Risks and challenges of the economy of Bangladesh

The key challenges on the domestic front continue to be the acceleration of private investments and the better use of public sector resources to implement important infrastructure and social programs. The investment outlook is clouded by uncertainties pertaining to the dynamics of domestic politics; structural reforms; developments in infrastructure and energy; and global economic prospects.

Bangladesh has the potential to attract FDI from a wide range of countries, including relocation away from China that is currently underway. If the government fails to provide necessary infrastructural support in the areas of power, gas and serviced land by establishing Special Economic Zones (SEZ) rapidly, and improved transport facilities through better connectivity and ports, many of these new opportunities will be lost to international competitors such as Vietnam, Cambodia and Myanmar.

The challenges of the economy of Bangladesh

The inability to realise the 8% growth target under the Sixth Five Year Plan was primarily attributable to shortfall in both domestic and foreign private investment as supply side constraints did not ease. With increase in the size of public investment to nearly 7% of GDP, which by international standards is rather sizable, the quality of spending has become all the more important for economic efficiency. Overall, the 8% growth target by the end of the Seventh Five Year Plan is attainable, provided necessary supporting reforms and policies are put in place.

Macro-economic policies have been congenial for the development of the private sector in Bangladesh, but the general state of the business environment has remained problematic. The pace of recovery of the European Union economies, the primary destination of Bangladeshi exports, following the European Debt Crisis will be critical.

Macro-economic policy space is generally limited in a developing economy like Bangladesh.

Risks to fiscal sustainability stem from both direct and indirect contingent liabilities, including those from the large, unfunded General Provident Fund, and from State-Owned Enterprises. The recent increase in pension from 80 to 90% of basic pay has increased the government's future pension liabilities. Fuel subsidies also present risks if global fuel prices increase, as the government has not yet taken advantage of the lower prices to change policies for fuel and fertilizer subsidies, as has occurred in India, Pakistan, Egypt and Indonesia.

Priority Areas Of Reforms 

Structural reforms are particularly challenging in the following areas:

Financial

 There has been no visible reduction in non-performing loans as habitual defaulters continue their delinquent behaviour with impunity. The banking sector remained entrenched in high non-performing loans and uneven interest rate spreads, reflecting the inadequacy of competition and contestability. Regulatory capital to risk-weighted assets were just 7.5% (as of June 2015), placing banks in some risk in the event of significant defaults.

Energy

The drop in oil prices generated substantial fiscal savings because fuel prices were heavily subsidised. Bangladesh has not made sufficient use of this opportunity either to build fiscal space, which would allow an effective counter-cyclical response in the event of an economic slowdown, or to invest in infrastructure or human capital. In fact, subsidies for electricity increased in FY 2015 because of increased reliance on costly liquid fuel-based power plants, keeping total energy subsidies nearly unchanged as a share of GDP.

Fiscal

The government is still committed to implement the new VAT law. There has been some progress in the automation of tax registration, reporting, administration, and collection. Also, local government finances need to be brought on to a more sustainable footing, addressing expenditure and revenue mismatches across different levels of government and reinforcing local government revenue capacity, including that through better property taxation.

Administrative

Administrative reforms to streamline court proceedings to facilitate contract enforcement have generally stagnated. Much of the reform agenda, including a broad-based reform of state-owned enterprises, remains to be implemented. Issues that need to be addressed include: implicit and explicit government guarantees; non-binding budget constraints; low efficiency; and a lack of transparency and accountability.

The Likely Headwinds

• Balance of payments (BOP) pressures could emerge from lost export production and slower remittance growth. Prolonged slow growth in advanced and emerging markets can particularly have an adverse impact on garment exports, thereby widening the trade deficit. Remittances have been flat so far in the year 2016 despite 5.4% growth in the stock of Bangladeshi workers abroad in FY 2015.
•  Greater downward flexibility in the taka-dollar exchange rate would be needed while resisting further nominal exchange rate appreciation against the dollar. 
• Deterioration in the solvency of state-owned banks is also likely, assuming failure to recover all non-performing loans and measuring capital on a conservative basis. 
• Greater attention is needed to swiftly reach the standards of safety and labour rights compliance in garments; to complete the critical ongoing road, electricity and gas development projects; to improve the efficiency and financial solvency of the banking sector. 
• Establishing a sound financing framework to meet the country's growing infrastructure needs remains a key challenge for policy makers.
• Efficient transport, reliable energy, safe drinking water, and modern telecommunication systems are critical in attracting foreign direct investment, expanding international trade, and achieving long-term investment and growth