Economic growth in Bangladesh and the role of banking sector
Bangladesh has come a long way in its economic growth. From a meagre US$ 5.70 billion in 1972, the gross domestic product (GDP) increased to US$ 285.82 billion in 2018. The Bangladesh economy is the 42nd largest in the world in nominal terms and 31st largest in terms of Purchasing Power Parity (PPP). Recently, Bangladesh graduated from least developed country (LDC) status to a lower middle income country, and hopes to become a developed country by 2041.
Four distinct growth phases are discernible (Ahmed 2012; Khuda and Barkat 2017) in the country's economic journey. The first phase (1990-1996), one of subdued growth rate expansion, witnessed less than 4.0 per cent annually in aggregate terms and less than 3.0 per cent in per capita terms. The second phase (1996-2003) witnessed growth rate fluctuating between 4.0 and over 5.0 per cent and around 4.0 per cent per capita. The third phase (2004-13) witnessed growth rate of around 6.0 per cent and per capita growth of around 5.0 per cent. The fourth phase (2013--) witnessed growth rate of over 6.0 per cent, and reached over 7.0 per cent during the last two financial years.
With acceleration in the growth of per capita income, there has been considerable progress in poverty reduction (Raihan and Khondker 2012). Poverty declined from 56.7 per cent in 1991 to 24.3 per cent in 2015. Today, it is around 22 per cent. As a result of considerable decline in poverty, especially during 2001-10, the number of poor people declined, with the size of the population below the upper poverty and lower poverty lines declining by around 8.58 million and 8.61 million respectively. However, there is high and rising income inequality.
MAJOR FACTORS CONTRIBUTING TO ECONOMIC GROWTH: Considerable increase in per capita income has been made possible by sustained economic growth. The three broad economic sectors (agriculture, industry and services) contributed to the process of economic growth. Between 2009-10 and 2016-18, the growth rate of the agriculture sector declined while it increased in the services and industry sectors. The overall share of the agriculture (including fisheries) sector to GDP declined to around 14 per cent, while that of the services and the industry sectors increased to around 52 per cent and 34 per cent respectively in FY 2016-17. Within the industry sector, growth in the manufacturing (led predominantly by the ready-made garments (RMG) sector), 'electricity, gas and water supply' and the construction sub-sectors experienced positive growth. Within the manufacturing sector increase, large industries experienced positive growth, while it remained largely unchanged in the case of small-scale industries. Within the services sector, growth in trade, hotels and restaurants and transport, storage and communication remained unchanged; and real estate declined. Financial intermediations registered positive growth, though at a low rate.
Economic growth in Bangladesh has been helped largely by export earnings from the ready-made garments (RMG) sector; remittances sent by migrant workers; growth in the agricultural sector; expansion in Medium, Small and Micro Enterprises (MSMEs); decline in the rate of population growth; and the government's safety net programmes.
First, considerable expansion has taken place in the RMG sector since the late 1970s. Today, it is the most important industry in the country; and Bangladesh is the second largest apparel exporter of western brands, after China. The RMG sector accounts for around 82 per cent of total exports. Bangladesh's garment exports increased from US$ 6.8 billion in 2005 to over US$30 billion (The Financial Express, July 05, 2018).
Second, being a labour surplus country, annually about 0.5 million Bangladeshis migrate abroad in search of jobs. According to the Bureau of Manpower Employment and Training (BMET), the total number of Bangladeshi labour migrants was around 11.5 million in 2017. The figure represents about 4.5 per cent of the country's population and 11 per cent of its labour force (BMET 2018). With increase in the number of migrant workers, there has been considerable increase in the amount of annual remittance.
Third, agriculture sector witnessed remarkable progress, despite continued loss of arable land. There has been a sharp increase in food grain production during the last over four decades. The increase has been made possible as a result of a liberalised input market and expansion of irrigation, encouraging farmers to adopt the new seed-fertiliser technology.
Fourth, small and medium enterprises (SMEs) has played a vital role in promoting economic growth, poverty reduction, and employment generation. The Government of Bangladesh highlighted the importance of SMEs in its Industrial Policy; and it has been identified as a 'thrust sector' by the Ministry of Finance. However, to efficiently run SMEs, allocation of adequate funds and skill development of both entrepreneurs and workers are critically needed.
ROLE OF BANKS IN ECONOMIC GROWTH: Commercial banks have been playing an important role in the economic development of Bangladesh. They provide investible funds to both the public sector, and specially the private sector. Further, banks have played a significant role in respect of the four major drivers of economic growth in Bangladesh as discussed above.
The banking sector, however, is faced with various challenges, which include among others, weak management, poor governance, lack of strong leadership, and non-compliance with ethical standards leading to various types of banking scams such as money laundering and Non-Performing Loans (NPLs).
Bangladesh is an import-dependent country. It needs to import raw materials, accessories and machineries to foster development of the industrial sector, including the RMG sector. Banks have been facilitating payment, finance and risk management services to the sector.
In 2017 the private commercial banks' (PCBs) share in export finance was the highest (60 per cent) followed by state owned commercial banks (SoCBs). Within the apparel sector, the RMG sector received the highest proportion of financing from banks, and the volumes and proportions have increased between 2014 and 2017. Import payments have been increasing over the years. The total import payments (c & f), including imports of EPZ, increased more than two times from US$21,629 million during 2007-08 to US$43,663.0 million during 2016-17.
Banks play a major role in facilitating remittances by migrant workers. During 2010-11 and 2016-17, the country received lower remittances than in the past; and the amounts remitted through banking channels likewise declined. However, Bangladesh received higher remittances during the last fiscal year resulting from a strong pick-up in global economic activities, especially in the Middle East countries. The major factors contributing to higher remittances through the banking channels during the last fiscal year are: (a) depreciation of the BDT against US$; (b) higher rate offered by local banks; (c) many banks, facing shortage of US$ for the last few months due to increase in import payments against decline in export earnings, have intensified their efforts to increase remittance inflows through their respective channels; and (d) Bangladesh Bank's (BB) strengthened surveillance on hundi -- the illegal outlet that many migrant workers use to send money home.
Given the importance of the agriculture sector, the government has given highest priority to agriculture and its allied sectors for adequate credit with low cost. Between 2013 and 2017, banks' loan disbursement exceeded the target; and the crop sub-sector received about one-half of total agricultural credit, followed by livestock and other agriculture activities.
Private Commercial Banks (PCBs) accounted for the largest share of agricultural credit followed by Specialised Banks (SBs), State-owned Commercial Banks (SoCBs) and Foreign Commercial Banks (FCBs) (Bangladesh Bank Annual Reports). Between 2001-02 and 2017-18, the Bangladesh Krishi Bank's total disbursement to the agriculture sector increased more than five times from BDT 15.63 billion to BDT 82.15 billion; and its total disbursement to the crop production sub-sector increased by about 3.6 times from BDT 8.59 billion to BDT 30.62 billion. During FY17, the SoCBs, PCBs, FCBs and SBs provided credit of BDT 210 billion, exceeding the target of BDT 175.50 billion. The FCBs and the PCBs exceeded their targets by about 44 per cent and 36 per cent respectively.
Between 2007 and 2017, the share of short-term loans was greater than that of long-term loans, and the gap has been widening during the past five years (Siddique et.al. 2018). In FY17, about 82 per cent of disbursement was in the form of short-term lending, and the rest was in the form of long-term loans for purchase of agricultural machineries, irrigation equipment and livestock. Credits for crop production and poverty alleviation programmes accounted for about 59 per cent and 11 per cent respectively of total short-term loans. Around 3.86 million farmers received agricultural and rural credit. Around 3 million small and marginal farmers received about BDT 150 billion agricultural loans from different banks. Over 8700 farmers in the less-developed areas (haor, char, etc.) received about BDT 0.4 billion of agricultural and rural credit. More than 19,000 farmers in the three hill districts received around BDT 0.5 billion at only 5.0 per cent interest rate. About BDT 4.0 billion was disbursed among about 0.12 million farmers through over 15,000 open credit disbursement programs arranged by different banks. The BB undertook a special refinance scheme under which it provided BDT 5.62 billion credit through BRAC to 0.15 million share-croppers with limited access to banks. Also, the BB undertook special refinance schemes for the jute and dairy farming sectors (Bangladesh Bank Annual Report 2018).
To ensure adequate funding for SMEs, the Bangladesh Bank in 2010 formulated the "SME Credit Policies and Programmes" aimed at helping SMEs in achieving sustainable inclusive growth. Under this programme, the BB does not impose targets on commercial banks and non-financial institutions (NBFIs); rather the targets are independently decided by them. Since 2012, both the targets and actual disbursements have been increasing. During FY17, while the target was BDT 1338.6 billion, BDT 1439.7 billion was disbursed by all banks and NBFIs among 697,000 cottage, micro, small and medium sized enterprises. Women-led entrepreneurs received special emphasis, with 49,000 of them receiving BDT 45.1 billion.
The BB has been encouraging all banks and NBFIs to grant loans to women entrepreneurs at reduced interest rate (9 per cent). Also, it set up a dedicated women entrepreneur desk and instructed all banks and NBFIs to do the same, reserve 15 per cent of the SME funds exclusively for women entrepreneurs, provide credit to new women entrepreneurs in this sector, and sanction loans of at least BDT 2.5 million to women entrepreneurs with only personal guarantee but no collateral under its refinance facilities. At the end of June 2017, BDT 20.3 billion was refinanced to 19,098 women-led enterprises.
CONCLUSION AND RECOMMENDATIONS: Banks have contributed considerably in the process of economic growth of Bangladesh. However, their contribution would have been greater, if they had effectively addressed various challenges faced by the banking sector such as weak management, poor governance, lack of strong leadership, and non-compliance with ethical standards leading to various types of banking scams such as money laundering and NPLs.
To become a developed country by 2041, the major impediments to development need to be effectively addressed. Therefore, there is urgent need to: (i) further increase public spending on infrastructure development; (ii) increase the investment-GDP ratio, and encourage greater investments in the private sector; (iii) increase export earnings by both increasing the volume and quality of RMG products as well as by considerably diversifying export basket and exploring new markets; (iv) increase inward remittances by providing adequate skills to the migrant workers, exploring new countries of destination, and further improving banking channels for receiving inward remittances; (v) create adequate number of "decent jobs" to provide the workforce with reasonable wages and decent standard of living; (vi) make required investments in the health and education sectors to be able to reap the benefits of "demographic dividend"; (vii) ensure continued growth in agriculture, despite loss of arable land and threats of natural disasters; (viii) increase efficiency and productivity in the SME sector by duly addressing various challenges faced by the sector; (ix) increase private sector credit to the productive sectors; (x) improve efficiency, management, governance, leadership, and transparency in the banking sector to check money laundering and other scams and recover NPLs, which could, then, be used for productive investment; (xi) strengthen macro prudential frameworks and enhance exchange rate flexibility to improve resource allocation, reduce vulnerabilities and boost resilience; (xii) ensure inclusive growth and development; and last, but not the least, (xiii) improve efficiency, transparency, accountability and overall governance, both in the public and the private sectors.
Barkat-e-Khuda PhD is Dr. Muuzaffar Ahmed Chair Professor, Bangladesh Istitute of Bank Management (BIBM). The article is an abridged version of the keynote paper presented by the writer at the Annual Banking Conference held in Dhaka (07-08 November 2018)