Challenges and opportunities Bangladesh's economy holds out

Ups and downs aside, Bangladesh's economy remains a fascinating story that is still unfolding. Indeed, it deserves to be told more cogently. The only other day, while sharing the "Economic Outlook for Asia Pacific', IMF Director for the region Krishna Srinivasan told the press in Marrakesh, Morocco, that Bangladesh's economy was on the right track. He noted that Bangladesh had taken significant measures in terms of tightening the monetary policy and allowing flexibility in the exchange rate to stabilize the economy. However, there is no scope for complacency as the country was well-advised by the global institution to remain focused on growth-related reforms, including raising more domestic resources despite its favourable public debt-GDP ratio.

Since Bangladesh has opted for an IMF loan programme knowing fully that it was required to go through a mutually agreed path of economic reforms for both growth and financial stabilization, I am, therefore, not surprised to see these conditionalities being discussed and consensus reached in different country missions, that is how it should be. However, both sides also know that the timings of implementation of the agreed reforms are crucial, and hence, there could be some readjustments to the pace of their initiation.

Moreover, Bangladesh is currently going through a critical phase of electoral transition, which has implications for the pace of implementation of the programme. These are structural constraints and should not blur our perception of the impeccable narrative of our inclusive development which has all the resilience to withstand contemporary challenges. The country is destined to move on, defying all these challenges. It is quite befitting to see the global institution taking a long view of Bangladesh's development challenges and opportunities.

If we look at the contour of the economic transformation of Bangladesh since its traumatic birth soaked in blood, it looks unbelievably impressive. In 1972, the per-capita GDP was about USD99, which went up to 260 dollars by 1975, growing by 163 per cent despite all the challenges of rehabilitation of a war-ravaged economy. However, the growth trajectory was deeply marred by the tragic killing of the father of the nation and his co-leaders in 1975 and witnessed a secular decline for nearly 13 years. By 1996, the per- capita GDP had grown only 52% to USD395.

The resumed vibrant growth pattern, however, faced some challenges in the first few years of the 2000s and resumed its average pace after 2008. The quantum jumps in growth continued since then, with occasional dips mainly due to international crises, notably the global pandemic. The 5-year average growth rate in Bangladesh accelerated from 4.15% in 1991-1995 to 7.13% during 2016-20. The pandemic pulled it down to some extent. However, the inbuilt resilience of the country has been providing an average growth rate of around six percent despite the war in Ukraine with all its fallouts.

The rising share of the manufacturing sector in GDP has provided a major transformational push in growth in Bangladesh. It witnessed a visible rise from 22% to 37% during the last decade or so. Agricultural production has witnessed a spectacular growth, though at a lower rate, during the same period. As a result, the poverty rate declined from 31.5 per cent in 2010 to 18.7 per cent in 2022.

Besides consistent economic growth, human-development achievements have been equally impressive. The expected lifespan increased from 65.2 years in 2005 to 73 in 2022. The infant mortality rate got reduced from 51 to 22 per thousand births during the above-mentioned period. Similarly, maternal mortality declined from 376 to 123 per one hundred thousand women with pregnancy-related complications.

A combination of key factors has underpinned the inspirational growth in Bangladesh. The manufacturing sector, particularly the ready-made garment (RMG) industry, has played a pivotal role, making Bangladesh one of the world's largest exporters of textiles and garments. Remittances from Bangladeshi expatriates, amounting to an impressive USD233 billion from 2009 to 2023, have substantially boosted the country's foreign-exchange reserves and improved the livelihoods of many families. Additionally, agriculture has ensured food security and created export opportunities for agricultural products, contributing to economic stability. Adopting digital technology for inclusive financing has extended financial access, fostering small business growth and personal investment. Women empowerment, with a notable increase in female labour-force participation from 30% to 38% between 2009 and 2022, has furthered social progress and economic development. Lastly, ensuring electricity coverage for 100% of the population has not only enhanced the overall quality of life but also improved the business environment for more significant investment.

These multifaceted drivers have collectively fueled a remarkable economic growth and development in Bangladesh, although continued investment, innovation, and sustainable practices will be essential for its long-term prosperity.

A persistent political stability and support to the private sector, both profit and non-profit, and focused public investment in employment-inducing infrastructures must have made the above gains possible. Although the tax-GDP ratio remained subdued, the country witnessed stunning macroeconomic stability for quite an extended period, including low inflation and exchange-rate volatility, and flexible interest rates in a well-managed debt architecture. Until very recently, the international rating agencies remained positive about the investment outlook of the country as there was no liquidity risk on the money market. The foreign- exchange reserves continued to rise with robust inflows of external earnings from RMG exports and remittances.

However, after over a decade of exceptionally well-anchored external economic stability, the country began to experience a prohibitive current-account deficit of USD 18.7 billion in 2022 to fetch the rising import bills of commodities and energy witnessed sudden price spikes due to the supply-chain disruptions and geopolitical tensions following the war in Ukraine. The government did not hesitate to provide adequate incentives to the entrepreneurs to cope with the fallouts of the global pandemic, which contributed to the acceleration of aggregate demand in the domestic economy. The trade imbalance rose sharply, forcing the government to readjust the heavily subsidized energy and commodity prices. In addition, the normal flow of foreign exchange from the exports and remittances was not good enough to pay the bulging import bills. This called for the selling of dollars from the reserve, which, too, was not sufficient to stabilize the trade imbalance. So, the central bank went for nearly a 30-percent depreciation of the domestic currency with known consequences of rising prices of imported goods. This, too, induced inflation, which was already in a rising trend due to the existing excessive supply of money.

Also, the central bank hesitated to go for a speedy contraction of the monetary policy, which, I suppose, was misjudged. Moreover, the decision to print more high-powered money as part of Seignior age (revenue to the government) in the context of lower revenue mobilization by the fiscal authority further fueled inflation. And who does not know that inflation erodes the purchasing power of consumers and creates extraordinary pressure on the living conditions of low-income groups of people?

This has happened in Bangladesh, creating an environment of social instability that demands many quick fixes in the short run. In a context like this, there is no way to focus on macroeconomic stability with known measures. These include: (1) Appropriate fiscal policy measures (unproductive activities must be eliminated or substantially curtailed) (2) Prudent monetary policy opting for market-determined solutions in flexible interest rates and exchange rates (3) Import management (discourage luxury imports but maintain necessary imports through tariff measures) (4) Facilitate more effortless remittance flow (further incentivize remitters through digitally enabled channels and provide banks the guidance to reduce the gap between formal and informal exchange rates and (5) Revamping social protection for the low-income groups to cope with inflation and maintaining socio-political stability.

In addition to these short-term challenges, Bangladesh has faced several medium- to longer-term challenges that must be addressed simultaneously. Two such challenges relate to graduation from the LDC group to be a developing country and, of course, addressing the climate-change challenges.

Graduating from the LDC group presents Bangladesh with core challenges, including the potential loss of preferential market access to Western countries. This move could profoundly affect the country's economic backbone, the ready-made garment industry, by increasing production costs and reducing competitiveness in key export markets. Additionally, the need for stricter enforcement of Intellectual Property Rights (IPR) could have adverse implications for Bangladesh's pharmaceutical and software sectors, curtailing the production of generic drugs and software development. The country may also face a reduction in international support measures (ISM), which have been crucial for its development initiatives. Moreover, the likelihood of higher interest rates on loans from international development partners may put added financial pressure on the government and businesses.

Furthermore, the graduation process may expose Bangladesh to greater economic vulnerability, necessitating strategic policies and reforms to diversify the economy, bolster domestic industries, and seek alternative markets and trading partners to ensure sustained economic growth and development in a post-LDC era. Rising global geopolitical tensions may further accelerate these challenges.

Addressing the climate challenge is no longer tomorrow's policy move. It is a matter of today. Climate-change adaptation must, therefore, be prioritized as Bangladesh is among the most vulnerable countries. The government of Bangladesh must collaborate with other stakeholders to secure more international support for addressing loss and damage due to man-made disasters. Enormous potential for green transformation exists in Bangladesh; for example, 8.1-million-liter diesel used for irrigation and existing conventional energy-based irrigation can easily be substituted by Solar Irrigation Pumps. Power -sector analysis of the Mujib Climate Prosperity Plan projects that over one-third of Bangladesh's energy demand could be met from renewable energy by 2030. Hence, there is a need for realizing green- energy transformation.

The external economy should be focused sharply on realizing its potential to maintain macroeconomic stability. The export-led growth pursued by Bangladesh is likely to be sustained further. However, the export-GDP ratio is still relatively low (less than 13%). A middle-income Bangladesh cannot rely mainly on RMG exports (84.5%). Enabling a regulatory environment can enhance cost-competitiveness for this sector. Enhanced use of technology can enhance productivity (a 25% increase in technology usage can yield a 3% increase in profits per worker). Export-and market- diversification initiatives must be coupled with effective economic diplomacy for better trade deals and increased FDI, especially in the SEZs.

The future of Bangladesh's economic landscape will revolve around digitisation and e-commerce, transforming the way businesses operate and connect with consumers. Small and Medium Enterprises (SMEs), fueled by innovative approaches, will be instrumental in driving macroeconomic success, promoting entrepreneurship, and enhancing economic resilience. The private sector's active involvement and responsible practices will play a pivotal role in achieving inclusive growth, ensuring the benefits are widely distributed.

Furthermore, bridging the gap between higher education and industry will be critical in equipping the workforce with the skills needed for the evolving digital era. To secure sustainable progress, modernizing and mechanizing agriculture, enabling smart urbanization, and fully utilizing its potential as a regional trade hub for deeper integration into local, regional, and global value chains will be imperative. In this context, we may look forward to the following opportunities: (a) The future will be all about digitisation and e-commerce (b) SMEs and related innovations will be critical to macroeconomic success(c) The role of the private sector will be pivotal in attaining inclusive growth (d) Linking higher education with industry will play a strategic role (e) Modernization and mechanization of agriculture will be needed most (f) Smart urbanization for sustainable progress must be a central policy concern and (g) Bangladesh as a potential regional trade hub must be utilized (further integration into the local, regional, and global value chains).

All these potentials can undoubtedly be realized if Bangladesh does not make cardinal mistakes by inviting socio-political instabilities that it has avoided for quite a long time.

The author is a noted economist, Emeritus Professor at Dhaka University, and former Governor of Bangladesh Bank.

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