Without a new round of structural improvements and reforms, Bangladesh’s economy may decline below 4 per cent on average between 2035 and 2039, the World Bank has said in a report.
The report titled ‘Change of Fabric’ released on Friday identified three main growth constraints: declining trade competitiveness, the weak and vulnerable financial sector, and unbalanced and inefficient urbanization.
“The cross-country model of growth drivers suggests that growth would decline without additional structural improvements. Addressing these constraints could secure faster development and sustain high growth in the future,” it said.
As Bangladesh approaches upper-middle-income status, several emerging megatrends, such as shifts in production, advances in technology, and climate change, challenge its growth model, according to the report.
“The current growth is driven by structural reforms in the past and macroeconomic stability. These reforms were accompanied by complementary reforms in agriculture and in social sectors,” said the global lender.
Despite political crises and frequent natural disasters, the country has been among the fastest growing economies in the world, it said.
Average annual economic growth has been 4 per cent over the past three decades in real per capita terms, which puts it in the top decile of countries during this period.
The World Bank identified three main growth constraints.
First, while apparel exports boosted development in the past, a protective trade regime has constrained export diversification. The share of exports in GDP has been declining in recent years from 16.7 per cent in FY11 to 10.7 per cent in FY21.
Second, banking sector vulnerabilities are growing. The Covid-19 crisis intensified longstanding financial sector vulnerabilities, further impeding efficient channeling of savings to productive investments. A nascent domestic capital market is also constraining longer-term financing for infrastructure, housing, and climate change mitigation.
Third, while the growth of Dhaka has historically yielded positive agglomeration effects, it now faces high congestion and poor environmental conditions. Besides, cities are underdeveloped and do not yet provide a conducive environment for more spatially balanced development.
LDC graduation will trigger different changes to export earnings
Bangladesh will graduate from the United Nations’ least developed country category in 2026 and to become an upper-middle-income country within the nextdecade.
After graduation, the country will lose the Everything but Arms (EBA) facility under the GSP preferences from 2029. Besides, due to the graduation, the country could not provide cash incentive to its exporters. The report claimed that Bangladesh will face a tariff increase of about 10 per cent of the European Union (EU) after graduation, but under the new GSP+ scheme, the tariffs are expected to remain largely unchanged.
The shift to the Canadian GSP will entail substantial tariff increases—between 16 and 18 per cent for 10 of the top 12 export products. Tariff increases in the Japanese market will be around 8 to 11 per cent.
Simulations project that exports from Bangladesh are expected to be substantially impacted by the phasing-out of preferences. According to the World Trade Organization (WTO), total exports are projected to fall by $5.37 billion or 14.3 per cent of initial exports.
Most of the reduction is expected in exports to the EU, a fall of $5.3 billion or 26.3 per cent of initial exports.
However, under the new GSP+ scheme, the losses are expected to be minimal. As a share of initial exports, exports to Canada (42.8 per cent), Japan (32.3 per cent), and the Republic of Korea (32.3 per cent) are also significantly affected.
The bulk of the reduction in exports is projected to take place in clothing.
The current growth rates are no reason for complacency
Bangladesh still has significant unrealized potential for growth and development. Despite similar conditions in the 1970s, the pace of poverty reduction and economic growth was slower than in its peer countries, according to the report.
“Economic booms are difficult to sustain, and few economies remain among global growth leaders over longer periods,” it said. Persistent rapid growth without additional structural improvements is rather unusual and may imply that the pace of growth could slow.
In addition, higher GDP growth in the last decade has not translated to faster poverty reduction as in the preceding past two decades, indicating the current episode of high growth has not been as inclusive as before, said the World Bank.
The World Bank recommended some policies to tackle the obstacles faced by Bangladesh.
The recommendations include reducing the nominal protection rate by 3-5 per cent every year until 2025in the Eighth Five Year Plan, considering several policies beyond tariff modernization to diversify exports and increase Global Value Chain (GVC) participation, non-tariff barriers liberalization and trade facilitation reforms covering sanitary and phytosanitary (SPS) requirements, pre-shipment inspection, and nonautomatic licensing requirements.