Bangladesh economy: Staying the course

Daisaku Kihara and Ragnar Gudmundsson | Published: June 09, 2018 20:19:57 | Updated: June 11, 2018 20:55:33


The economy of Bangladesh continues to perform well. For the second consecutive year, the gross domestic product (GDP) growth rate is expected to exceed 7.0 per cent. Additionally, in 2018, Bangladesh has fulfilled the eligibility criteria to graduate from the Least Developed Country category (UN classification) for the first time. This solid economic performance is remarkable, especially as it has been sustained for over a decade and proven resilient to a volatile global economic environment. The commitment to macroeconomic stability has helped prevent sudden shifts in economic sentiment, while allowing for significant progress in reducing poverty and promoting social inclusion.

Looking ahead, the outlook for the coming year remains strong, with the economy projected to grow at about 7.0 per cent, and inflation to stay below 6.0 per cent. Following the recent easing of monetary policy, potential second-round effects of higher food prices and strong credit growth nevertheless warrant close attention. Greater exchange rate flexibility has cushioned the impact of the recent widening of the current account deficit, which is likely to persist over the medium term as implementation of externally-funded infrastructure projects accelerates.

The latest edition of IMF's annual review of the economy (http://www.imf.org/~/ media/Files/ Publications/ CR/2018/cr18158.ashx) highlights a number of challenges that need to be addressed to sustain this high growth momentum and ensure that economic rewards are shared fairly and widely.

First, mobilising resources for inclusive growth. At less than 10 per cent, Bangladesh's tax revenue-to-GDP ratio remains low compared with other countries, constraining the government's ability to increase social spending, develop infrastructure, and support structural reforms. Higher tax revenues have an essential role to play in accelerating Bangladesh's transition to a higher middle-income status. For this reason, implementing the VAT reform remains a crucial step to improving revenue mobilisation. More generally, efforts to bolster tax revenue should focus on broadening the tax base, enforcing compliance, and enhancing risk-based auditing.

Second, maintaining the commitment to fiscal discipline as large infrastructure projects unfold. IMF's latest debt sustainability analysis shows that the public debt-to-GDP ratio remains manageable at low levels. Moving forward, it will be important to preserve debt sustainability through strong public financial management and higher investment efficiency, especially as external financing is expected to be less concessional. In the immediate term, donor support will continue to be essential in meeting spending needs to address the Rohingya refugee crisis.

Third, ensuring the health and stability of the financial sector. While Bangladesh rightly stands out for its leading role in promoting financial inclusion, recent concerns regarding banking sector governance call for prompt corrective action. IMF analysis underscores the need to strengthen regulation, adopt risk-based supervision, end regulatory forbearance, and improve banks' internal control and risk management systems, particularly in the state-owned commercial banks. A related priority is the need to reform the National Savings Certificates scheme, which has not only become a very expensive way to finance the fiscal deficit, but has also constrained the implementation of monetary policy and the development of capital markets.

Fourth, promoting export diversification and stimulating private sector investment. Bangladesh's ready-made garment sector has played a key role in diversifying the economy, from an agrarian to a more manufacturing based economy. With signs of greater competition emerging from abroad, the challenge is to develop new export engines to create jobs and shield the economy from the excessive reliance on a single sector. A useful step in that regard would be to review the trade regime, including its incentives and tax structure, and to establish a level playing field where all industries can exploit their comparative advantage. Combined with reforms spearheaded by the Bangladesh Investment Development Authority to enhance the business environment, such an approach would help increase foreign direct investment, more effectively and transparently than the provision of exemptions or subsidies. 

And fifth, building on the significant progress already made, to prioritise an inclusive approach to growth that leaves no one behind. In this regard, IMF report focuses not only on continuing the substantial progress made on financial inclusion, but also on the importance of promoting female labour force participation. Beyond efforts to reduce the large informal sector in the economy, where most women work, special attention should be placed on improving technical and vocational training, enhancing rural infrastructure to reduce time spent on domestic tasks, strengthening the legal framework to protect workers' rights, enhancing the provision of health services-including quality maternal health care-and improving women's access to lending facilities.

Addressing these challenges resolutely will set the stage for Bangladesh to reach its ambitious development objectives. The IMF stands ready to work closely with the Bangladesh authorities, including through provision of policy advice and capacity development initiatives, building on a long-standing collaboration with public institutions, close engagement with representatives of the business community and civil society, and effective coordination with development partners.

Daisaku Kihara is the IMF mission chief for Bangladesh and Ragnar Gudmundsson is the IMF

resident representative in Bangladesh. media@imf.org.

 

 

 

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