How Bangladesh should address the upcoming challenges

Bangladesh's economy is currently experiencing a number of unprecedented challenges that will require energetic and coordinated measures in several areas. However, the country's impressive track record should give Bangladesh confidence in going forward. 

Over the past years, significant progress has been made in many socio-economic indicators at a pace faster than many developing countries with similar levels of economic development.

Indeed, Bangladesh has come to this point by overcoming many obstacles and setbacks, and with targeted actions, it has the capacity to overcome the hurdles its economy is facing at the current juncture. 

Addressing the emergent challenges is not going to be easy and whether the economy can sustain its past momentum will critically hinge on the steps the policymakers are going to take and their efficacy.

Bangladesh's economy has undergone a number of transformative changes which were achieved by rising up to the first generation of challenges the country faced. However, it is now having to address the second generation of challenges. Business as usual will not do. 

Some of the new challenges have their origin in past achievements. Challenges emanating from the increasing global integration of the Bangladesh economy is one. One significant transformation in Bangladesh's economic history has been the transition to a trade-dependent economy from a predominantly aid-dependent economy. 

In the early 1990s, the country's annual foreign trade earnings equaled its foreign borrowings; today, in contrast, income from exports and remittances is about eight times higher than the external borrowings, marking an increase in the relevant ratio from 1:1 to 8:1.   

From natural resource–based, jute-dominated export dependence, Bangladesh made the transition to process and manufacturing-based export structure. Despite not producing cotton, Bangladesh was able to transform its comparative advantages into a competitive advantage through supportive government policies, and thanks to the entrepreneurial capacities of our RMG producers and exporters, by relying on the dedication of our quick-learning workforce, the majority of whom were women workers. 

The role of public policies often goes unnoticed in Bangladesh's development story and export success. Bonded warehouse facilities, allowing import of raw materials under back to back LCs, cash compensation scheme for building backward linkages in the apparel sector all played an important role.  

The list of transformative changes could be prolonged. But the reality is, as was noted at the outset, at present Bangladesh is having to tackle a host of challenges, on multiple fronts. Going forward, continuation of the economy's robust performance will critically hinge on the country's ability to address the emergent challenges. 

To recall, macroeconomic stability with low levels of inflation and high levels of GDP growth rates have been key to Bangladesh's underlying strengths and major drivers of her socio- economic achievements.  At present all three have come under pressure; the outlook is uncertain and risks greater. 

A concerted effort must be taken to tackle the causes underpinning the emergent situation, not because many of the attendant remedial measures have been recommended by the IMF, but because the actions ought to originate from our own felt needs. These call for concrete measures that can no longer be deferred or delayed. The quality of macroeconomic management as also sectoral, demands serious rethinking.

Inflation has emerged as a major challenge for Bangladesh. The high food, non-food inflation reflects the weak state of macroeconomic management over the recent past years. Even if the rate of inflation comes down somewhat in the foreseeable future, this will be in relation to higher benchmarks and reference points. 

Price levels are expected to remain high. While post-covid impacts and Russia-Ukraine war are partly to blame, these developments do not explain the entire story.  Significant exchange rate depreciation, falling reserves, difficulties in opening of import L/Cs and high inflation are symptoms of deeper ills which need to be dealt with the urgency that these deserve. 

Large scale loan default, illicit financial outflows, low domestic resource mobilisation from direct taxation, syndication in supply chain and monopolistic market control, weakness in institutional enforcement, lack of good governance- all have combined to generate the current difficulties the economy is facing.

In view of Bangladesh's increasing global integration, noted above, it is important to note that thanks to the RMG exports Bangladesh was able to get a strong foothold in an item which has a global market of more than a trillion USD (if textiles are also included). 

Holding a 7 percent share in the global apparel market at present, compared to China's 31 percent, there is further room for growth of RMG exports through intra-RMG diversification. Bangladesh has been able to make a crucial shift from mainly woven-based RMG to woven and knitwear-based RMG export. 

A second transition, from predominantly cotton-based RMG to cotton and non-cotton-based RMG, will now need to be made. This is, however, not to undermine the importance of export diversification, beyond the RMG. 

That Bangladesh was not able to diversify her exports owes also to the very low level of FDI flow to the country. Although Bangladesh's FDI policies and incentives compare well with neighbouring countries, implicit anti-FDI bias among a section of concerned stakeholders in Bangladesh cannot be denied. 

Encouraging FDI, particularly in the labour-intensive sectors, is crucial for both employment generation and export growth with diversification. To note, in this backdrop, FDI in the RMG sector, in areas outside the export processing zones, had faced many obstacles even until very recent times. 

Bangladesh has significant opportunities in leather, and footwear, food processing, pharmaceuticals, light engineering, assembling plants, and API production. Both domestic investment and FDI will need to be geared towards these sectors. However, the signs and signals are not very encouraging. 

To recall, despite the plan for setting up an API park in Munshiganj in 2012, building of an effluent treatment plant has turned on to be a major stumbling block in operationalising the park. Bangladesh is having to import API worth more than a billion USD every year. The consequent higher cost of production of drugs undermines competitiveness of the sector, both in the domestic and in the global market. 

The pharmaceutical industry's potentials remain untapped because the API park is yet to take off.  Same is the story with the leather sector, and the park in Savar. There are significant export opportunities in the services export, in such areas as back-end and front-end services, freelancing, commercial and e-commerce-based services. However, the export targets for services are not being met.

The window of opportunity in terms of export diversification is becoming narrow since competing countries are pursuing proactive policies to strengthen presence in global markets of similar products. A sense of urgency must dictate the next steps in this regard. 

Thanks to the high-paced rapid infrastructure development of recent times, Bangladesh now has an opportunity to translate its export opportunities in the southern Asian region, through a triangulation of multimodal connectivity, investment connectivity and trade connectivity.  

Only 12 percent of total export earnings of Bangladesh originate from South Asia, East Asia, and ASEAN countries. Bangladesh must take advantage of the Asian century by tapping into the growing markets of India, China, ASEAN and other emerging developing countries of Asia. Bangladesh will need to realise the potentials of sub-regional cooperation by building production networks and regional value chains.

Implementing the one-stop service act provisions in the Special Economic Zones (SEZs) could play a crucial role in attracting both domestic investors and FDI to these zones. Transport corridors like the Padma Bridge can evolve into economic corridors, only if investment could be attracted to adjoining areas along the transport links, by stimulating employment generating and income-augmenting activities.

To raise competitiveness, Bangladesh must take targeted steps to harness productivity. Labour-displacing technology poses risks of jobless growth unless the economy branches out to newer sectors, creating new and decent jobs. More attention will need to be given to upskilling and technological upgradation of women as they tend to be left behind in technology- embedded production processes. 

RMG is an example, where over the past decades the share of women in the labour force has come down from about 90 percent to about 64 percent of the workforce. This calls for renewed attention to women's training and career advancement, and enhancing their preparedness for high skill jobs and in managerial roles.

One must also be reminded that investment in infrastructure entails a significant amount of foreign borrowings which have become more costly because of Bangladesh's middle income graduation and the consequent reduced access to concessional loans. Interest burden of borrowings on the basis of flexible SOFR/LIBOR interest rates are on the rise. 

Many loans incurred under hard terms are nearing maturity. Policymakers will also need to be cognizant of the higher debt repayment liabilities originating from significant depreciation of the Bangladeshi Taka in the recent past.  The consequent higher debt servicing liabilities call for careful attention to selection, prioritisation and implementation of public Infrastructure projects (PIPs). 

Good Governance in implementation must be ensured without exception. Projects must be implemented on time, within budget, and must not be overcapitalized. For many developing countries debt trap and middle income trap have become synonymous because of lax attention to the attendant governance concerns. Bangladesh must avoid falling into debt trap, through ensuring accountability, transparency and good governance in project implementation.  A high-powered committee may be set up to monitor this. The IMED of the Planning Ministry must be strengthened further.  

Bangabandhu's strategic decision to join the group of Least Developed Countries (LDCs) (which was set up in 1971; Bangladesh was included in December 1975), proved to be a turning point for Bangladesh. This had enabled Bangladesh to benefit significantly from the international support measures (ISMs) favouring the LDCs in the form of preferential market access, TRIPS waiver, aid for trade and other special and differential treatment (S&DT).  

However, following Bangladesh's LDC graduation in November 2026, Bangladesh will experience significant preference erosion. Although the EU and UK have offered to extend preferential duty-free market access for an additional three years, the export scenario for the other markets will change immediately after graduation. 

Also, the requirements of market entry are becoming increasingly more stringent. Labour rights, environmental compliance and working condition requirement, gender sensitivity, CO2 emission penalties and governance issues in production processes are increasingly being put forward as preconditions for market entry. Bangladesh will need to ensure compliance with this newly emerging trading scenario.

Additionally, GSP plus eligibility in the EU will depend on Bangladesh's ability to ensure compliance in a number of areas. The aforesaid demands are coming from importing governments, brands and buyers as also the consumers in major markets. Bangladesh's policymakers and entrepreneurs will need to be prepared for the evolving trading regime by undertaking appropriate measures to align production practices and processes at the enterprise level. 

On the other hand, ability to meet these requirements will allow Bangladesh to project itself as a 'Compliant Sourcing Country' and project 'Brand Bangladesh' favourably in the global market. 

Bangladesh will also need to proactively pursue trading arrangements, such as free trade agreements (FTAs) and comprehensive economic partnership agreements (CEPAs). It is to be noted that these will need to be negotiated, in most part, on the basis of full or less-than-full reciprocity, rather than on the basis of non-reciprocity which has been the case for preferential treatment enjoyed as an LDC till now. 

Bangladesh will need to be ready for undertaking the trade negotiations and design its 'offensive and defensive interests' and 'offer and request lists' strategically. For example, negotiating CEPAs with India and China, or for that matter with RCEP, will require rigorous evidence-based research and wide-ranging construction with concerned stakeholders as regards pace of trade liberalisation, sensitive list, possible revenue loss implications and non- negotiables. Appropriate homework will need to be undertaken to identify the win-win outcomes and secure the country's economic investments. 

Also, as a future 'non-LDC developing' country member of the WTO, Bangladesh will need to be alert to the developments in the WTO and take steps to comply with the relatively more stringent requirements and obligations applicable for these countries in the WTO. 

From this vantage point, the developments in the WTO as regards support measures for the graduating LDCs must be carefully monitored. In view of the upcoming 13th WTO Ministerial Conference in Abu Dhabi (WTO-MC 13) to be held on 26-29 February, 2024, Bangladesh must take an active interest in the relevant negotiations particularly as regards issues that concern the graduating LDCs and developing countries. 

Bangladesh will need to vigorously pursue banking sector reforms, ensure central bank autonomy and exercise zero tolerance against wilful loan defaulters. Measures will need to be taken against tax dodgers as also those who have taken and are taking capital out of the country, be it through hundi/hawla channels or trade mispricing. 

To be true, many laws have been enacted and many institutions have been set up including Financial Intelligence Unit at the central bank, Anti-Corruption Commission, Office of the Comptroller & Auditor General, Transfer Pricing Cell at NBR, Competition Commission, Directorate of National Consumer Rights Protection, to name only a few. 

However, these will need to play, and be allowed to play, their mandated role. Appropriate monitoring, empowerment, enforcement and institutional accountability will need to be ensured so that these institutions are able to deliver. 

Many economists in Bangladesh have been arguing for change of course with regard to exchange rate and interest rate management for quite some time. It is good that though with considerable delay the central bank has taken a number of measures leading to course correction. These will need to be continued. 

The policy of aligning interest rate with market determined rate needs to be continued as part of the ongoing contractionary policy. The low hanging fruit for reserve replenishment appears to be bringing back remittances sent through informal channels back to the formal channel. Further depreciation will help in this regard, which will also help reduce the subsidies to attract remittances currently estimated at about 10 thousand crore taka (incurred by both the government and the banks). 

Inequality in Bangladesh has been on the rise over the past several years. The Gini-coefficient of income inequality has been increasing; so has been the wealth and asset inequalities. 

The ratio of highest and lowest 5 percent income earners have risen manifold over the past two decades: from 30 times to 80 times between 2010 and 2022 according to the BBS-HIES. Monetary and fiscal policies, and the overall development strategy must be geared to establish a more equitable society and to ensure distributive justice. Quality education and skills development will help Bangladesh to reap the benefits of demographic dividend and contribute to inclusive development. 

Political economic forces are no less important than economic forces in making things happen. There is an urgent need to examine why things don't happen even when a decision to the effect has been taken at high policy levels. Both institutional capacity and a system of accountability are important here. 

As the new government takes the helm of governance, a re-evaluation of the political-economy dynamics must be put on the cards. And a culture of personal responsibility and a system of institutional accountability will need to be established to ensure that policies are implemented on the ground.

The 'Bangladesh Vision 2041' of the government as also the 2024 election manifesto of the ruling party talks of an economically developed, socially inclusive and environmentally sustainable well-governed Bangladesh by 2041. Policies and practices of the government must be tuned to attaining these high aspirations. Now is the time to walk the talk.  

Illustration: TBS

Professor Mustafizur Rahman is a Dist inguished Fellow of the Centre for Policy Dialogue