Pressure on external sector of economy to persist

Pressure on the external sector of Bangladesh's economy is expected to persist in the current financial year, said a top official of the World Bank yesterday.

"We have already seen this forecast materialising in data from the past two months, which show weak performance in export earnings and remittance inflows," said Abdoulaye Seck, the country director of the Washington-based development lender.

He was speaking at a meeting of the American Chamber of Commerce (AmCham) in Bangladesh at the Sheraton Hotel in the capital's Banani.

As the post-pandemic recovery was disrupted in the last fiscal year, the WB lowered GDP growth projections to 5.6 percent for Bangladesh for FY24. It expects growth to gradually accelerate over the medium term.

"Inflation is likely to remain elevated in the near term and gradually subside, as import prices stabilise over the medium term," said Seck.

"To help contain inflation, the transmission of monetary policy can be strengthened, including phasing out the use of interest rate caps on lending."

He said in the near term, policy adjustments can help stabilise macroeconomic conditions.

According to the WB official, additional exchange rate flexibility will incentivise migrants to send remittances using formal channels and will encourage repatriation of export earnings.

He said financial sector vulnerabilities need to be addressed through effective bank supervision.

"Recent monetary policy updates are a step in the right direction, but a faster pace of implementation is needed."

Seck highlighted three key constraints facing the economy.

Exports remain highly concentrated only in one product: garments. As a result, the share of exports in the gross domestic product has declined in recent years, falling from 16.7 percent in 2010-11 to 14.1 percent in FY23.

"With the impending end of preferential access to markets due to the LDC graduation, Bangladesh will need to find new drivers of exports and growth," he said.

Secondly, the financial sector needs to be strengthened to effectively channel savings into productive investments to support future growth as envisaged in the 8th Five-Year Plan.

"Banking sector vulnerabilities are growing. A nascent domestic capital market is also constraining longer-term financing for infrastructure, housing, and climate change mitigation," Seck said.

Third, according to the WB official, the benefits of urbanisation, with its positive agglomeration effects, have slowed because of high congestion costs and poor environmental conditions.

"These challenges need to be immediately addressed."

"We have estimated that GDP growth under a business-as-usual scenario would naturally decline over time, amid headwinds from external vulnerabilities and declining population growth."

But if Bangladesh adopts key policy reforms, a high pace of growth can be sustained, he said, adding that a strong partnership between the private sector, civil society and the government will be needed in this process.

He said the economy needs a more diversified, competitive formal private sector to create more jobs.

Annual FDI flow comprises only 1 percent of GDP. The agriculture sector is also undiversified, with a high concentration in rice, and the sector's productivity has remained low in the last decade.

At less than 10 percent of GDP, Bangladesh's domestic revenue is very low, according to Seck.

"Weak domestic resource mobilisation is a key constraint that limits the ability of the public sector to support the country's development, including investing in human capital, building climate resilience, and strengthening investment climate for private sector growth."

He pointed out that female labour force participation is still about half of male.

"Our estimates are that Bangladesh would add 2 to 3 percentages of growth each year should female labour force be equal to male participation."

AmCham President Syed Ershad Ahmed said Bangladesh responded rapidly to the Covid-19 pandemic, supported by sound macroeconomic policies.

"Our economy has achieved significant milestones, but it still faces major challenges."

The challenges include increasing inflationary pressures, a deficit in the balance of payments, and a shortfall in revenue.

"These challenges are not unique to Bangladesh. Many developing countries are also struggling with similar issues."

Ahmed said many countries such as Sri Lanka have successfully tackled economic challenges.

"This raises concerns about whether our current economic policies can effectively address issues such as high inflation, trade deficits, and a shortage of foreign currency reserves."

"We need to develop a more effective monetary policy for Bangladesh. Moreover, we must prioritise improved governance, particularly in the banking sector, to enhance risk management."