The rise and rise of Bangladesh

A report titled “Bangladesh Development Update: Towards Regulatory Predictability”, released this month by the World Bank, ranks Bangladesh among the top five fastest growing economies in the world.

The report projects Bangladesh to grow at a rate of 7.3 per cent during 2018-19. It is preceded by two other South Asian neighbours, India and Bhutan, which are estimated to grow at a rate of 7.5 per cent and 7.6 per cent, respectively, during the same period.

It is undoubtedly a time for celebration for Bangladesh, but simultaneously the country should note and address many challenges that its economy continues to face. This piece takes stock of some of the key factors that have helped Bangladesh to achieve this position, and also tries to identify a few challenges that remain.

At the time of its independence in 1971, it was beyond anyone’s imagination that a tiny piece of land in the South Asian region called Bangladesh will perform so tremendously that it will exceed several domestic as well international agencies’ targets on economic performance. In 2018, it fulfilled the United Nations criteria for graduating from “least developed country” to a “developing country”, well in advance.

In a short span of time Bangladesh has become one of the world’s economic success stories, with major contributions from the ready-made garments industry, remarkable agricultural production and infrastructural development. With around 4,500 factories, Bangladesh is the second-biggest exporter of ready-made garments in the world. With this backdrop, it becomes pertinent to understand the factors that lead Bangladesh to this stage of economic growth.

Among the domestic factors, the index of industrial production played a vital role, increasing by 18.5 per cent in 2018. This increase is mainly attributed to the growth of the textiles sector along with pharmaceuticals, non-metallic minerals, leather and chemical products. The industries sector grew at 10.2 per cent in 2017, with a significant contribution from large and medium scale manufacturing industries. Electricity is a key input for any industrial production and Bangladesh has invested heavily in this sector. This has allowed energy generation to more than double over the past decade. Currently, it has an installed capacity of 18,275 megawatts.

For the agricultural sector, it has been a wonderful year. A bumper harvest in an area of more than 5.65 million hectares was contributed by rice, wheat and maize. Bangladesh produced around 70 million metric tonnes of rice, 3.7 million metric tonnes of maize and 1.3 million metric tonnes of wheat in 2018. Last year, the agricultural sector grew by 4.2 per cent.

Thanks to macroeconomic policies, Bangladesh has been able to maintain by and large a stagnant inflation rate, between 5 per cent and 5.5 per cent, for quite a long time. Further, the gap between rural and urban inflation has been narrowing in the last three years.

In the external sector, the export has shown a tremendous performance, with 14.5 per cent growth in ready-made garments and 8 per cent growth in non-ready made garments exports. This sector took advantage of the US-China trade war and expanded its US market by 17.4 per cent, compared with only 1.4 per cent growth during the last financial year.

Along with export, remittance is a major source of external earnings for Bangladesh. It received more than US$10 billion in remittances in the first eight months of 2018, primarily from the US, Europe and Gulf countries. This resulted in a sharp decline in its current account deficit to US$4.3 billion in the first seven months of the 2018-19 financial year compared with US$5.4 billion in the corresponding period of 2017-18. Further, investment by foreign institutional investors and brokerage firms, among others, kept the index of the Dhaka Stock Exchange largely in a stable position.

Having discussed the prominent responsible factors for the growth of the Bangladeshi economy, let us have a look at some of the areas that are still challenging and need attention to elevate further its growth trajectory.

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Attracting foreign direct investment remains one of the key challenges for Bangladesh, which currently accounts for only 1 per cent of GDP. In spite of having a large pool of labour, moderate infrastructural development and well established foreign relations with major investing countries, Bangladesh remains unappealing to foreign investors. This is an area that needs urgent attention.

Income inequality and extreme poverty are two prominent obstacles to Bangladesh’s economic growth. It faces an unemployment rate of more than 6 per cent, with a large difference between men and women. Policies need to be devised to address these concerns.

A high fiscal deficit, low tax collection, regulatory uncertainties, labour unrest and high levels of corruption are among other issues that are dragging on economic growth.

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The economic performance achieved so far is definitely commendable. But, to sustain growth and reach an even higher stage, the country needs to remove a lot of obstacles. Banking sector reforms, implementing labour laws, improving indicators of ease of doing business and curbing corruption are immediate needs of the hour.

Bangladesh also needs to be vigilant about the threat posed by religious fundamentalism and create a safe and secure environment both socially and economically.

Dr Rahul Choudhury is a visiting research fellow at the Institute of South Asian Studies, National University of Singapore