First ‘Quarterly Review of Bangladesh Economy’ of 2018

SANEM QRBE_01

This April 2018, QRBE presents SANEM’s reflections on the major challenges of the Bangladesh economy. Dr. Selim Raihan, Executive Director of SANEM and Professor of Economics, University of Dhaka makes the keynote presentation.

Bangladesh has successfully met all three criteria for LDC graduation in the first review in March 2018. It is expected that Bangladesh will be able to meet the graduation criteria in the second review in 2021 and will finally graduate from the LDC status in 2024. Benefits of graduation from the LDC status are cited to include an improved country-image and higher rating for investment by international rating agencies which may attract larger foreign direct investment. However, there are a number of risk factors for Bangladesh associated with its graduation from the LDC status. Simulation results from the global dynamic general equilibrium model suggest that the loss of preferences in the markets of European Union, Canada, Australia, Japan, India and China in 2027 (the year which will mark the end of preferences for Bangladesh if the country can officially graduate from the LDC status in 2024) might lead to an annual reduction in total exports of Bangladesh by 11% which would be equivalent to around US$ 6 billion given the current projection of growth in exports. Also, many of the exemptions of WTO provisions, including the cut in tariff and subsidies and adherence to intellectual property rights (especially for pharmaceuticals sector), which are currently enjoyed by Bangladesh as an LDC, will no longer be available after 2027. Furthermore, as Bangladesh has already graduated from the World Bank’s ‘low-income’ category to ‘lower-middle income’ category, the scope for loans at lower interest rates would be limited. It is important to mention here that much of the aforementioned prospective benefits is not ‘automatic’ as the country has to work quite a lot to materialize those benefits. In contrast, almost all of the possible losses would be ‘automatic’ as soon as the country graduates from the LDC status.

Therefore, the country has to prepare itself over the next 9 years to counter these losses. Bangladesh has a poor record of attracting foreign direct investment, high concentration of exports, weak competitiveness, and poor physical and social infrastructures. The country need to attract the large volume of foreign direct investment, noticeably diversify their export baskets, enhance competitiveness, and significantly improve physical and social infrastructures. Improvement in the quality of economic and political institutions and quality service delivery by the public institutions are very crucial in sustaining the development process.

The crisis in the banking sector is a culmination of the pro-longed structural problems in the banking sector. There are exceedingly high non-performing loans, which is now more than 80,000 crore taka. Frequent scams in the banking sector, which came one after another, and we are not sure whether some more to come. This has created a lack of confidence in the banking sector by the depositors. In recent time excessive lending by some private banks has shot up the ADR ratio above 90% for these banks. Such excessive lending happened in the context of a sluggish private sector investment growth. There is a concern that a large part of this lending is misused. The banking sector is now characterized by weak regulation and monitoring and no visible punishment of irregularities backed by political patronage. Also, lack of independence of Bangladesh Bank intensified the problem. Recent decisions on allowing state agencies to deposit 50% of their funds to deposit in private banks and slashing CRR by 1.0 percentage point to 5.5% may lead to a bigger crisis. Also, cutting down interest rates on NSD is not it a valid proposition.

Using the general equilibrium model, we made an estimation and we find that the current level of inefficiency in the banking sector is leading to a loss in GDP by around 1% annually which is equivalent to around 10000 crore taka in 2016-17.

In light of previous budget experiences, the key challenges of Budget FY2018-19 are: (i) low revenue mobilization through taxes, (ii) poor performance in income tax generation, (iii) low ADP implementation, (iv) quality of public spending, and (v) low spending on human development. Data from last 4 years show that although the implementation rate of some ministries has improved e.g power division, the rate for some other crucial ministries has in fact deteriorated significantly, e.g. health, education, social welfare etc. In the case of tax composition, a lack of improvement can be noticed over the past few years. Value added tax (VAT) has been the prime source of tax revenue, followed by income tax. But the proportionate contribution of income tax has been quite low in comparison to other south Asian countries.

In order to meet the development challenges of the country, particularly those of SDGs, the country needs to drastically improve its performance in terms of revenue mobilization through increased tax generation effort. In the context of expenditure, both implementation rate and quality of spending have to be increased substantially. Expenditure target should not only be aimed towards spending but be aligned with development goals of the country. In particular, allocation in social sectors, e.g. health and education, has to be increased by a significant margin.

Press Coverage of the April, 2018 QRBE:

Daily Asian Age  || Banglavision || Bangladesh Post  || Financial Express

Samakal || NTV Online || Channel 24 Online || DBC News

Jamuna TV  || Kaler Kantha || Jugantor || Amader Shomoy

Bangla Tribune || Ittefaq || Dhaka Tribune ||  Daily Star 

bdnews24.com || bdnew24.com || bdnews24.com