Monday, 6 February, 2023
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Bangladesh Will Prevail Over Challenges of Global Economic Crisis

Dr. Atiur Rahman

Bangladesh Will Prevail Over Challenges of Global Economic Crisis
Dr. Atiur Rahman

In the current context of global economic turmoil, Bangladesh, like most other economies, is experiencing high-inflation, fluctuating exchange rates, and noticeable pressure on the balance of payments. The depleting foreign exchange reserve is the manifestation of all those macroeconomic imbalances. Yet, it must also be noted that unlike Sri Lanka or Pakistan, our economy benefits from stronger internal conditions stemming from the buoyancy of our export and remittance sector after the outbreak of Covid-19. The stunning performance of our agricultural sector is yet another source of Bangladesh’s resilience. If we had to import vast amounts of rice, the pressure on our foreign exchange reserve would have been further accentuated. Unfortunately, vested interest groups have generated a spike in gossip and uninformed speculations about our macroeconomic resilience. Therefore, this year, we celebrate our victory day under unique circumstances. The world is heading toward a recession. Bangladesh is also not immune from the heat of that economic meltdown. Bangladesh’s Taka lost nearly a quarter of its value against the USD fuelling imported inflation. Although inflation in Bangladesh has been easing during the last couple of months, it remains much higher than the targeted rate set by the Monetary Policy. Thanks to a bumper harvest of Aman rice, food inflation remains tolerable to some extent, particularly in rural areas. It is, however, biting the low and lower-middle-income people in urban areas. The social protection provided by the government for struggling urban consumers has been welcomed by most observers. However, it cannot be denied that the urban population engaged in informal economic activities remains vulnerable to the risk of high inflation.

Despite some of the above short-term challenges, it can safely be argued that Bangladesh’s economy has been going through a phenomenal transformation, particularly in the manufacturing sector. In the past two decades, the manufacturing sector’s contribution to overall GDP has grown from 18% to 35%. Though the share of agriculture declined, production increased by a large margin in this sector. Investment is growing, and alongside it, loan distribution is also increasing. In the past decade, the investment-GDP ratio grew from 26.3% to 31.57%. Apart from these, life expectancy is now more than 73 years, which was only 47 years in 1972. The literacy rate increased to 75% from 56% in 2008. Per capita income is now more than 2800 USD, which was just 759 USD earlier in 2008-09. There have been phenomenal growths in significant indicators of the external economy during the last 12-13 years. Export earnings reached 52 billion USD in 2021-22 from 15.6 billion USD in 2008-09. In terms of foreign direct investment, the amount increased to 2,507 million USD from 961 million USD during the same period.

The observers believe that although Bangladesh has faced many challenges, its future looks bright, and many more opportunities remain to be exploited. Indeed, Bangladesh can follow the path of Southeast Asian nations in terms of growth trajectory, and per capita income can reach 4,000 USD by 2026. Currently, 73% of the country's GDP originates from consumption which is also the source of its resilience. By 2026, another 12% can be added up to the number. And by 2030, Bangladesh will become the ninth-largest consumer market in the world. This tells about the strength of Bangladesh’s inclusive development strategy. In 2026, around one-third of the population will join the middle-income group. Around 11% will move up from the low-income group. About 36% of the population will have higher education, and as a result, they will have a higher income.

However, one must also remember that, like many of its peers, Bangladesh faces many challenges from the pandemic and the Ukraine war. It, therefore, should stick to its sustainable recovery plan. As part of the process, the lifeline of the economy of Bangladesh, agriculture must be sustained. Adequate finance must be provided to the innovative farmers. More support should be given to agricultural research. To ensure the participation of the private sector in research and innovation, more incentives can be given to them. The Bangladesh Bank and the universities can work together to enhance growth in agriculture-based start-ups. For irrigation, the use of fossil fuels can be reduced by using solar irrigation pumps. To encourage e-commerce, nano-loan programs can be implemented through MFS and agent banking. And it is a must to provide technical assistance and finance to women entrepreneurs doing business in agriculture-related sectors.

Infrastructural development must also be continued. Currently, it takes 28 days on average to reach an export shipment from Bangladesh (the average for Asian countries is 18 days). Import shipment requires 34 days to reach (the average for Asian countries is 20 days). Import and export expenditures can be hugely reduced by developing proper infrastructures (Currently, we have the highest import-export expenditure in South Asia). Private sector participation in developing infrastructure must be increased (currently, it is only 1.1% of the GDP). We must effectively face the challenges and maintain our growth-enhancing exports to use the opportunities present in front of us. However, as a middle-income country, we can no longer rely solely on cheap labour to survive the export competition. Advanced technologies must be used. We can gain a stronger position in competition if we can improve our regulatory standards. At the same time, productiveness must be increased with the use of machinery. (A 25% increase in the use of machinery can increase production per labour by 3%). New export markets must be sought and explored. Diplomatic initiatives must be taken to ensure trade agreements and increase foreign direct investment.

Bangladesh can also benefit from the geo-political polarization now prevailing in Asia. Bangladesh is already getting the benefits of the US retailers opting for more of the Bangladesh apparel products as the US-China trade tensions, and China’s zero-Covid policies get intensified. A survey by the USFIA showed that in 2022, Bangladesh could attract a higher number of US consumers than China and Vietnam. This may augur well for Bangladesh’s export sector, which is recovering fast. India’s ‘Look East’ policy should translate into ‘Act East’ reality. In that case, Bangladesh will benefit from the regional trading engagements.

Bangladesh can hugely benefit from its ‘open regionalism’ in international diplomacy. In the fiscal year 2021-22, bilateral trade between Bangladesh and India amounted to 11 billion USD, of which 1.27 billion USD was Bangladesh’s export to India. Currently, only 1% of India’s international investment destination is in South Asian countries. However, India’s investment in Bangladesh is increasing, but there are opportunities to attract much more such investment. If only 1% of India’s aggregate import is exported from Bangladesh, it can increase Bangladesh’s export to India fourfold.

Another source of strength of our external economy is the remittance sector. We can benefit greatly more from this sector by properly providing incentives to our expatriate workers. Suppose an opportunity is provided to the higher-income group of remitters to invest in treasury and other bonds digitally, and expatriate workers are included in the universal pension scheme. In that case, they can undoubtedly bring additional foreign exchanges to the country. Bangladesh Bank’s start-up fund can provide loans or assistance to expatriate workers who come back to Bangladesh to encourage them to become entrepreneurs. Special scholarships must be provided to the children of the expatriate workers, and other benefits must be provided to their families.

A blended approach is a correct way forward in terms of energy.  As part of this approach, the use of fossil fuels must be reduced for irrigation. Solar irrigation pumps can be an effective alternative. A smooth policy path must be laid out for a gradual transition to the use of green energy. Bangladesh Petroleum Corporation must continue to search for new gas fields alongside importing fuel. Regional cooperation for energy, especially with India and Nepal, can help reduce the pressure largely. The pipeline for the import of diesel from India has indeed been a strategic move for Bangladesh.

Like many other countries, Bangladesh’s macroeconomy also faces several challenges. However, we also have many lessons from past experiences regarding how to face crises. It is high time we stop panicking and jointly face the global economic crisis capitalising on those lessons. All signs indicate that Bangladesh will again prevail against a global financial challenge. All we have to do is to ensure that all spheres of society come together and combine their energy and enthusiasm to benefit the broader society.

 

The writer is an eminent economist and former Governor of Bangladesh Bank