Economic advances in Bangladesh may decelerate as the World Bank lowers the country's growth forecast by 0.60- percentage points to 5.6 per cent for this fiscal amid blowing headwinds.
Sluggish consumption and private investment -- amid high inflation and belt-tightening measures -- are cited as cardinal causes of growth contraction in the current fiscal year (FY) 2023-24 in the country context in the latest WB development update for South Asia.
In its last development update in April, the World Bank had projected 6.20-percent growth in gross domestic product (GDP) for Bangladesh.
"The private consumption and investment growth slowed in Bangladesh. A surge in inflation eroded consumer purchasing power, contributing to a deceleration in estimated private consumption from 7.5 per cent to 3.5 per cent," it says in its development-update report released Tuesday.
The Washington-based global lender unveiled its flagship report on "South Asia Development Update-Toward Faster, Cleaner Growth" under which the "Bangladesh Development Update-New Frontiers in Poverty Reduction" was also uncovered in Dhaka office.
"Real GDP growth is projected to decelerate to 5.6 per cent in FY24 due to persistent inflationary pressures and external-sector challenges. Elevated inflation will continue to limit real wage growth, reducing private consumption growth," the World Bank says.
According to the financier, investments are expected to remain constrained by foreign-exchange, import- suppression measures, growing financial-sector vulnerabilities, and energy shortages.
A little better luck next time -- the WB forecasts a bit better GDP growth for FY2025 as Bangladesh can grow at a 5.8-percent rate.
The update has also lowered the South Asian economic growth for the current FY2024 where this subcontinent might be slower to 5.6 per cent from 5.9 per cent it had forecast in April.
Asked about the higher inflationary pressures on Bangladesh's macro-economy, WB Country Director Abdoulaye Seck said both the monetary and fiscal policies need to address inflation.
"The FY2024 Monetary Policy Statement (MPS) introduced greater, albeit still limited, flexibility in the interest rate on lending, which would help facilitate monetary-policy transition. It is important to ensure that the treasury rate, which determines the final lending rate, is market-driven," he replied to a question from journalists.
Meanwhile, WB Economist in Dhaka office Nazmus Sadat Khan in his presentation on the Bangladesh part of the Development Update showed the inflation rose due to higher domestic energy prices, weak monetary transmission, depreciation of taka against USD, and supply-chain disruption and import restrictions.
To a question, World Bank Country Director Mr Seck said weak monetary-policy implementation has undermined the higher inflationary trend in Bangladesh as the central bank has failed to introduce a market-based bank rate.
The lending-rate cap "should totally be lifted to curb the inflation as the Consumer Price Index (CPI) trend is not adjustable with the restricted bank rate in Bangladesh", he added.
On the fiscal-policy side, it would be necessary to reduce tariffs on essential imports and ensure they are not hampered due to foreign-exchange shortages.
Domestic financing of the deficit was heavily monetized last year, which is incompatible with the objective of reducing inflation, the WB country chief noted about print-money circulation.
"Bangladesh faces a significant policy trade-off between inflation and growth, and it may be necessary to risk some reduction in growth through contractionary monetary and fiscal policies to bring inflation closer to the target," he said.
The WB Development Update says further flexibility in the exchange rate would be crucial to removing the existing distortions on the foreign-exchange market and attracting foreign currency through the formal channels.
Though the recent depreciation of the currency and the convergence of the multiple administered exchange rates in the first quarter of the current fiscal year helped, further corrections are necessary in the wake of rising gap between the formal and informal exchange rates.
A market-determined exchange rate is critical for attracting more remittance through the formal channel, reducing the difference between export shipments and export receipts, and making illegal capital outflows less attractive.
"This would support Balance of Payments (BoP) and reserve accumulation and restore market confidence. Forcing the market to trade at an exchange rate significantly different from the market clearing rate may only support the further use of the informal foreign-exchange markets such as the kerb and hundi markets," the WB says in its extensive observations on the country's economic affairs.
Addressing financial-sector vulnerabilities is fundamental to supporting economic growth.
"Increased stressed assets in the banking system and existence of chronic under-capitalized banks necessitate immediate measures to strengthen weak bank management and the financial-sector safety nets, including the deposit insurance and other crisis-preparedness measures," it suggests.
In addition to recognising non-performing loans (NPLs) in line with international standards, a viable NPL- resolution mechanism, improvement in corporate governance and modernization and restructuring of state-owned banks remain critical as per WB thoughts.
The Development Update suggests continued prudent fiscal policy for weathering the negative impacts of the external sector. "Government revenue from trade-related taxes is expected to remain low in the short term due to depressed imports and in the long term due to Bangladesh's graduation from the LDC and the reduction in trade tariff rates as outlined in the recently approved National Tariff Policy. To compensate, the government will need to increase revenue collection from domestic activities."
Also, fiscal policy needs to complement monetary policy to address the inflation and external-sector challenges, including measures to raise revenues and constrain expenditure growth. At the same time, it will be important to strengthen the support to the poor with proper social-expenditure targeting.
The report says: "Greater recourse to domestically financed development projects may contribute to the financial- account deficit and put pressure on demand for dollars. In this context, there is an opportunity to adjust current borrowing policies with a greater emphasis on external financing for the country's development spending needs."
Addressing longstanding structural reforms could accelerate the pace of the recovery and strengthen resilience to future shocks.
About LDC-graduation challenges, the WB development update says Bangladesh could strengthen its trade competitiveness, expand bilateral and multilateral free-trade agreements, improve business climate, strengthen financial-sector stability and soundness to promote investment, and increase domestic resource mobilization.
About poverty reduction, the WB report says: "Bangladesh has made significant progress in poverty reduction in the last decade. However, accelerated inflation, weak employment and declining real wages in recent times have affected the poor disproportionately. This could create social and economic disruptions that would require government counter measures."
It says although Bangladesh's overall poverty has been reduced, it is growing in urban areas and having an uneven progress in divisions.
The WB suggests that the policymakers need to continue what worked to reduce poverty, ensuring greater access to water, electricity, better housing, and financing, and at the same time focus on improving the factors that lagged behind like inclusive and sustainable urbanization, creating more jobs in rural areas, and reducing inequality.
In the South Asian region, the WB Development Update projects that the Indian economy could grow at 6.3 per cent, Pakistan and Sri Lanka at 1.7 per cent, the Maldives at 5.2 per cent, Nepal at 3.9 per cent and Bhutan at 4.0 per cent in the current financial year (FY2024).
kabirhumayan10@gmail.com
© 2025 - All Rights with The Financial Express
