Bangladesh has recorded remarkable economic progress, having accelerated GDP (gross domestic product) growth from 3.0 per cent in the 1970s to 6.0 per cent in the last 10 years. However, it has done so against the odds, given the occurrence of frequent natural disasters and political unrest. In the first quarter of 2015, for example, it was paralysed several times by "Hartal" following a banned protest to mark the anniversary of last year's highly disputed elections. This severely hampered the flow of goods for the first three months of the year - impeding further economic growth.
In fact, while the political unrest has now eased, the World Bank estimates that Bangladesh lost about 1.0 per cent of its GDP in the first quarter of 2015 - totalling about USD2.2 billion. As such, Bangladesh's potential growth has been dampened, constrained not only by the uncertain political climate, but also on account of internal infrastructure problems and a struggle to diversify exports away from the ready-made garment (RMG) sector.
Therefore, for Bangladesh to capitalise on its growth potential, taking advantage of its huge young, skilled workforce, which is full of innovation and productivity, the country must make greater progress in diversifying its exports.
BANGLADESH'S EXPORT DIVERSIFICATION STRATEGY: In terms of exports, Bangladesh is the third largest global apparel exporter to the EU and fourth largest to the US. However, while RMG exports are the local economy's golden goose - accounting for just over 80 per cent of total exports - such heavy reliance leaves Bangladesh vulnerable to external shocks.
Indeed, the local RMG industry is facing increasing competition from Vietnam, India and Pakistan, for example, just recently the value of garments exported out of India surpassed that of Bangladeshi exports.
Yet, this threat has not necessarily come about because of cheaper production costs elsewhere or the fact that some investors or RMG buyers may be moving away from Bangladesh. It is primarily due to the logistical challenges posed by underdeveloped infrastructure.
For example, the Dhaka-Chittagong road remains the main transportation link connecting production units with the main port of entry and exit of goods. Given that the transportation of garment exports is mainly carried out using trucks, this road is the lifeline of Bangladeshi trade. Yet congestion often disrupts the normal flow of traffic on this road, holding up consignments for days on end. And the problem is not just the poor roads. Transport facilities are severely underdeveloped, causing traffic bottlenecks that drive up the cost of doing business. Lack of harbour and airport capacity also contribute to longer shipping and transit times. And power shortages are another major obstacle.
With such severe vulnerabilities to both competition from other countries as well as internal infrastructure problems, diversification will be necessary if Bangladesh is to attain middle-income country status over the next decade. The good news is that this is already taking place in two major export industries, using the lessons learned from the success of apparel exports.
The first is the pharmaceutical industry which has vast production capacity and is becoming increasingly better regulated -quality control is high and efficient. The second is IT programming and the creation of IT parks. While this sector cannot be compared with that of India or Taiwan, for example, small steps are being undertaken to create parks with attractive conditions, such as tax exemption for investors.
The next step in Bangladesh's export diversification strategy will be to increase volumes of local regional trade with South Asia and to export more goods to the neighbouring countries of Thailand, Malaysia, Indonesia, and others, that are right on the doorstep.
HOW FOREIGN BANKS CAN SUPPORT EXPORT DIVERSIFICATION: The financial industry in Bangladesh has an important role to play in the development of the country in terms of stimulating the necessary foreign direct investment and international trade required to allow diversification away from the RMG sector.
For example, foreign correspondent banks, such as Commerzbank - which has been working with Bangladesh since 1972 - maintain strong relationships with local banks, enabling them to offer credit and trade services to their corporate clients. By collaborating with an international banking partner, local banks can offer payments and documentation infrastructure, as well as payment risk instruments, such as Letters of Credit (LC), which provide foreign suppliers to Bangladeshi businesses with security, allowing them to reach into new markets while being able to manage the inherent payment risks involved in such trade.
Indeed, the LC is the international trade payment method of choice in Bangladesh. It is not only used cross-border, but also locally across the entire Bangladeshi textile industry between suppliers and factories, following the implementation of a Central Bank regulation requiring all transactions to be LC-based.
Furthermore, local banks can also inspire confidence in the international financial world and foreign suppliers by ensuring that there are transparent processes in place, for example, by proactively communicating reasons for delayed payments under LCs to their international counterparts. Certainly, the increasing amount of information coming from public entities, such as the Ministry of Finance and the Central Bank of Bangladesh, will also help in this respect.
Just recently, for example, Dr Atiur Rahman, the Central Bank Governor, was awarded Best Central Bank Governor in Asia and the Pacific region by the international publication, The Banker. This demonstrated that the regulator is performing well, which will help give confidence to foreign exporters and banks.
Bangladesh is a country full of potential. However, there is still a lot of work to do with respect to its economic development. Achieving a 7.0 per cent economic growth target in the 2015-16 fiscal year will be a challenge, but not an impossible one. In this respect, export diversification and attracting investment will be vital to progress. And the basis for this will be a stable political environment as well as continuous and fast investment in infrastructure.
Alexander Rost is Regional Head, Indian Subcontinent & ASEAN
at Commerzbank, Frankfurt,
Germany. rebecca.
© 2024 - All Rights with The Financial Express
