WB: Market based interest, exchange rates for recovery

To accelerate Bangladesh’s recovery and economic growth, the World Bank (WB) has strongly recommended structural and policy reforms, including removing the lending rate cap and market-driven single exchange rate.

At the same time, the global lender has kept the country’s real GDP growth forecast at 5.2 per cent for FY2022-23 due to rising inflation, revenue shortfall, tighter financial conditions, disruptive import restrictions, energy shortages, slower global growth and global economic uncertainty.

This forecast is lower than the revised target of 6.5 per cent of the government for FY23. The previous target set in this fiscal year’s national budget was 7.5 per cent.

However, WB has projected a 6.2 per cent GDP growth for FY2023-24.

WB Country Director for Bangladesh and Bhutan Abdoulaye Seck disclosed the projections while unveiling the latest edition of “Bangladesh Development Update” at their office in Dhaka on Tuesday.

“Growth in Bangladesh is expected to accelerate over the medium term, as inflationary pressure eases, external conditions improve, and reform implementation gains momentum,” WB said.

According to the report, inflation accelerated from an average of 6.1 per cent in FY2021-22 to an average of 8.7 per cent in the first eight months of FY23 as international commodity prices rose and the taka depreciated.

Significant administered price adjustments of energy and electricity coupled with exchange rate depreciation raised input costs in the second half of FY22, with knock-on effects that are still working through the economy.

“Russia’s invasion of Ukraine and global uncertainty has impacted countries around the globe. Bangladesh’s post-pandemic recovery has been disrupted by elevated commodity prices, rising interest rates, and slowing global growth,” said Seck.

Why reforms are crucial

The World Bank said in its report that the balance of payments (BOP) deficit reached $7.2 billion in the first half of FY23, up from $5.3 billion in FY22, creating considerable pressure on foreign exchange reserves.

A multiple exchange rate system has contributed to the BOP pressure, disincentivising export and remittance inflows. Moving towards a single market-based exchange rate will help restore external balance and this is one of the reform points suggested by WB.

Risks to the outlook remain elevated. Domestic banks faced challenges with tighter liquidity and increasing non-performing loans.

The fiscal deficit widened in FY23, with higher financing from domestic banks. However, the January 2023 joint WB-IMF Debt Sustainability Analysis assessed that Bangladesh remained at low risk of debt distress.

The global lender also recommended lifting the interest rate cap and addressing financial sector vulnerabilities in new legislation.

National elections will be held in Bangladesh at the end of this year or the beginning of next year. Regarding that, Seck said executing such reforms before elections becomes a bit difficult in many countries around the world.

“World Bank will provide all kinds of support in any kind of reforms for Bangladesh,” he added.

Suggestion for accelerating growth

In the first half of FY23, revenue declined as imports fell and the deficit rose sharply. Less external borrowing with higher interest rates also contributed to the financial account deficit.

To increase revenue for accelerating growth, WB suggested not squeezing imports too much. Otherwise, the country’s economy may fall under more pressure.

In this context, Zahid Hussain, a consultant of WB, said that the import demand cut was a temporary solution to save the reserve but it is not a long-term solution.

“Most of our imports are related to manufacturing and investment. So, reducing imports will slow down the economy. So the only solution is to increase the supply of foreign currency,” he said.

Improving trade competitiveness for export diversification will be critical to achieving Bangladesh’s aspiration of upper-middle-income status by 2031, the report said. If achieved, it will also help accelerate growth.

“The ready-made garments sector accounts for about 83 per cent of Bangladesh’s exports. The Covid-19 pandemic underscored the risk of overreliance on a single sector,” said Bernard Haven, the WB’s senior economist and co-author of the report.