WB sees NPL, political instability as key risks to BD economy

The World Bank (WB) has identified rising non-performing loan (NPL) in commercial banks and resurgence of political instability as key risks for expanding Bangladesh's economy as expected.

Bangladesh's downside risk also lies on inadequate compliance in the garment industries and failure to address labour issues in the Gulf countries, it said in the "Bangladesh Development Update" report, released Wednesday in Dhaka.

The Bank has, however, cut its gross domestic product (GDP) forecast for Bangladesh further to 5.4 per cent for the current fiscal from its previous projection of 5.7 per cent in January this year, taking impact of the recent political turmoil into account.

 "Costs of political turmoil, stagnating private investment and declining remittances have forced the bank to lower its growth forecast further for Bangladesh," said Zahid Hussain, lead economist of the WB Dhaka office while explaining the Development Update report Wednesday.

"The economic growth target has been cut further mainly due to the loss of the political violence," he said adding the political turmoil due to January 5 election inflicted a value-added loss of about US$1.4 billion -- 86 per cent in services, 11 per cent in industry and 3.0 per cent in agriculture.

GDP growth is projected to fade to 5.4 per cent in FY2014, from 6.0 per cent in last FY2013, but an export growth revival and uptick in public spending could yet stem the slide, it said.

Mr Hussain said there was limited scope to achieve more than 6.0 per cent economic growth in the current fiscal if the present economic scenario is taken into account.

Yet Bangladesh has the potential to achieve more than 6.0 per cent growth if the government takes prudent economic policy and political stability is continued, he said.

Mr Hussain said Bangladesh needs to invest more in transport, power and primary energy, manage image crisis on the recent garment sector debacle and stem the decline in remittance if it wants to achieve 6.5 per cent GDP growth.

The WB report said GDP growth lost momentum in recent years because of lingering uncertainties over the modalities of the political transition, slow pace of structural reforms, and the country's inability to firmly establish a transformative infrastructure.

"Business and consumer confidence in general suffered through decline in rate of return on investment perceived by domestic and foreign investors, and by reduced remittances and demand for labour," the report added.

Bangladesh is likely to achieve the MDG goal of halving poverty, and to accelerate progress towards the post-2015 goal of eliminating extreme poverty, but it will need to sustain higher growth rates, it said.   

Bangladesh needs steps immediately to resolve the remaining political uncertainties while maintaining stability, boosting investment in transformative infrastructure, especially in power and roads, and streamlining trade and investment regulations, conduct a successful transformation of the readymade garment (RMG) industry and reverse the decline in remittance to tackle its challenges, the report said.

About the inflation, the WB said: "Political disturbances obstructed food distribution channels, resulting in constrained supplies and higher food prices.

The development update said fiscal management this year is facing challenges because of a large and growing shortfall in NBR tax revenue, demand for fiscal support from sectors adversely affected by the political turmoil and slower utilisation of Annual Development Programme (ADP).

"Tax revenue growth in the first seven months of FY14 was barely 10 per cent. Usual shortfalls in public investment spending are unlikely to be enough to keep deviation from FY14 budget deficit target within a reasonable limit. Government bank borrowing so far has been contained, while net non-bank borrowing has increased," the WB report said.

Mr Hussain said domestic financing to the national budget might boost compared to the target of 2.9 per cent of GDP as the country's financial policy is under challenge.

He said the budget deficit, 4.6 per cent of GDP limit, in the current FY2014 budget might cross due to the fiscal policy constraints.

About the NPL, the WB report said public and private commercial banks are suffering from increase in nonperforming loans due to deteriorating economic condition, exposure to the stock market and strengthening of provisioning requirements by Bangladesh Bank (BB).

"Since December 2011, the health of public sector banks has deteriorated at a faster rate compared to the private sector banks. The situation is likely to have deteriorated further by end-December 2013 due to the impact of political turbulence on business borrowers and the response to call for relief from the business community," it said.

Although the WB was conservative on the Bangladesh's economic growth projection, it said Bangladesh had great potential to bounce back but maintaining stability and resolving the remaining political uncertainties while boosting investment in power and roads, managing well the transition in the readymade garment industry and stemming the decline in remittances are the key challenges for accelerating growth.

The report said with frequent non-stop general strikes and blockades to cut off Dhaka from the rest of Bangladesh before the January 5 election, production and distribution chains suffered prolonged disruption.

"The disruptions lasted long enough to make it impossible for firms and workers to make up all the losses suffered. Although many businesses worked weekends and nights to make-up the loss of working days, but there were just too many days lost to be fully made up."  

The WB report said Bangladesh has the potential to attract significantly higher foreign direct investment (FDI) by positioning itself as a competitive centre for labour-intensive manufacturing and attract efficiency-seeking FDI.  

 "But in the last 18 months, a good number of investors could not invest in shipping, airlines, logistics, travel and some other sectors as they failed to get licences," the report said.

About the external balances, Mr Hussain said the external balances have remained comfortable due to strong and weak imports which more than offset the decline in the level of workers' remittances. "But Bangladesh's external balance may erode from the current comfortable level, but stability is likely to continue," he added.

Remittances are expected to remain weak while imports are likely to pick up, leading to narrowing of the current account surplus, these could lead to slower accumulation of foreign reserves during the rest of FY14, Mr Hussain said.

The WB in its another report on "South Asia Economic Focus" said it was cautiously optimistic about economic prospects in this region in 2014 because of growing exports and investment as it emphasized that the risks to growth were becoming more domestic, including an increasingly vulnerable banking sector.

In its twice-a-year report, released from its Washington headquarters, the World Bank forecast that South Asian economic growth would rise to 5.8 per cent in 2015 from 5.2 per cent this year and 4.8 per cent in 2013.

South Asian countries which include Afghanistan, Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan, and Sri Lanka appeared to have largely recovered from last year's financial turmoil caused by changes in US Federal Reserve monetary policy. Many were rebuilding currency reserves while curbing current account deficits, the WB report said.