The Bangladeshi Taka fell a sheer 7.0 per cent against the US Dollar during calendar year 2017 after being range-bound for three years. Economists say the recent import of grains, as successive floods spoilt domestic output, was the prime reason for the weakening of the domestic currency. But what happens if such import compulsions persist? In that situation, more foreign capital inflows would become an imperative to reduce further pressure on the Taka. As of now, its $32-billion foreign reserves provided a breather. In comparison, Pakistan with a gross domestic product (GDP) of ~1.2X of Bangladesh has foreign reserves of only $19 billion. However, India has a foreign reserve to GDP ratio of 17 per cent, higher than Bangladesh's 14 per cent. So if Bangladesh wants to shore up foreign capital inflows for its own comfort, what are its options? Let us look at this from the perspective of foreign direct investment (FDI), foreign portfolio investment (FPI), trade, borrowings and remittances.
Bangladesh's capital markets saw an unprecedented rise in FPI despite Bloomberg data showing that the average profit-per-company of its largest 200 listed companies grew at compound annual growth rate (CAGR) of only 2.0 per cent in the last six years. FPI net of remittances were up 92 per cent year-on-year (YoY) during the July-October 2017 period alone. However, there is immense scope to increase FPI further. In equities alone, only a dozen funds had 90 per cent+ allocation to Bangladesh, as compared to 1,000+ each in the case of India or Korea. Moreover, most of the FPI inflows into frontier markets like Bangladesh are through short-term long-only and hedge funds, unlike emerging markets where long-term pension, superannuation and sovereign funds are also evincing interest. Some of this long-term interest has to shift to Bangladesh. But for this, it is imperative to make its corporates more profitable, close the gap between its listed economy and real economy with more listings, and pitch for single-country funds from long-term FPI investors.
Bangladesh's FDI inflow has lagged at 14 per cent, unlike the 92 per cent spike in FPI inflows. Its gross investment rate has ranged between 25-30 per cent in recent years, unlike the 35-40 per cent seen in most emerging markets in the early years of their development. But where would incremental FDI flow? Energy, garments and banking have been the top recipients, but these may not suffice the scale of its employable workforce. As it is, new industrial parks for textiles and footwear in Ethiopia, which provide one-stop services, training and easier regulations, threaten Bangladesh's dominance. It needs new sunrise sectors. Bangladesh's per capita income grew 9.0 per cent last year, higher than India's 7.0 per cent or Pakistan's 3.0 per cent. As incomes rise, so do aspirations, creating a demand for discretionary products. This is why consumer and industrial sectors dominate the profits of corporates in developed countries. Even China now reflects a similar picture. But these sectors remain small in the profits of South Asian markets like Bangladesh. Pushing incremental FDI into such new, scalable sectors is an imperative to absorb fresh investments.
On trade, Bangladesh's current account has been favourable than Pakistan or India as its good exports grew a healthy 14 per cent in 2016, in line with its import. But while the drop in the Taka should make its exports competitive, Pakistan, its rival in export of garments and leather, also saw an equivalent fall in its own currency. Even other export-oriented markets like Indonesia and Turkey saw a fall in their currencies. It is also pertinent to note that a substantive portion of Bangladesh's incremental imports were of food, which may create a productive workforce but does not create productive assets like imported machinery and equipment. Thus, pushing exports further to complement the surge in import is an imperative to balance its foreign exchange position. It should focus on services export now, and build that capacity. Services would also utilise a large portion of educated population as well. India's Information Technology Enabled Services (ITeS) sector is an example, where only Philippines, Sri Lanka and Chile came up as serious competitors in recent years, unlike the merchandise goods space where significantly more countries compete.
On borrowings, Pakistan's over-dependence on external borrowings to replenish foreign exchange shortfalls is a clear example of how a risky public finance situation can mar vibrant corporate profitability (Pakistan's average profit-per-company of its largest 200 listed companies grew by a healthy 9.0 per cent CAGR in the last six years). As of now, Bangladesh has maintained its borrowings position well enough, and it is imperative it continues to do so.
But remittance poses a bigger challenge, since the oil price collapse in the Gulf countries has impacted investments and recruitments in those markets. Moreover, the growing push to hire locals through Saudisation, Emiratisation, etc., may eventually reduce the scope for South Asian migrants. It is imperative that Bangladesh re-skills its labour force to be able to serve in new, high-growth markets elsewhere, and not just concentrate on the Gulf markets.
All in all, Bangladesh has some to-dos, if it wants to boost its foreign reserves further as a buffer if imports persist. Equally important is to control the prices of grains; otherwise the political costs may overshadow the economic costs. After all, many governments have been voted out due to rise in food prices - India in 2014 being an example.
Sourajit Aiyer is an author, guest-lecturer and corporate executive, based in Mumbai, India.
sourajitaiyer@gmail.com