Bangladeshs Economic Prospects and Challenges

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9/23/2010
Economic growth continues in Bangladesh, although at a slower pace, during the world
economic slowdown. Bangladesh has achieved steady economic growth at 5% or more per year
over the past decade. Its growth exceeded 6 percent in FY 2008 reached 5.!% in FY 200! and is
expected to slow slightly to 5.5% in FY 20"0 than#s primarily to sl$ggish exports and private
investment. %owever more s$pportive external conditions are expected to lead to an increase in
growth to aro$nd 6% in FY 20"".
he most important !actors !ostering economic growth in Bangladesh ha"e #een its
macroeconomic sta#ilit$ and outward orientation. %a&or impediments to economic
de"elopment ha"e #een wea' go"ernment, political insta#ilit$, a wea' #an'ing s$stem, and
an unrelia#le power suppl$. Bangladesh contin$es to ran# near the &ottom o' (ransparency
International)s corr$ption perception index 'or 200! *despite an improvement over 2008+.
Interest rate spreads exceed regional averages and water and power o$tages signi'icantly red$ce
total 'actor prod$ctivity in &oth agric$lt$re and man$'act$ring. ,o&ili-ation o' p$&lic reven$es
will also remain a ma.or challenge in the immediate '$t$re.
Economic growth in 2009 was positi"e despite the glo#al economic crisis. (e"ertheless, the
countr$s #attle against po"ert$ is not progressing as rapidl$ as anticipated. (he wel'are
impact o' the crisis is 'elt most &y ho$seholds employed o$tside agric$lt$re and/or receiving
remittances 'rom a&road. In addition press$re 'rom 'ood price increases since 2008 contin$e to
a''ect ho$sehold incomes. 0ccording to 1orld Ban# estimates poverty levels in Bangladesh
altho$gh still very high declined 'rom 2000 to 2005. (he percentage o' the pop$lation living in
poverty *less than 22 a day in p$rchasing power+ 'ell 'rom 85% to 8"% while the percentage
living in severe poverty *less than 2".25 a day in p$rchasing power+ declined 'rom 58% to 5"%.
3rior to the crisis Bangladesh was on target to c$t poverty &y nearly "" percentage points
&etween 2005 and 20"0. 1ith the impact o' the crisis the poverty rate is now pro.ected to 'all &y
a&o$t ! percentage points. (his translates to aro$nd 2.4 million additional poor people in 20"0
d$e to the crisis according to the 1orld Ban#.
)rowth is slowing in 2010, hampered #$ domestic suppl$*side constraints. (he 1orld Ban#
and the I,F &oth maintain that lac# o' relia&le power and gas s$pply is a ma.or constraint on
&$sinesses in Bangladesh. (otal gas prod$ction declined in 200! as have gas sales to the power
sector res$lting in 're5$ent power c$ts. 6ven &$sinesses with their own power plants have &een
disr$pted d$e to the gas shortages. Ind$strial prod$ction in apparel ceramics 'a&rics steel and
particles are among the hardest hit. 1ithin the apparel sector #nitwear is especially v$lnera&le
&eca$se spinning dyeing and 'inishing 'actories need $ninterr$pted gas s$pply 'or '$ll
prod$ction. Ind$stry trade associations report that irreg$lar gas s$pply ca$sed a 50% decline in
textile prod$ction and orders are going $n'$l'illed. 7as rationing meas$res implemented at the
end o' 8an$ary 20"0 have res$lted in 'actories &eing sh$t down one day per wee#. 9nless there is
"
:ancy ;eiter Foreign <ervice 6conomist 9<0I=/670(/67. (he a$thor)s views expressed in this p$&lication do
not necessarily re'lect the views o' the 9nited <tates 0gency 'or International =evelopment or the 9nited <tates
7overnment.
"
a signi'icant easing o' this energy &ottlenec# 'irms are li#ely to maximi-e prod$ction &ased on
existing capital stoc# rather than 'resh investment.
he political en"ironment !or economic growth is currentl$ sta#le !ollowing the +ecem#er
200, election #ut threats remain. (he election ret$rned the 0wami >eag$e to power a'ter two
years o' r$le &y a transitional government. 3rovided that it retains the s$pport o' the military the
c$rrent government is expected to remain in power and dominate policy ma#ing 'or the next
several years. (he government 'aces no immediate challenge to its r$le &$t there are two
potential so$rces o' political insta&ility in 20"0?""@ namely an escalation in social $nrest and a
new campaign o' violence waged &y militant gro$ps.
-lthough the present regime is regarded as #usiness*!riendl$, the #usiness en"ironment in
Bangladesh is mediocre at #est and is continuing to decline. Bangladesh ran#ed ""!
th
in the
world *o$t o' "8" co$ntries+ on the 6ase o' =oing B$siness Index in the 1orld Ban#)s Doing
Business 2010. (his mar#s the co$ntry)s second ann$al decline dropping 'rom "0!
th
in the
previo$s year. (his means that other co$ntries are re'orming their &$siness environments 'aster
than Bangladesh. 0reas o' partic$lar wea#ness in the &$siness environment o' Bangladesh are
en'orcing contracts *where Bangladesh ran#s a dismal "80
th
+ registering property *"A6
th
+
employing wor#ers *"24
th
+ and dealing with constr$ction permits *""8
th
+. B' these only
employing wor#ers experienced a positive change 'rom the previo$s year. 0ccording to Doing
Business, en'orcing a commercial contract in Bangladesh involves 4" proced$res ta#es nearly
'o$r years and costs 6C% o' the claim. ;egistering property involves eight proced$res ta#es
245 days and costs "0% o' the val$e o' the property. Bn the other hand Bangladesh is
o$tstanding in the area o' protecting investors where it ran#s 20
th
in the world. For protecting
investors Bangladesh ran#s close to mean B6D= levels on indexes o' disclos$re director
lia&ility and shareholder s$its.
.urther !inancial sector de"elopment is needed to allow Bangladesh to achie"e its growth
potential. Bangladesh contin$es to lag &ehind that o' comparator co$ntries in the area o'
'inancial sector development. 1hile it)s tr$e that the reg$latory 'ramewor# has &een
strengthened s$pervision has &een enhanced and steps have &een ta#en to restr$ct$re and
privati-e the large nationali-ed commercial &an#s there is still a need to strengthen the co$ntry)s
crisis management and li5$idity s$pport 'ramewor#s. 3otential v$lnera&ilities in the &an#ing
sector incl$de $neven loan classi'ication provisioning and capital. :on?pr$dential government
interventionEs$ch as interest rate ceilings moral s$asion directed credit and explicit
re5$irements to ease de&t service 'or some sectors o' the economyEincreases ris#s red$ces
transparency and creates ine''iciencies. In addition mar#et discipline is a''ected &y inade5$ate
in'ormation stemming 'rom non?transparent acco$nting and reporting.

he ./ 2011 #udget is #oth e0pansionar$ and progressi"e, ta0ing the richer people with
high ta0es on lu0ur$ items, while o!!ering rural su#sidies and po"ert$ reduction programs.
(he new &$dget will increase per capita &$dget expendit$re 'rom 2!0 in FY 200! to 2"2! in FY
20"". (he &$dget also aims to revive the declining trend o' the 0nn$al =evelopment 3rogram
*0=3+. 0=3 as a percentage o' total expendit$re has &een 'alling since FY 2005 when it was
C6.!%. In FY 200! this stood at 2".A% and plans are to increase this to C6.5% &y FY 20"5. (he
other stated aims o' the FY 20"" &$dget are to@ contin$e e''orts to mitigate the adverse lagged
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impact o' the glo&al 'inancial crisisF ta#e advantage o' the opport$nities in view o' glo&al
economic recoveryF and 'actor?in regional dimensions o' development.

1e"enue collection in the latest reported period increased #$ 12.13 relati"e to the same
period last !iscal $ear driven &y 26."% growth in domestic indirect taxes and "!.C% growth in
income tax collections. (he impressive growth in domestic?&ased taxes is d$e largely to
improved 0=3 implementation higher tax rates &roadening o' tax &ase and improved
compliance.
he ./ 2010 #udget re"erses the trend toward trade li#erali4ation #$ raising some import
duties and lowering duties on imported raw materials, increasing e!!ecti"e protection. (he
average protection rate was increased 'rom 20."% to 22.!% mainly thro$gh wider imposition o'
para?tari''s and the introd$ction o' a 5% reg$latory d$ty. 0ltho$gh c$stoms d$ties have &een
red$ced on 865 items the &ene'its are o''set &y wider application o' a s$pplementary d$ty.
(hese meas$res 'avor domestic prod$cers over cons$mers. (hey have received a positive
reaction 'rom &$siness interests who welcome assistance with selling in the local mar#et at a
time when overseas demand is wea#ening. %owever they h$rt exporters and will have a
negative impact on Bangladesh)s competitiveness in the longer r$n.
5n!lation increased sharpl$ in earl$ 2010, dri"en #$ !ood and !uel prices. 0 short'all in
domestic rice prod$ction rising world 'ood prices and high 'ood in'lation in India were
contri&$ting 'actors. 0verage ann$al in'lation 'or FY 20"0 is expected to reach 8% $p 'rom
6.06% in FY 200!. 0n incremental tightening o' monetary policy as anno$nced in the ,onetary
3olicy <tatement 'or the second hal' o' FY 20"0 co$ld help dampen in'lationary press$res
despite the signi'icant $pward press$re related to world 'ood prices and domestic prod$ction. In
FY 20"" in'lationary press$res are expected to ease slightly d$e to more moderate expected
increases in glo&al commodity prices and sta&le macroeconomic policy.
6or'er remittances, while important to the Bangladeshi econom$, are poised to decline,
according to the 6orld Ban'. Bangladesh is among the top ten remittance?receiving co$ntries.
1or#ers 'rom Bangladesh have ta#en advantage o' the opport$nities that glo&ali-ation has
a''orded 'or poor and $ns#illed wor#ers to improve their lives and those o' their 'amilies. (hese
remittances provide s$&stantial &ene'its to their 'amilies in Bangladesh and in 'act were the
chie' driver &ehind private cons$mption so 'ar in FY20"0. %owever migration contin$ed its
downward trend with 4C.5 percent 'ewer wor#ers 'inding employment a&road in FY"0 *8$ly?
=ec+ compared to FY0!. ,oreover a reported A2000 migrant wor#ers have ret$rned home in
calendar year 200! which is one third more than in 2008. %owever growth in p$&lic
cons$mption is li#ely to remain ro&$st &eca$se o' '$ller implementation o' the p$&lic sector pay
increase pac#age possi&le increase in energy and 'ertili-er s$&sidies and '$rther expansion o'
sa'ety net programs.
Bangladesh continues to !ace !ormida#le natural challenges. 1ith !0% o' its landmass lying
less than ten meters a&ove mean sea level Bangladesh has repeatedly s$''ered horrendo$s
h$man and property losses 'rom storms and 'looding. In the longer r$n glo&al warming
threatens to red$ce its area &y a si-a&le amo$nt thro$gh a rising sea level. Beyond damaging or
destroying nat$ral coastal de'enses sea level rise co$ld disr$pt local livelihoods and worsen 'ood
C
insec$rity. Bangladesh)s soil and gro$ndwater co$ld &ecome increasingly saline and
salini-ation will also drive warm water '$rther inland. 0s a res$lt the threat posed &y climate
change goes &eyond the coastal areas to m$ch o' the co$ntry.
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1e!erences
Denter 'or 3olicy =ialog$e Bangladesh. 20"0. GBangladesh B$dget ;eview 20"0?"".H *8$ne+
Denter 'or :ew 0merican <ec$rity. 20"0. In Bangladesh, Challenges and Opportunities.
*,ay+

6conomist Intelligence 9nit *6I9+. 20"0. Monthly Report. Bangladesh *8$ne+.
International ,onetary F$nd *I,F+. 20"0. Stateent o! an IM" Mission at the Con#lusion o! the
Sta!! $isit to Bangladesh. *0pril "C+
International ,onetary F$nd *I,F+. 20"0. "inan#ial Syste Sta%ility &ssessent *Fe&r$ary+
9<0I=. 20"0. In'ormation 'rom we& site.
9<0I=/Bangladesh. 2008. In'ormation 'rom we& site.
1orld Ban#. 20"0. Doing Business 2010. Country 'ro!ile !or Bangladesh.
1orld Ban#. 2008. 'o(erty Data. & Suppleent to the )orld De(elopent Indi#ators.
1orld Ban#. 200!. GBangladesh@ 6conomic 9pdate. *Bcto&er 200!+.
1orld Ban#. 20"0. GBangladesh@ 6conomic 9pdate. *0pril 20"0+.
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