Present economic situation of Bangladesh and future prospects

May 4, 2015 | By | Reply More

11060343_10204964278081451_8343735937365421780_oDuring the end of last fiscal year, we have seen huge gap between GDP target and actual achievement, declining inflation rate, increasing export, growing foreign exchange reserve, declining subsidy requirement, high interest government deficit financing, declining foreign direct investment, declining private sector investment, increasing default rate, increasing liquidity and some ADP targets achievement.

At present, economy of Bangladesh is passing through a good time with some favourable economic indicators such as macroeconomic stability (Ba3 -stable outlook rating by Moody’s for six consecutive years), modest low cost concessional external borrowing, ample foreign exchange reserve, declining inflation rate, declining interest rate of loan, stable foreign exchange rate, controlled budget deficit, surplus in Balance of Payment, less pressure in government subsidy etc. But, we are moving around the GDP growth rate of 6% over the last decade which is not improving significantly.

In this article, I have shown the sector wise analysis of the present economic situation and future prospects. The sectors comprise of banking sector, GDP growth, inflation rate, investment, government revenue and expenditure, foreign exchange reserve, import, export etc.

Banking sector: Credit flow from banking sector has not increased as expected in the current fiscal year. We have recently seen high default culture in banking sector as around BDT 426 billion of bank money is stuck up in court cases now. Non Performing Loan has augmented due to less governance, supervision as well as more window dressing of classified loans through rescheduling. Besides, in the current fiscal year we have not seen any significant structural reform in banking sector however we have found some small initiatives from Bangladesh Bank to introduce new product lines. Ensuring Capital Adequacy Ratio of 10% has become challenging for few banks where BASEL III will require to ensure Capital Adequacy Ratio of 12.5% including additional 2.5% of RWA as Capital Conservation Buffer. Traditionally, 85% of the income of bank comes from interest on loan. Interest rate of banking sector is comparatively quite low now as a whole but it seems burden for the small investors yet. The Government and Bangladesh Bank together are trying to cut bank interest rate to 9% or below from the existing effective interest rate of 18% to 22%. The highest interest rate paid by Financial Institutions is 10% and the spread is around 5% to 7%. The reasons for high spread are high operating cost, financial depression, lack of adequate competition, market power of few large dominant banks, high inflation rate, high risk premium due to high risk of most borrowers, burden of Non-Performing Loan, limitations in using Open Market Operation etc. High interest rate spread increases the likelihood of NPLs. It causes inflation increasing cost of production or cost of goods sold. Opening Back to Back L/C and machinery import have increased to support investment. Private commercial banks are the major market share holders in trade facilitation. They have contributed over four -fifths of export proceeds and three-fourths of import payments during current fiscal year. PCBs also dominate as a major market share holders in trade financing, remittance services and maintaining foreign currency accounts.

GDP growth: Investment friendly environment and favourable political environment to generate medium and long term investors’ confidence are extremely required for ensuring high GDP growth rate. The main road block of ensuring high GDP growth rate is the steady private investment at this moment however we have some favourable economic indicators. Besides, lack of adequate reform in power generation and supply, land availability, communication system and corruption are also responsible for steady private investment. We are noticing low private investment but high illegal transfer of investable fund to abroad in some cases through over invoicing and other mechanism of money laundering.

Inflation rate: Inflation rate is under control now. It is around the targeted 6.5% in this fiscal year. Inflation rate is high for food items compared to non-food items. Inflation rate is likely to be controlled as the Bangladesh Bank is committed to maintain contractionary monetary policy. However, the present declining inflation rate may be the result of steady demand in economy due to less economic activities which can be detrimental for the GDP growth in long run.

Investment: Private sector investment has declined mainly due to lack of confidence in entrepreneurs. Agricultural credit is steady, investment in manufacturing is low and machinery import has increased but not being reflected in investment. Large tern loan disbursement has increased but small loan disbursement is low which is risky for the banking sector. Infrastructure development is also required for creating favourable environment of private investment.

Government revenue and expenditure: Government revenue from import duty seems to decline in current fiscal year due to decrease of commodity price in international market. Besides, government revenue collection is declining in this fiscal year due to political unrest. Government subsidy requirement will also drop down due to declining import expenditure and declining oil price in international market. Deficit financing of government is highly dependent on National Savings Certificate now which will ensure less government borrowing from banking sector and more availability of fund for private sector. But, this dependency is generating huge high cost debt burden for the government as deposit interest rate of banking sector is very low compared to the interest rate of National Savings Certificate. Government subsidy should be well managed to ensure power generation and power supply to productive sectors. We may see huge deficit in income tax, VAT and non-tax revenue collection at the end of this fiscal year. We have not found any big change in the structure of government expenditure yet but it will take place as a proposal has already been submitted to government for increasing pay scale of government employees. It will require around BDT 22000 crore additional expenditure for government. If Annual Development Programmes are not implemented then it will decline the government expenditure. Government has the plan to introduce property tax in upcoming budget of FY15-16.

Foreign exchange reserve: Remittance has slightly declined but Bangladeshi labor force has got the opportunity again to go Saudi Arabia recently. Hence, skill development of the labor force is highly required to sustain in the competition and ensure remittance growth as neighbouring countries are also sending labor force in Saudi Arabia. Besides, remittance from Saudi Arabia may not come as expected due to decline in oil price and less employment opportunity in that country followed by less economic growth. Balance of Payment situation seems good with surplus but current account balance is slightly in under pressure with deficit of around $1.3 billion in the first seven months of current fiscal year due to pick up of import. BoP shows surplus balance now but it may not remain satisfactory for long run as repayment period of foreign debt is not far away. Remittance has increased significantly as the figure has reached to $2407 crore on April 29, 2015. It is adequate to meet the import requirement of 8-9 months. The reasons for such upward reserve are reduction of oil price in world economy, growing export, increasing remittance, reduction of purchasing power of USD internationally and more USD can be gained now against gold and other foreign currency as reserve of foreign currency is calculated at USD. Bangladesh is holding the second position in foreign currency reserve among the members of SAARC.

Import and export: We have found 16.5% import growth in last eight months of current fiscal year which has mainly generated from import of garments related products. Export growth is only 2.4% in last 8 months as export of readymade garments has dropped down slightly. Export to US market has dropped down more compared to European market but growth of our competitors is high in these market comparatively. Although export growth in US market is becoming negative but export growth to Australia, Brazil and India is improving.

In Bangladesh, there is a need to explore policy options to increase competition in the financial market through diversification of products using cost saving and efficient technology. The higher the non interest income of a financial institution the lower the spread. It seems that banks are not interested in value added services as credit default swap, options, future, hedging etc. as they can earn substantial profit without these initiatives with traditional credit to borrowers.

There are some challenges ahead of the government before the upcoming budget of FY15-16 arising from less interest toward infrastructure development, declining foreign direct investment, lack of confidence of private investors, unstable transportation service, narrow tax revenue base and week tax collection, non-implementation of Public Private Partnership, risk of natural disaster, implementation of new pay scale, fractious political environment, low level of per capita income, lack of fiscal and labor market reform during current FY 14-15. Besides, some challenges are arising for the next FY 15-16 that may include whitening the black money, easing the income tax return, training and development of teachers of primary and secondary schools, reducing corporate tax, utilization of internal resources, implementation of modernization plan of government  revenue collection, identifying and removing tax fraud by NBR, decentralization of national budget to districts level, cutting yield rate of hot selling savings tools, implementing the conditions arising from budgetary support of World Bank  etc.

In the upcoming budget of FY15-16, education, health and human resources development will get preference in spite of fuel and energy sector to bring the GDP growth rate to 7%-8%. The directors of State Owned Commercial Banks will be trained as these banks are backward in automation. We may see shifting from MDGs to SDGs, GDP growth rate acceleration, removing barriers of female participation to economic activities and measures to get rid of political turmoil and maintaining macroeconomic stability.

Mohammad Saiful Islam
MBA in Banking & Insurance
University of Dhaka

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Category: Blog Posts

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