Domestic demand to drive economy: WB

Aided by domestic demand, the World Bank (WB) has said Bangladesh economy will expand at a rate of 7.0 per cent during the current fiscal year.

The projection is lower than the official target of 7.8 per cent set for the current fiscal.

The government said the country achieved 7.86 per cent gross domestic product growth during fiscal year 2018.

Driven by strong domestic demand, the bank said, "Bangladesh's economy remains among the fastest-growing economies in the developing world."

"It would grow at an even faster pace if it implemented economic reforms," it said.

Increased public spending on infrastructure, along with robust private investments, exports and remittance inflows will support growth, the bank said, without ignoring downsides like adverse weather conditions, regulatory unpredictability and a problematic banking sector.

More than growth, what matters is the sustainable development of the country.

"The 7.0 per cent, 7.2 per cent, …7.6 per cent GDP growth is not a big factor, but the issue is the quality and sustainable development of a country," the bank's country director Qimiao Fan said.

His comments came at the launch of "Bangladesh Development Update" released on Tuesday in Dhaka.

"To realise its goal of achieving upper-middle income status, Bangladesh must make sure its economic fundamentals are sound with ensuring necessary structural reforms," the bank's report said.

Despite growth potentials, there are risks.

World Bank lead economist in Dhaka and author of the report Dr. Zahid Hussain cited slowdown in major export markets, weakening of efforts to improve economic governance, pressure on budget due to high non-performing loans and the Rohingya issues as the risks factors for the Bangladesh's economy in the coming days.

As immediate measures, Hussain said the country needs policies to contain inflation, correct the exchange rate, and remove interest rate distortions.

Policy and institutional reforms are the best defense against the downside risks, he added.

Executive chairman of Power and Participation Research Centre Dr Hossain Zillur Rahman said the statistics on GDP is not a key factor for the economy rather how it benefits the people is important.

He said, "The key factors are: whether the current impressive economic growth is sustainable and inclusive. And where the benefit is going and who are getting it are the important factors."

Executive director of the think-tank Policy Research Institute of Bangladesh (PRI) Ahsan H. Mansur said, "The sustainability of the current higher growth is now a matter of concern due to some emerging factors." "As private investment compared to GDP is not increasing at an expected pace, the balance of payments is under pressure, the higher GDP growth could be vulnerable."

"It is very important for the economy to go for export-driven growth policy for its sustainability. But I do not see any remarkable policy reforms in the export sector, which will help the country to achieve higher growth," Dr Mansur said.

Dr Mansur cautioned against the possible "debt-trap", saying the country is going towards trade financing, which can plunge it into a vulnerable economy.

"In the 90s, Bangladesh's GDP-debt ratio was about 31.4 per cent which now at comfortable 12-13 per cent rate. But the government's higher borrowing like trade financing for the mega projects are creating vulnerability gradually," he said.

Dr Mansur said Bangladesh is taking up development projects with inflated cost rather than prioritising the quality.

"We are building Padma Bridge investing nearly Tk 40,000 crore (Tk 400 billion). It may cross Tk 50,000 crore (Tk 500 billion) at the final stage. The government should calculate the economic rate of return from its huge investment," Dr Mansur said.

Dr Hossain Zillur stressed the need for taking up high priority projects with rational cost and ensuring their quality.

The WB report said economic growth will remain resilient, underpinned by strong domestic demand and structural transformation, but there is no room for complacency.

"To achieve its growth aspirations, Bangladesh needs to create more and better jobs by boosting private investment, diversifying exports and building human capital," the report said.

"The country also needs to make doing business easier, complete its mega-projects on a fast track, improve financial sector governance and ensure a reliable supply of electricity," it added.

"Further, sustaining its export and remittance growth will be important. It also needs to focus on improving infrastructure, urban management, and environment conservation," the development update said.

The bank's Mr Fan said to maintain the current growth trajectory, it needs to promote entrepreneurship, innovation and structural transformation.

Bangladesh should also focus on improving education, skills, nutrition and adaptability to enable its workforce to thrive in an environment of rapidly changing technology and global demands, he added.

The WB report stresses the importance of increasing resilience to a possible slowdown in major export markets or a decline in donor support to address the influx of Rohingya refugees.

The report said the country also needs to improve financial sector governance, including banking sector performance, especially the high share of non-performing loans (NPLs), which reached 10.4 per cent of all loans in FY2018.

"For the first time since FY2011, Bangladesh faces a deficit in the overall balance of payments, putting pressure on the exchange rate and international reserves. This has resulted from a substantial widening of deficits on the trade, services and income accounts," the development update said.

The WB report said the situation calls for comprehensive reforms in the power sector, including addressing inefficiencies at different stages of power supply and distribution, and reducing dependency on imported fossil fuels.

The report urges more efficient pricing and use of gas, it added.

By prioritising more efficient plants, Bangladesh can reduce idled gas capacity by 8.0 per cent and electricity shortages by 15 per cent a year, the report said, adding the government needs to focus on smarter pricing of electricity through a cost-based pricing mechanism, better load management, and increased efficiency in electricity generation."

"Better load management alone could save $1.65 billion annually in fuel cost. Bangladesh can also benefit from boosting regional trade and strengthening the cross-border electricity transmission network," the bank report said.

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