Bangladesh Beyond 50 : The competitiveness agenda for tomorrow

Five decades since independence: Phenomenal growth success driven by private sector economy

Over the past five decades, Bangladesh managed to transition from an agrarian economy to a more manufacturing-based and service-oriented economy and fared well in social indicators. Bangladesh is now one of the top five emerging growth stories. It has registered average Gross Domestic Product (GDP) growth rates of more than 6% in the last ten years and over eight percent in fiscal year 2019. Despite grave challenges from the Covid-19 pandemic, Bangladesh's economy proved its resilience by achieving a growth rate of 5.2% in fiscal year 2020 which was higher than comparators such as India with 4.2%, Bhutan with 0.6% and Vietnam with 2.9%. The success of a persistent and sturdy growth rate is based on real structural transformation, growing private sector engagement, export-oriented industrialisation, rural renewal and steady development outcomes.

Supportive policy measures played a crucial role in strengthening private sector led growth

Trade liberalisation has helped the private sector, especially the export sector to flourish despite several policy reversals in the last two decades. During the 1970s and 1980s, the country was highly protectionist, but trade liberalisation accelerated by the 1990s which helped the private sector, especially the RMG to grow.

Since then, there has been a dichotomy whereby the RMG sector has benefitted from several policies. This includes a combination of a bonded warehouse system for duty-free imported inputs, back to back letters of credit of import finance, a customs green channel for rapid import-export cargo clearance and an overall free trade channel for RMG production in export processing zones (EPZs) or the domestic economy, while there has been a general increase in para-tariffs.

Bangladesh Bank has encouraged private sector credit growth to the economy, including the rural sector, although the allocation of credit has not been efficiently managed. Most money has gone to industry and not to consumption loans, and certain preferential loans have been directed at the private sector. Prudent fiscal management also benefitted the private sector. The government has managed to maintain a relatively prudent fiscal policy in the last two decades by ensuring that the expenditure growth is well aligned with revenue performance leading to sustainable and manageable fiscal deficits below 5% in most years.

Access to serviced land has been a binding constraint for investment and growth for decades, however, this has been addressed with the help of Export Processing Zones (EPZs) and Economic Zones (EZs).  The energy constraint has been significantly addressed by the energy sector reform since 2010 although challenges remain in terms of cost and distribution. Bangladesh has made impressive progress in generation capacity, mostly through megaprojects and the expansion of gas use, more than tripling the capacity, from less than 6,000 megawatts in 2009 to more than 20,000 megawatts in December 2020.

 Why improving competitiveness is critical for the next phase of the growth story

Attaining prosperity envisioned in  Vision 2041: Building on Bangladesh's success, the country has laid out its grand vision to become an 'Upper Middle-Income Country' by 2031 and a 'Developed Country' by 2041. The 8^th five-year plan envisages a sustainable economic growth trajectory of 7 % and above till FY2025. Bangladesh's GDP per capita needs to increase five-fold to attain the 'Developed Country' status in 2041, while exports and FDI will have to grow eight and six times respectively.

Creating more and better jobs: Generating the necessary number of jobs for the young Bangladeshis and attaining Upper Middle-Income status through sustainable growth will require a considerable increase in private investment as a proportion of GDP. The 8th Five Year Plan aims to accelerate economic development through stronger trade and investment, including targets such as: (i) increase in gross investment from 31.8% to 36.6% of GDP; (ii) increase in private investment from 23% to 27% of GDP; (iii) increasing FDI from 0.9% of GDP to 3% of GDP and (iv) Increasing exports from US$ 33.6 billion in 2020 to US$ 56 billion by 2025. Achieving these targets imply that Bangladesh will need to enter a more coordinated phase of policy agenda and reforms to sustain its recent growth trajectory and improve overall competitiveness.

The private investment imperative: Private investment as a proportion of GDP has exhibited stagnation in recent years which is concerning as it is a critical component for propelling Bangladesh into an accelerated prosperity status. Over the past decade, the private sector as a proportion of GDP has been hovering between 21 to 23% of GDP. Between FY2018 and FY2019, private investment as a proportion of GDP rose only by 0.3 percentage points. Various constraints have resulted in a lack of dynamism in private sector investment in Bangladesh.

Breaking the FDI impasse:  The importance of Bangladesh raking in higher levels of FDI is paramount, especially when the country aspires to become an upper-middle income country by 2031 and a developed country by 2041. FDI over the last decade has averaged 1.1% of GDP whereas comparator countries like Vietnam and Malaysia have fared better with 6% and 3.4% respectively. Principal share of FDI is concentrated within a narrow spectrum of industries such as power, banking, food, telecommunications and textile and weaving over the past several years.

Diversification of economic base: Diversification of, and more dynamism in the formal sector are required for large-scale formal job creation and extending quality gains into the informal sector. Bangladesh will need rapid growth in the formal sector in order to see significant gains in job quality. For example, reaching a target of 35% of workers in wage employment by 2025 (from 22.3% today) would require the creation of 1.35 million formal sector jobs each year over the next decade. This is 2.5 times the number of wage jobs that were created in the period 2003-2015. This implies that the formal sector will need to grow several times faster than the overall economy to sustain a sufficient pace of quality job creation. While the established sectors such as RMG continue to fuel prosperity, unleashing potential of new growth sectors will be key in expanding the formal sector opportunities. This requires creating and/strengthening markets and mobilising greater flow of private investments in new growth sectors.

Preparing for the post-LDC world: The need for improving economic competitiveness becomes even more pressing as Bangladesh will face grave challenges post its LDC graduation. After graduating from its LDC status in 2026, Bangladesh will primarily face three types of challenges: erosion of trade preference, loss of policy space and tightened financing on development. More than 75% of Bangladesh's exports are in those markets that offer LDC tariff preferences which will be eliminated after graduation, thus making its products less competitive in terms of price. Loss of policy space includes cancellation of export subsidies and cash incentives. Moreover, financing for development will be comparatively difficult as Bangladesh enjoys reduced interest rates for development financing as an LDC which will not be offered after graduation.

Managing sustained recovery from Covid effect: Due to the Covid-19 pandemic, Bangladesh's GDP growth rate has decelerated to 5.2% in fiscal year 2020 from an impressive 8%+ the previous year. Covid led to global  FDI falling  below US$1 trillion for the first time since 2005, as the world continues to struggle with the economic impact of Covid-19. Developing countries had a mild hit, FDI flows fell by 12% in contrast to developed countries, where FDI flows plummeted by 69%. A particular concern is the rise in unemployment and poverty, which has created an atmosphere of depressed global and local demand and low business confidence for investment. Thus, it is vital to increase domestic demand and employment which are major driving forces behind the economy.

Focusing on priority improvement areas

Bangladesh's regulatory environment is a complex maze with 23 government agencies providing investor services.  To start and operate a business, an investor may need to secure up to 150 approvals, registrations, certificates or clearances from various agencies. Moreover, the lack of coordination among these agencies results in duplication of information for several requirements, as well as circularity . This leads to an increase in cost and time for receiving approvals and thus adversely affects growth in private investment.

Regulatory burdens are different for various sectors which induces informality in the economy. Moreover, non-uniform regulatory information across sectors aggravates challenges in doing business. Institutional frameworks are generally weak for the private sector as a whole, with problems more pronounced at the sector-specific level. Different sectors face differing regulatory burdens, which further encourage informality; a few sectors with powerful voices such as RMG have managed to advocate their way into a simpler regulatory environment; many other sectors and their representative associations do not have access to the knowledge of best practices, experience or ability to identify and advocate reforms to their regulatory environments.

Difficulty in accessing finance is a continuous problem faced by private investors . The central-bank recently mandated that lending rates should be in single digits. The lending rate in Bangladesh is higher (8.3% than comparators such as Vietnam (7.6%), Malaysia (3.9%) and Thailand (3.3%) in 2020 according to World Bank data. In this regard, foreign commercial financing can reduce the private sector cost of capital as it can secure loans at a lower rate.

Comparatively high logistics costs in Bangladesh leads to products being less competitive in the global market. Logistics costs in Bangladesh are high in most sectors, ranging from 4.5% of sales (for leather footwear) to 47.9% of sales (for horticulture). Congestion and delays are pervasive problems across the national logistics system, from roads to seaports and land ports. If there were no congestion on roads, logistics costs would be at least 7–35% lower, depending on the sector.

A protectionist trade regime promotes anti-export bias towards non RMG goods and may hinder products from becoming globally competitive. The current trade regime is inclusive of para-tariffs such as supplementary and regulatory duties on raw materials. This makes domestically produced goods comparatively cheaper than imported goods. As a result, producers reap a higher margin in the domestic market and have little incentive to improve the quality of product and be competitive. The country can improve economic diversification and competitiveness by reducing para-tariffs such as supplementary and regulatory duties on raw materials and can be more harmonised with comparator countries.

Paying tax is a hassle for firms as it is plagued with numerous policy and administrative complexities. The World Bank reports that, on average, firms in Bangladesh make 21 tax payments a year, spend 302 hours a year filing, preparing and paying taxes and pay total taxes amounting to 31.60% of profits.

Poor enforcement of contracts often turns away private investment including FDI. Bangladesh has a burdensome commercial  litigation process that most businesses find frustrating, costly and a key impediment to business operations. According to Doing Business, 2020, on average it takes 1,442 days to enforce a contract and the financial cost of enforcement is as high as 66.80% of the claim. As compared with this, it took only 400 days in Vietnam and 452.8 days in China to enforce a contract.

Discrepancies in insolvency laws in Bangladesh dampen the business environment and disincentivise private investment and FDI. Though the primary statute guiding the operation of insolvency is the Bankruptcy Act, 1997 –it is rarely used by the creditor or debtor, who prefers alternative laws like Artho Rin Adalat Ain. Ninety percent of commercial banks and financial institutions prefer to or are required by Bangladesh Bank regulations to sue under the Money Loan Courts Act, 2003 instead of having recourse under the Bankruptcy Act, 1997, thereby making the Bankruptcy Act redundant.

Bangladesh must capitalise on emerging shifts in global supply chain and production systems  but to do  so it requires to put in place a targeted investment promotion strategy and its operationalisation at the soonest. We will not be the only country that will be competing to lure the investors contemplating relocation.  Countries such as Vietnam, Indonesia, India, and the Philippines are all expected to put in a strong effort.  This calls for preparing and implementing a targeted, time-bound, and focused investment promotion plan that will help identification and targeting of the investors group, outreach with Bangladesh's value proposition, and putting in place an effective investors facilitation and after care process.

Dr M Masrur Reaz is the chairman and CEO of Policy Exchange