Structural reforms essential to sustain growth, poverty reduction in Bangladesh: World Bank

Sustained economic growth has led to improved living conditions and a substantial decrease in extreme poverty rates from 9.0% in 2016 to 5.0% in 2022, highlights a recent World Bank report on Bangladesh Development titled "New Frontiers in Poverty Reduction."

According to the WB report, the level of extreme poverty in Bangladesh is now comparable to Latin America and the Caribbean countries, and fares better than the South Asian average. 

Bangladesh has witnessed a decline in infant mortality and stunting, along with increased access to electricity, sanitary toilets, and education. 

Notably, rural areas have experienced faster poverty reduction compared to urban areas, although inequality has slightly narrowed in rural areas and widened in urban areas.

However, despite this remarkable progress, the Bangladeshi economy now faces new challenges. A balance of payment deficit, rising inflation, and vulnerabilities in the financial sector pose significant concerns, reads the World Bank report. 

In FY23, real GDP growth decelerated to 6.0% from 7.1% in FY22. Industrial production was hindered by disruptions in raw material imports, higher energy prices, and shortages of power and gas. 

According to the report, private consumption and investment growth were also affected by high inflation and increasing uncertainty. 

On the bright side, the trade deficit narrowed thanks to import compression and resilient export growth. Inflation accelerated due to administered energy price hikes and currency depreciation.

Adding to the challenges, monetary policy has faced obstacles due to lending interest rate caps, leading to decelerated private sector credit growth amidst tighter liquidity conditions and reduced demand for trade finance.

Financial sector vulnerabilities remained high. According to the Bangladesh Bank's Financial Stability Report, there was also a significant increase in non-performing loans, rescheduled loans, and written-off loans.

Moreover, the external sector remains under pressure. The current account deficit narrowed in FY23, supported by resilient export growth and import suppression measures, but official remittance inflows stagnated despite the demand for overseas workers. The disparity between official and informal exchange rates discouraged the use of official banking channels for remittance inflows. The financial account shifted into a deficit as trade credit and medium-to-long-term borrowing contracted sharply. Despite modest depreciation, the exchange rate flexibility proved insufficient to clear the foreign exchange market.

Looking ahead, Bangladesh's real GDP growth is projected to slow to 5.6% in FY24. Unless policies are tightened, inflation is expected to remain high in the near term, potentially subsiding if import prices stabilize. The external sector pressure is anticipated to persist in FY24, easing in the medium term contingent upon global economic conditions and further exchange rate flexibility. The fiscal deficit is predicted to stay within 5.5% of GDP over the medium term with a moderate rise in revenues.

The report emphasizes the need for policy reforms to accelerate the pace of recovery. In the short term, changes in monetary and exchange rate policies are necessary to reverse the decline in reserves and manage inflationary pressures. 

As Bangladesh prepares to graduate from the UN's Least Developed Country status in 2026, the WB report suggested: "The focus must be on strengthening trade competitiveness, expanding bilateral and multilateral free trade agreements, enhancing financial sector stability, improving the business climate to attract investment, mobilizing domestic resources effectively, addressing climate change adaptation and mitigation, and enhancing the governance framework."

These priority areas of reform will not only promote Bangladesh's overall development but also expedite poverty reduction efforts.