activities. This strategy has helped the Bangladesh economy maintain six plus percent average GDP growth for well over a decade amid financial crises and a prolonged slowdown of global growth. Real GDP growth has averaged at 6.2 percent over the last five years. CPI inflation has followed a steadily downward trend since the end of 2011. Bangladesh’s inflation volatility is the lowest in the region, suggesting a strong platform of macro stability to attract foreign ventures.

Rising foreign exchange reserves and exchange rate stability are contributing to the improvement of the investment climate in the eyes of the foreign investors in particular.

Progress in bringing the annual average CPI inflation down from 7.35 percent at the beginning of FY2015 to 6.5 percent by June 2015 is broadly satisfactory, with 6.76 percent inflation in February 2015. The monetary program seeks to limit broad money (M2) growth at 16.5 percent up to June 2015 using reserve money as the main policy tool. Private sector credit growth is targeted at 15.5 percent growth by June. The figure was 13.3 percent in January 2015. Broad money and domestic credit growth targets are in line with supporting higher output activities along with keeping inflation at a moderate level.

Lower fuel subsidy from declining international oil prices has kept fiscal deficit under control. It is still below 5 percent – a manageable figure for an emerging economy like Bangladesh. Exports rebounded with 2.43 percent growth in the first 8 months of FY2015, while the import growth increased by 16.43 percent during the same period. Remittances continued positive growth at 7.63 percent during July-February of FY 2015. Further measures are needed to attract and facilitate FDI, which is currently USD 1.5 billion. Foreign currency reserves are hovering over 23 billion dollars, covering imports of more than 6 months. The exchange rate also remained stable since mid-2013.

Deposit and lending interest rates of banks and financial institutions have been coming down, though very slowly, in line with declining inflation. The spread between the deposit and lending rates has come down to 5 percentage points or lower in the banking sector, reflecting a gradual improvement in banking governance.

Bangladesh Bank has also been focusing on capital market development. It played instrumental role in structuring the refinancing program supporting capital market activities. In the first half of FY2015, Bangladesh Bank has accomplished a number of new investor friendly regulatory reforms facilitating external transactions of foreign and local businesses. Consequent to one such major reform, foreign equity investments in unlisted local companies can now be sold to local investors at market based prices rather than at net asset value.

Insufficient financial market development in Bangladesh significantly constrains the availability of adequate transmission channels. Absence of old age financial security nets in the form of pension and the retirement scheme for the elderly people is one such serious inadequacy, not only for monetary policy transmission but also for access to long term savings options that fund infrastructure and other long term investments. Apart from pension and provident fund schemes for those employed in the informal public and private sector organisations, long term old age pension and retirement savings schemes for the general adult population exist in developed and developing economies including the neighbouring India. Bangladesh Bank is closely working with the government to set up an institutional framework for such schemes in the country. The government is also paving the way so monetary policy becomes more effective than before. This step will help nurture financial markets developments and long term investment potentials in the real sector.

The lowest debt-GDP ratio in the region indicates opportunities for the Bangladesh government to incur productive debt, which can be used to build infrastructure and institutions that eventually accelerate growth. The government has already promised a remarkable number of new Special Economic Zones (SEZ), and is further considering a generous set of incentives for investors in those SEZs. The incentives may include time bound full and partial waivers on the tax/VAT/stamp duty.

Current global economic and geopolitical developments have led Bangladesh to focus more on Asia and the East to acquire new trade relations and to augment investment opportunities. Bangladesh’s inclusion in the Regional Comprehensive Economic Partnership (RCEP) will be of multitude advantages, using Bangladesh as a cost efficient manufacturing base for items like automobile parts, electrical and electronic goods, apparels and various other consumer goods.

Inclusive and environmentally responsible financing is of paramount importance for economies like Bangladesh that are threatened by limited financial means and climatic erratic cycles. The Bangladesh case is a great example to learn how the financial sector can play a crucial role in triggering a shift of financial flows away from speculative price bubbles toward inclusive financing of the sustainable green options. Experience from Bangladesh suggests that policy interventions for such shift can be crafted in ways that uphold macroeconomic and financial stability. Since the late 2000s, Bangladesh’s approach of internalising inclusive initiatives and green financing has started drawing external attention. These policies with refinancing schemes from the central bank are facilitating the economy toward a robust growth trajectory for the long run.

Bangladesh is reaping the advantages of regional cooperation. Being an active member of the SAARC, the country is opening up investment opportunities for the neighbours such as India, Nepal, Myanmar, Bhutan, Sri Lanka, and Pakistan. India and Bangladesh not only share similar culture, history, demographic features, and the economic climate, but they also share the similar timing of policy synchronisation. Both countries embarked on market reforms in the early 1990s and steered their policy direction towards further liberalisation of trade and industry. Bangladesh’s bilateral trade with India is rising rapidly as shown below:

India has already been providing electricity through the joint grid. Indian private sector investors are showing interest in investing in mega projects on coal based electricity, gas exploration, and special economic zones. Also India has been supporting in developing our railway sector where they have huge experience and technical advantages. Given our deep bilateral relationship rooted in history, culture and, of course sacrifices of Indian people and soldiers who shed blood on our soil in 1971, we two nations can carry this historic friendship and mutual economic cooperation to a new height. This trend has been reinvigorated for the last half a decade.

Under the dynamic leadership of the Prime Minister Sheikh Hasina, a democratic commander empowered by secular spirits and long-term development vision, Bangladesh is rapidly transforming into a prospective hotspot for future investment in the areas of manufacturing, infrastructure, education, and technology. A country that houses 160 million people is sure to be a robust market for modern consumption goods. The demographic dividend of Bangladesh, which treasures on the growing population of the young workers, heralds the message of growing productivity and rising demand in the future. That is why most capital rich countries take much interest in Bangladesh nowadays. China, India, and Japan, the three largest economies of Asia are increasing their investment portfolios in Bangladesh, making the country a hub of South Asian connectivity.

Since the late 2000s, in particular, the government has focussed more on the quality and inclusiveness of growth rather than simply the numbers of growth per se. Expectedly our growth has displayed a feature of greater sustainability than ever before. This very quality of growth is instrumental to drawing foreign investments into this land of opportunities. All these prospects will lead Bangladesh to a new path of growth and prosperity in the decades to come.

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Diplomatist Magazine was launched in October of 1996 as the signature magazine of L.B. Associates (Pvt) Ltd, a contract publishing house based in Noida, a satellite town of New Delhi, India, the National Capital.