Bangladesh economy faces four challenges, three risks

Bangladesh economy currently faces four challenges--high inflation, deficit in foreign currency, import restrictions and risks to the financial sector, according to the World Bank.

The WB, however, projected the Bangladesh economy will grow by 5.6 per cent though the government set a growth target of 7.5 per cent.

Washington-based global lender highlighted these in its Bangladesh Development Update, which was unveiled at a press conference in Dhaka on Tuesday.

World Bank country director for Bangladesh and Bhutan Abdoulaye Seck, and senior economists at World Bank Dhaka office Bernard Haven and Rangeet Ghoshe addressed the event.

Besides, there are three risks to the economy.

First, a delay in the reform of the exchange rate prolongs deficit in shortfall of foreign currency and import restrictions.

Second, high inflation continues for long due to rising prices of goods.

Third, ongoing risk to the financial sector may increase further as a coordinated reform programme has not been taken.

The WB also commented on the recent bank merger initiative saying a caution should be maintained and it is necessary to follow international standards to complete the process.

Abdoulaye Seck said the economy of Bangladesh has the capacity to bounce back. However, there is no doubt that high inflation persists in this country, but wages remain stuck in the same place to a large extent, thus, many families with low-income face pressure.

Besides, there is much vulnerability in the financial sector.

Bangladesh's economy made a strong turnaround from the Covid-19 pandemic, but the post-pandemic recovery continues to be disrupted by high inflation, a persistent balance of payments deficit, financial sector vulnerabilities, and global economic uncertainty, says the World Bank in its twice-yearly-update.

The World Bank has cut the GDP growth of Bangladesh projecting a 5.4 per cent growth in the 2023-24 fiscal, which is much less than the target of 7.5 per cent growth set by the government. According to the WB projection, currently a 7.5 per cent target is unachievable.

The global lender further said GDP growth may rise slightly to 5.7 per cent in the next fiscal. GDP growth slowed significantly to 5.8 per cent in the 2022-23 fiscal from 7.1 per cent in the 2021-22 fiscal. GDP growth is going to drop below 6 per cent after two fiscal years since the 2021-22 fiscal.

The World Bank, however, think various reforms revive the previous growth trend and these reforms include market-driven exchange rate, strengthening monetary and fiscal policies, and taking effective decisions on banking sector reform.

The World Bank update reads, “Moving forward with forced bank mergers may be counterproductive without a thorough assessment of asset quality. A consolidation process will require careful assessment and prudent implementation of procedures to avoid weakening good banks acquiring bad banks, and an assessment of the asset quality of weak banks will be required.”

Earlier in March, private EXIM Bank and crisis-hit Padma Bank inked an agreement on mergers following the announcement of Bangladesh Bank’s roadmap for banking reforms. People concerned from the banking sectors said the process is going too fast.

World Bank country director Abdoulaye Seck said an analysis is necessary on what reform will be adopted and how it will be implemented. Asset values should be fixed properly, and specific policies should be formulated on bank mergers and acquisitions. He said the World Bank is ready to provide assistance to Bangladesh in banking sector reform.

World Bank senior economist Bernard Haven said initiatives must be taken on troubled banks and the merger process should start after identifying the problems of the certain bank. Besides, the practice of international standards on mergers also should be taken into consideration because a better-performing bank does not take additional liabilities.

The World Bank report said, “Stressed assets in the banking sector continue to rise. Officially recognized non-performing loans (NPL) increased by 20.7 per cent year-on-year at the end of December 2023 compared to the previous year. The gross NPL ratio (ratio of NPLs to total loans) stood at 9 per cent in December 2023 compared to 8.2 per cent in December 2022. The NPL ratio understates banking sector vulnerabilities due to lax regulatory definitions and reporting standards, repeated forbearance measures, and weak regulatory enforcement.”

Besides, a contractionary monetary policy also cuts the lending growth.

“The balance of payments remained in deficit in the first seven months of FY24, led by the financial account. The balance of payments deficit persisted, although it narrowed from a US$ 7.4 billion deficit over the same period of FY23 to US$ 4.7 billion. The financial account deficit widened to US$ 7.3 billion over July-January FY24 compared to US$ 0.9 billion over the same period of FY23,” the World Bank update states.

Abdoulaye Seck said high inflation rate hampers investment. He recommended the introduction of market-based interest rates saying problems still persist due to delays in decisions on banking sector reforms.

Overall inflation, according to the Bangladesh Bureau of Statistics (BBS), has remained over 9 per cent in the country over the past year. People with lower income brackets feel the pressure of high inflation. The World Bank advised strengthening monetary policy to control the existing high inflation in the country.

Three factors contributed to high inflation, according to World Bank evaluation. “Inflation dampened consumption growth, fueled by increased electricity and fuel prices, shortages stemming from import restrictions, and the depreciation of the taka.”

Abdoulaye Seck said inflation can be controlled through a strong monetary policy or the new strategy that is applied to adjust fuel oil prices. A cut in subsidy in the export sector will bring little relief in the financial sector, he added.

Bangladesh is one of the countries among the lowest in tax-GDP ratio.

The global lender advised strengthening the revenue collection system from the internal sources to increase investment for long-term growth.

According to the World Bank, there are mainly three bottlenecks in revenue collection, and these are tax evasion, tax exemption and various para-tariffs on trade and commerce. The World Bank recommended reducing para-tariffs as part of preparation for LDC graduation, rationalising tax rebates and enhancing the capacity of tax administration.