Stabilising macroeconomy

Bangladesh needs fast, bold reforms

WB country director suggests bringing additional exchange rate flexibility

FE REPORT | Friday, 20 October 2023

Higher energy prices and deep depreciation of local currency have contributed to rising inflation in Bangladesh, the World Bank Country Director has said, stressing the need for fast and bold economic reforms to stabilise the macroeconomic situation in the near term.
"The past year has been extremely challenging," Mr Abdoulaye Seck told a luncheon meeting on "Inclusive and Resilient Economic Growth in Bangladesh - the World Bank's Engagement", organized by the American Chamber of Commerce in Bangladesh (AmCham) at a city hotel on Thursday.
He observed that elevated commodity prices and synchronous global monetary policy tightening have led to a persistent balance of payment (BoP) deficit, weighing on foreign exchange reserves.
Domestic policies like multiple exchange rate, deposit- and lending-rate caps, and insufficient supervision on the banking sector have exacerbated the BoP deficit, he added.
Mr Seck further said Bangladesh along with other countries faced unprecedented and intertwined global challenges, and to navigate the emerging challenges and sustain a strong pace of growth and poverty reduction, the country will require fast and bold economic reforms.
"Additional exchange rate flexibility will incentivise migrants to send remittances using formal channels and will encourage repatriation of export earnings," he said, suggesting the reform measures.
To contain inflation, he suggested strengthening the monetary policy, including phasing out the use of interest rate caps on lending, and said that the financial sector vulnerabilities should be addressed through effective bank supervision.
Recent monetary policy updates are a step in the right direction, he observed, recommending a faster pace of its implementation.
Mr Seck pointed out that food prices have been increasing faster than wages, reducing the purchasing power of many families.
"Private investment growth slowed with higher uncertainty, which is not uncommon in an election year.
Industrial production slowed with higher raw materials and energy prices, and gas and electricity disruptions," he added.
The WB Bangladesh chief has identified three key constraints to the economic growth of Bangladesh over the longer term - highly concentrated exports, financial sector vulnerabilities, and impact on urbanisation for high congestion costs and poor environmental conditions.
"These challenges need to be immediately addressed. We have estimated that GDP growth under a business-as-usual scenario would naturally decline over time, amid headwinds from external vulnerabilities and declining population growth."
On the other hand, he said, if Bangladesh adopts key policy reforms, a high pace of growth can be sustained. "A strong partnership between the private sector, civil society, and the government will be needed in this process."
To create more jobs, the WB country director said, the economy needs a more diversified, competitive formal private sector. For its per capita income level, Bangladesh is still much more closed to trade and investment than its peers, with total trade in goods and services being only about 30 per cent of GDP, he pointed out.
"Foreign direct investment (FDI)-an important source of technology-is limited. The annual FDI flow comprises only 1.0 per cent of GDP. The agriculture sector is also undiversified, with a high concentration in rice, and sector productivity has remained low in the last decade."
The country needs to address spatial and gender disparities by promoting socio-economic inclusion where human capital development is important, added Mr Seck.
He stressed the need for strengthening domestic resource mobilisation as weak resource mobilisation is a key constraint that limits the ability to support development, including investing in human capital, building climate resilience, and strengthening investment climate for private sector growth.
However, he lauded Bangladesh's economy as the country has built a solid track record on macroeconomic stability, which is essential for sustainable growth.
Investment in major energy and transportation projects have largely been productive, helping expand access to electricity, and improving connectivity, he added.
Addressing the meeting, AmCham President Syed Ershad Ahmed said Bangladesh needs to develop a more effective monetary policy and stressed the need for prioritising improved governance, particularly within the banking sector, to enhance risk management in the financial industry.
"To achieve our goal of achieving upper-middle-income status by 2031, we need to create jobs through a competitive business environment, increase human capital, build a skilled workforce, establish efficient infrastructure, and create a policy environment that attracts private investment," he said.

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