Bangladesh’s economy is juggling high inflation, a mountain of debt against low revenue income, a shortage of USD, steady depletion of reserves, skyrocketing non-performing loans (NPLs), and uncertainty due to the upcoming national polls.
The country must implement timely reforms to tackle this long list of issues plaguing the economy, or risk paying a steep price for deliberate inaction, warns World Bank in its latest Bangladesh Development Update.
The World Bank Dhaka office published this update, part of a broader report covering the South Asian region, at a press conference on Tuesday. The global lender has cut Bangladesh’s GDP growth projection for FY24 to 5.6 per cent in October, a slip from April forecast of 6.2 per cent.
This latest World Bank forecast for Bangladesh is now similar to the average GDP growth figures posted by this region. It should be noted that the projection places Bangladesh second only to India in terms of economic growth.
Other global agencies such as the Asian Development Bank and the International Monetary Fund (IMF) had projected 6.5 per cent GDP growth for Bangladesh in FY24. The government had set a 7.5 per cent growth target in the FY24 budget.
When asked whether Bangladesh will turn into another Sri Lanka if it fails to tackle the economic challenges, World Bank Country Director Abdoulaye Seck said, “Bangladesh has a strong track record of economic performance, and the country has a bright future ahead.
“Bangladesh has strong economic fundamentals, with a demographic dividend, growing market share in readymade garments, and a large overseas workforce. With the right and timely policy adjustments, there is no reason why Bangladesh cannot reach its development objectives.”
Curbing inflation
Inflation is the key challenge faced by Bangladesh’s economy. However, the World Bank is optimistic the country will be able to reduce inflation by the end of FY24.
The global lender projects that Bangladesh’s inflation will drop to 8.5 per cent, due to declining commodity prices in the global market. Average inflation was over 9 per cent in FY23.
Bangladesh witnessed the highest in a decade 12.5 per cent food inflation in August, 2023. During that period, general inflation was 9.92 per cent. The World Bank has recommended increasing the interest rate to tame inflation.
Monetary policy should be utilised to curb inflation, which is not possible without increasing the interest rate, Abdoulaye Seck said.
Even though there was a 9 per cent cap on bank loan interest rate, Bangladesh has imposed a new interest rate calculation “Six Months Moving Average Rate of Treasury Bill (Smart)” by lifting the cap from July this year.
Under the new lending rate formula for commercial banks, the rate will be fixed based on the weighted average rate of a six-month treasury bill, plus a 3 per cent premium. This figure was 10.32 per cent in September this year.
According to the World Bank report, the treasury rate will need to be market driven for SMART to serve as a market proxy.
Reducing tariffs on essential imports will further help curb inflation. Besides, removing distortions of the exchange rate will help mitigate devaluation of Taka, and reduce depletion of forex reserves.
The World Bank also recommends taking steps to boost remittances through the banking channel.
Reforms
At the press conference, the World Bank mentioned that Bangladesh has shown incredible success in poverty alleviation. The country managed to reduce poverty by 11 million people between 2016 and 2022, despite Covid-19 pandemic.
Abdoulaye Seck pointed out, “Despite these gains, inequality has slightly narrowed in rural areas, and widened in urban areas. The World Bank stands ready to support Bangladesh to take on urgent reforms to accelerate inclusive economic growth.”
Bangladesh will need to strengthen its trade competitiveness, expand bilateral and multilateral free trade agreements, strengthen financial sector stability and soundness, improve business climate to attract investment, improve domestic resource mobilisation, address climate change adaptation and mitigation, and improve the governance framework.
The World Bank country director further said, “Now it is high time to introduce bolder, faster and sustainable reforms. A delay in reforms will create a difficult situation for Bangladesh, and prevent the country from successfully initiating the process.”
Bangladesh should boost revenue mobilisation and take immediate measures to strengthen banks’ management because the large number of NPLs is a major risk for Bangladesh’s financial sector.
As of June this year, the NPL amount in the banking sector reached Tk 1.56 lakh crore.
