The national budget for FY 2014-15 is knocking at the door. It is essential to understand the causes of declining growth in Gross Domestic Product (GDP). The reasons are falling investment, demand-induced decreased import of capital machinery, concentration of productive capacity in readymade garments (RMG) and lack of production diversity in other exportable commodities, declining wage earners' inflow of remittances and unsatisfactory foreign direct investment (FDI) in the country.
The external sector has shown an upward trend in export earnings despite slower inflow of remittances and fall in import payments during the last fiscal year. Collapse of Rana Plaza, fire in Tazreen Fashions and political instability have all led export earnings to grow at a decreasing rate in recent years. Despite these challenges, however, the growth in RMG sector can especially be ascribed to the increase in export of knit and woven garment.
Moreover, export earnings increased more from non-traditional markets than that of the traditional markets. Import payments showed a decreasing trend because of lower demand for imports of crude petroleum and petroleum products. Political turmoil in the country in the recent past has created an uncertain environment for business for setting up new industries. This has resulted in decreased investment as reflected from demand-induced negative growth in the import of capital machinery. Opening of letters of credit (LCs) for capital machinery and petroleum products, however, started to increase due to relative calm in the political front since January 2014.
The matter of serious concern is that the concentration of export in readymade garments and its declining rate of growth may pose serious challege to the economy.
Import payment decreased from FY 2010-11 because of lower import of food grains, capital machinery and industrial raw materials and the continous bumper harvest of food grain after FY 2011-12. Â
Inflows of remittance slowed in the last few months primarily because of a decline in labour migration to major markets like Saudi Arabia and Malaysia. As a result, this declining inflow of remittances is likely to exert adverse impact on the rural economy since consumption and expenditure of people living in rural areas are largely contingent upon remittance sent by their household members living abroad.
The country has now experienced increasing trend of the net foreign portfolio investment because of lower prices of stocks and attractive yield of government securities and appreciation of taka against dollars in recent months. Large gap between commitment and disbursement of foreign direct investment (FDI) over the years has been noticed recently. This can be attributed mainly to lack of infrastructural facilities and political turmoil as well as a sizeable chunk of foreign aid trapped in the pipeline.
In FY 2012-13, net foreign aid stood at US$ 1,886.61 million with a rate of growth of 51.19 per cent as compared to US$ 1247.82 million with 18.88 per cent rate of growth in the previous fiscal year. However, net foreign aid decreased by 28.93 and 25.69 per cent respectively in FY 2010-11 and FY 2008-09. In FY 2010-11, the payment (principal) increased by 5.83 per cent than that of the previous fiscal year despite the increasing rate of food aid by 16.64 per cent and project aid decreased by 19.36 per cent. Therefore, government had to finance a significantly larger proportion of the deficit through domestic borrowing, specifically through banks.
During the period of July-January of FY 2013-14, inflow of net foreign aid .was US$ 779.57 million with negative rate of growth 17.34 per cent as compared to US$ 943.09 million with 73.93 per cent rate of growth in the same period of the corresponding previous fiscal year. In the same period, although principal payments of aid increased by 29.08 per cent from 26.89 per cent during the same period of FY 2012-13, total aid showed 0.91 per cent rate of growth as compared to 51.80 per cent in FY 2012-13. Although project aid increased to US$ 1568.35 million during July-January of FY 2013-14 from US$ 1534.20 million in the same period of the previous fiscal year.
The historical data of foreign aid show that the gap between commitment and disbursement is increasing over the years. Although the gap increased to US$ 3139.92 million in the last FY 2012-13, disbursement of foreign aid increased by 31 per cent than that of the previous fiscal year. The commitment was higher in FY 2012-13 as US$ 5926.05 million which was US$ 4764.52 million in FY 2011-12. Huge gap between commitment and disbursement over the years has resulted in pipeline of huge foreign aid. Therefore, the government should take necessary steps for approval of projects and meeting conditions in a speedy way so as to increase disbursement, investment, and growth in GDP.
Foreign direct investment (FDI) is one of the vital components to promote the economic development of a developing country. The deceleration of FDI can reduce investment and shrink employment generation. All governments try to attract FDI by implementing new policies. Several policies have been taken by the present government to ensure foreign direct investment during the last two years.
The flow of FDI of Bangladesh has increased in an irregular way over the last 15 years. Despite increased flow of FDI, the amount is still lower than that of other Asian countries.
Despite turmoil both at home and abroad, inflow of remittance and declining rate of import payment beefed up the foreign exchange reserve by 47.77 per cent in FY 2012-13 than that of the previous fiscal year. In FY 2012-13, reserve was US$ 15,315.78 million which was US$ 10364.40 million.
Although the economy observed a comfortable current account balance, the decreasing rate of remittance and manpower export might affect the economy by reducing employment opportunities and output. In addition, declining investment demand-induced decrease in import of capital machinery and industrial raw goods may further aggravate the current declining growth in the manufacturing sector.
After exploring the implications of unsatisfactory performances of the external sector, it can be said that the declining growth in GDP may persist if indicators of the external sector continue to remain the same.  Â
However, in order to address the structural bottlenecks that impede development of the external sector of the Bangladesh economy, a thorough re-examination of current trade and industrial policies is urgent. Adoption of a new policy regime, which will enhance entrepreneurial capabilities and increase production linkages, may be fruitful in achieving development in this sector, thereby fostering growth of the economy.
The writer is a Lecturer at the Department of Economics,
University of Barisal.
 nahida.sultana.jhumu@gmail.com
Budget FY 2014-15: Re-examining trade and industrial policies
Nahida Sultana | Published: June 04, 2014 00:00:00 | Updated: November 30, 2024 06:01:00
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