The Bangladesh economy in the New Year: The opportunities and challenges

Continued from yesterday

The rural income inequality was, therefore, not increasing as fast as in the urban areas. However, urban income inequality and poverty remain as significant challenges for the policy makers. The faster transition to urbanization fuelled by accelerating rural-urban migration is a growing challenge to our sustainable development campaign which will have to be addressed by policy makers in the New Year and as well as in the coming years. A country with higher proportion of young population always in  search of employment opportunities in the urban and semi-urban areas must be prepared to face this challenge of evolving urbanization with farsighted policies including health, education and social protection and, of course, financial and other resources.

Inflation: Thanks to prudent Monetary Policy pursued by Bangladesh Bank inflation remained subdued during last year. The average inflation at the end of June 2017 was 5.44 percent. This was 5.92 percent at the end of June 2016. Over the last few months food inflation increased due to sudden upsurge in rice price. It was 7.87 percent at the end of September 2017.This was the highest food inflation over the last three years. This will certainly push the average inflation at the year end. So the Monetary Policy Statement which Bangladesh Bank will announce in January 2018 must be cautious enough to anchor on the rising expectation of inflation.

Import: The last half of the past calendar year witnessed uptake in total import bill. It was 43.49 billion USD in fiscal year 2016-17.The import bill for the first four months (up to October 2017) of the current fiscal year was 17.14 billion USD. This was 29 percent higher than the same period of last fiscal year. It is believed that the trend will continue throughout the current fiscal year. Since most part of the import is made for export in terms of machines and raw materials this trend is encouraging for our growth story. However, both Bangladesh Bank and NBR must make sure that the import really takes place without any irregularities through necessary supervision and monitoring.

Exports: The growth of export earnings during last fiscal year was indeed very sluggish recording only 2% growth. However, the export during first five months of the current fiscal year was 14.6 billion USD recording a growth rate of 7% over the same period of the last fiscal year. This means the growth of export has rebounded and given the uptake in global trade growth Bangladesh will certainly do better in the New Year. The import trend supports this expectation as well.

If the government and Bangladesh Bank continue their fiscal and export development funding support to the conventional major exporters and as well to four thousand more small and medium sized non-conventional exporters( earning around a million USD or so a year) Bangladesh will surely experience a huge boost in its export earnings. In addition, if the on-going process of remediation of RMG factories continues and the 200 million USD Green Transformation Fund created at the Sustainable Finance Department of Bangladesh Bank is quickly disbursed to the factories through some pro-active moves by the regulator and participating banks and financial institutions Bangladesh will witness a green branding of its RMGs recording further growth in its exports earnings in the New Year.

Remittances: Bangladesh experienced a negative growth in remittances during last fiscal year compared to the fiscal year 2015-16. The remittances dropped to 12.8 billion USD in fiscal year 2016-1 from 14.93 billion USD of the fiscal year 2015-16. The remittances were down mainly because of fall in oil price and instability in the Middle-East during the last fiscal year.

However, inflow of remittances to Bangladesh during first five months of the current fiscal year (up to November) recorded 5.8 billion USD experiencing an eleven percent growth over the same period of last fiscal year. Bangladesh Bank should continue to monitor the Exchange Houses and other financial service providers including their last mile services to the beneficiaries of the remitters. If needed Bangladesh Bank should talk to the central banks of countries of origin of remittances to legalize agents of mobile and agent banking to curtail 'digital hundies'. The current exchange rate of Taka to USD is soft enough to attract remittances through formal channels. The banks should take advantage of this devaluation and help bring more remittances in the coming days.

Reserve: Bangladesh added nearly 3 plus billion USD to its Foreign Exchange Reserve almost every year during 2009 to 2016. It was 33.5 billion USD in June 2017. This was only 0.36 billion USD more than what was in June 2016. The Reserve dropped to 33 billion USD on 20 December 2017 mainly due to growing import bill. This is still good enough to support import bill of 8-9 months. Given the increased trend of exports and remittances it is hoped that Bangladesh will be able maintain a comfortable Reserve in 2018. But BB must remain alert in monitoring the foreign exchange market so that there is no 'foul play' by any financial institution to destabilize the market.

Banking Sector: The banking sector experienced unprecedented financial stability despite global financial crisis which began in 2008. A number of scams were unearthed during the last few years mainly by Bangladesh Bank supervisors which only strengthened the fundamentals of the financial sector. There was no loss of trust on the regulator. The key financial indicators including capital adequacies of banks remained aligned with Basel-111 requirements. The picture is almost same even today with the average capital adequacy ratio still remaining 10.65 percent risk-weighted assets. The non-performing loan ratio has, of course, gone up to uncomfortable double digits, particularly for the state-owned banks recording 25 percent plus NPL.

However, it must also be noted that 86 percent of this NPL has also been provisioned for. Only Taka 6,344 crores remain to be provisioned. Other key financial indicators also remain robust. The deposit and credit increased by 10.69 percent and 18.11 percent respectively. The private credit growth during past five months remain high (about 18%). The liquidity position in the financial sector remains comfortable leading to lower average interest rate (9.39%) against deposit rate of 4.89 percent.

The spread is 4.5 percent which can, of course, be further lowered. The financial inclusion indices in terms of increase in the number of new branches (189), Ten Taka Accounts (17.2 million as of September 2017, 53% of which are of farmers), School Banking Accounts (1.33 million),enhanced agricultural loans ( targeted to 20,500 crore BDT in current fiscal year), SME loans during first nine months of current year amounting to one lakh twenty three thousand crore BTD ( going to one lakh thirty one thousand entrepreneurs without any collateral and more than six thousand crore through refinance with !5 % of this prioritized for women), disbursing nearly nine hundred crore BDT every day through Mobile Financial Services plus growing presence agent banking.

No doubt, Standards and Poor's and Moody's maintained stable sovereign rating for Bangladesh in 2017. Despite all these gains, lack of good governance and liquidity crunch in a few banks including 'ill famous' Farmers Bank and high non-performing loans of some of the 'big wigs'from the public banks have, of late, been creating tensions in the banking sector. Since the macro fundamentals are strong the Bangladesh Bank with necessary support from the government should exercise its regulatory power in a manner so that they clear this mess as quickly as possible and restore necessary confidence in the financial sector.

Concluding Remarks: Since Bangladesh has done so well in achieving most MDGs and given its impeccable track record of addressing foreign debt liability plus a number of on-going reform measures to raise domestic revenue it will not be unwise to predict that it will show similar success in implementing SDGs by 2030. By then it will be an upper Middle Income Country marching forward to be a developed country in 2041. No doubt, PWCs in its ' World in2050' Report has recently predicted Bangladesh will be 23rd largest economy in terms of PPP adjusted USD and one of the three fasted growing countries in the world. Let's remain optimistic and entrepreneurial to live up to this dream. The exploration of aspirations witnessed in 1971 during our war of liberation should continue to drive us to materialize that dream. Happy New Year. (Concluded)


The writer is a Professor of Development Studies at Dhaka University and a former Governor of Bangladesh Bank. Email: [email protected]