WB stresses bold reforms to put economy back on growth trajectory

Infographic: TBS

The World Bank has lowered Bangladesh's growth outlook for the current fiscal year as political turmoil severely affected economic activities in the first two months (July-August), but sees the transition as an opportunity to take urgent and bold reforms to put the economy back on a robust growth trajectory.

In its Bangladesh Development Update released in Dhaka today (15 October), the global lender predicts that Bangladesh's gross domestic product (GDP) growth may fall to 4% in FY25 driven by subdued investment and industrial sector activities, before accelerating to 5.5% in FY26.

As per the report, Bangladesh's real GDP growth moderated to 5.2% in FY24, declining from 5.8% in FY23, as existing and increasing vulnerabilities in the financial sector weighed on growth. On the demand side, the slowdown was driven by weak consumption and export growth. On the supply side, the growth slowdown was mainly due to the industry sector, it said.

It finds four challenges for Bangladesh's economy in the current fiscal – high inflation, external sector pressure, financial sector vulnerability and political uncertainty.

The latest report, the first of its kind from any global agency since Professor Muhammad Yunus-led interim government took office on 8 August, points to higher unemployment rates among educated youth and women as job creation in large industries, like the ready-made garments sector, has stagnated.

It points to the increased income inequality, particularly in urban areas, highlighting the necessity of urgent and bold reforms to enhance economic and financial governance, improve business environment so that Bangladesh can return to a strong and inclusive growth path, with millions of jobs for its youth.

It describes the perspectives that triggered the students' protest which boiled into widespread uprising leading to the fall of Sheikh Hasina's Awami League government on 5 August.

"The protest started with demands to reform the quota system for government jobs, but following a brutal crackdown, the movement transformed into a widespread anti-government uprising leading to Prime Minister Sheikh Hasina's resignation on 5 August 2024. The uprising, repression, violence, large-scale arrests, curfews, and internet shutdowns severely affected economic activity in July and August," it said.

"Political uncertainty, inadequate law and order, and labour unrest in the industrial area continued to weigh on complete normalisation of the activities," the report reads.

"However, the transition is viewed as an opportunity to introduce critical, longstanding reforms to strengthen transparency, accountability and improve public service delivery," it says.

"There is a certain level of urgency that is driving the delivery of much-needed reforms prior to holding national elections," reads the report.

Inflation, which averaged 9.7% in FY24 and moderated in August, is expected to subside in the medium term if supply-side issues stabilise and prudent monetary and fiscal policies are maintained, the World Bank report predicts.

The current account deficit narrowed to $6.5 billion in FY24 thanks to a contraction in imports and robust remittances, while the balance of payments deficit also improved, it said.

"Pressure on the external sector is expected to persist in FY25, easing later if global conditions improve and exchange rate flexibility increases," said Dhruv Sharma, World Bank Senior Economist and Co-author of the report.

The report referred to the Bangladesh Bank's step in May 2024 to implement a crawling peg exchange rate system that narrowed the gap between the formal and informal exchange rates, encouraging inward remittance through formal channels.

While the banking sector faces tight liquidity conditions and elevated non-performing loans the Bangladesh Bank has made restoring discipline and stability in the sector a priority alongside managing inflation, it said.

All started from job challenges

"The student-led protests in Bangladesh were initially sparked by demands to withdraw the quota system in public sector jobs but were driven by deeper economic and social challenges," it said, citing Bangladesh's significant challenges in job creation, job quality, and skills shortages and skills mismatches.

Decades of relatively rapid growth has not generated sufficient jobs for an expanding working-age population. The structural transformation from agriculture to manufacturing and services that had been sustained since 2000 has slowed down in recent years as excess labour has been absorbed in the agriculture sector, the report finds.

"As a result, from 2016 to 2022 most new jobs were in the low-wage, low-productivity agriculture sector and by contrast new urban employment growth declined," it said, explaining why cities failed to create enough jobs for educated youths.

Since 2016, while more jobs were created in Dhaka, three divisions – Chattogram, Rajshahi, and Sylhet –faced significant net employment losses, it finds.

"In recent years, Bangladesh's growth has not translated into job creation for the large number of youths entering the job market every year. Particularly, the educated youth and women faced difficulty in getting jobs to fulfill their aspirations," said Abdoulaye Seck, World Bank Country Director for Bangladesh and Bhutan, said joining the report launch virtually.

The share of tertiary-educated youth among those who are unemployed has increased to 27.8%, as many struggle to find jobs that align with their skills and educational qualifications, it said, referring to a growing mismatch between the competencies of graduates and the skills and knowledge demanded by employers.

"To address these challenges, Bangladesh needs a comprehensive policy approach that improves the business environment, attracts foreign investment, promotes export diversification, and enhances education and technical training systems to align with employer demands," it says.

The manufacturing sector grew annually by 9.1% but experienced a 9.6% decline in jobs. Real wages across all sectors have declined and gender disparity in the labour market is significant, the report said, exploring labour market constraints that leave emigration as a critical source of employment for many Bangladeshis.

From 2010 to 2022, Bangladesh's Gini index – a measure of income inequality – increased by nearly three points from 0.50 to 0.53, the latest update says, highlighting widening income gaps mostly in urban areas.

The private sector cannot generate enough jobs as most firms in Bangladesh are small and face significant obstacles for growth, the World Bank's latest update points out.

The informal sector accounts for 84.9% of total employment but is limited by low productivity. Large industries have stagnated in job creation, and foreign direct investment (FDI) remains low due to a challenging business environment, the global lender said in its latest update on Bangladesh, explaining why the private sector is failing to create enough jobs for youths.