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The Financial Express

Boosting the private sector


Boosting the private sector

Bangladesh should embark on a new round of reforms for strengthening and modernising the private sector in order to propel the country towards export-led diversified growth and fuller employment. This has been the key recommendation of the country-specific private sector diagnostic study titled 'Creating Markets in Bangladesh: Unleashing the Private Sector to Sustain Development Success' released in June by the World Bank Group comprising WB and IFC. Bangladesh's perspective plan (2021-41) aspires for an upper middle-income country status by 2031 alongside attaining full employment and elimination of extreme poverty. But alarmingly, nearly half the population faced the risk of slipping back into poverty even before the pandemic struck. In this backdrop, boosting the growth of a broad-based private sector - which is plagued by one of the most difficult business environments in the world, has become essential.

According to this study, "High import tariffs and the discretionary use of regulations protect well-established businesses and sectors at the expense of the rest, and this impedes innovation. Limited progress in opening the infrastructure sector for competitive private participation - with the exception of power generation - holds back investment and modernisation. As a result, Bangladesh's private sector has not moved beyond its initial success and is becoming increasingly concentrated and inward looking, seeking to maximise rents from existing markets instead of embracing openness and competitiveness"… "Despite improvements, human capital gaps reduce the productivity of Bangladesh's future workforce by more than half, according to the World Bank Human Capital Index. Meanwhile, half the country lacks sufficient access to healthcare. Although infrastructure has improved, large investments are needed to manage the rapid urbanization that increasingly hampers the quality of life and drains productivity"… "These development gaps will need to be addressed at a time when Bangladesh's traditional growth model - leveraging low-cost labour in international markets - faces multiple threats, such as wage pressure, technological change, environmental and social compliance, and eroding trade preferences".

Despite Bangladesh managing the pandemic relatively well, the pace of recovery remains dependent on the severity of the second wave, revival of the botched vaccination campaign, as well as the resilience of global economy. The financial sector may be further destabilised due to elevated level of stressed assets and low capital buffers. Credit supply to the private sector had plummeted to its lowest level even before the pandemic had struck, at least partly due to insufficient bank capitalisation, unresolved NPLs, and the imposition of an interest rate cap. Besides, as tapping new sources for revenue and growth will have to be prioritised, the private sector must play a central role as over 70 per cent of all investments in Bangladesh emanate from it. Therefore, facilitation of rapid economic recovery and bridging the growing gap in infrastructure investments will require financial, macroeconomic and regulatory environment that can support additional private investments in diverse competitive sectors.  The windows of opportunities that exist for Bangladesh would require an increasingly sophisticated, innovative, and diversified manufacturing cum agribusiness domain alongside value-added services sector and modern infrastructure. According to the WB-IFC study, the medium-term vision for the economy should incorporate the following elements. Firstly, a modernised RMG sector should increasingly become characterised by market diversification, greater FDI inflow, technology transfer, higher value commodities, improved design cum branding, and growth of backward cum forward linkages, which could help offset job losses due to automation, restructuring, and pandemic's impact on global value chain. Secondly, the instruments available to RMG like bonded warehouses and access to innovative trade financing could be offered to other highly potential sectors like footwear, leather, plastics, pharmaceuticals, and electrical goods for scaling up diversified exports.

Thirdly, enhancing the production of agricultural commodities like horticulture, animal protein, dairy, and aquaculture - where Bangladesh enjoys comparative advantage, accompanied by strong regulatory framework would lead to a more dynamic, diverse, and thriving agribusiness sector. Fourthly, targeted financial access for SMEs and female entrepreneurs, well-developed markets for corporate equity and bonds, access to foreign capital, diverse range of products, and a dynamic financial technology ecosystem are likely to result in a more stable and efficient financial market capable of meeting private sector needs. Fifthly, an integrated multimodal master plan, three or four well-functioning modern seaports, efficient trade facilitation environment, and private investments in physical infrastructure would lead to a modern transport cum logistics network that can facilitate the expansion and diversification of exports.

Sixthly, worthwhile private investments for pooling power supply from cheap and clean energy sources coupled with strengthened transmission cum distribution systems would propel a recalibrated energy sector towards cleaner energy mix having better cost-effectiveness and reliability. And seventhly, leveraging the private sector participation for widening access to high-quality, integrated healthcare provision supported by technologies like telemedicine and e-pharmaceuticals are likely to generate an expanded, inclusive, and well-managed healthcare system.   

The appendix of the study identifies various constraints faced by the private sector, and provides a set of comprehensive recommendations in the shape of policy interventions by the government for overcoming those. These constraints in the area of business environment and governance include: excessive licensing and other regulatory requirements for starting new business; overburdened court system and legal barriers that undermine contract enforcement; ineffective insolvency and debt recovery framework that raises risks for investors, lenders, and suppliers; weak corporate governance cum insufficient regulatory oversight exacerbating investment risks; and overlapping cum poorly enforced regulations raising uncertainty and enabling discretion, thereby creating uneven playing field.

The constraints in the financial sector include: gaps in access to credit and its high cost for SMEs that curb the growth of domestic firms; dearth of domestic markets for long-term financing that limit private investment, especially in infrastructure sector; restrictive foreign exchange controls that limit FDI and financing from foreign banks; and weak banking sector governance contributing to lower credit provision for the private sector. Trade and investment constraints include: high rates of protection; insufficient instruments for promoting exports; and restrictions on investments in services sector. The proposed policy interventions should be given due consideration by the government for implementation.   

 

Dr Helal Uddin Ahmed is a retired Additional Secretary and former Editor of Bangladesh Quarterly.  [email protected] 

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