Country Report Bangladesh
Bangladesh has posted strong growth in the face of a deteriorating external environment. In 2012, the economy expanded by 6.3% and is expected to grow by around 6% in 2013. Bangladesh remains one of the poorest countries in the world with inadequate infrastructure, widespread corruption and recurrent floods. Recent government efforts to strengthen secularism and address war crimes committed during the war of independence have led to widespread public protests and political polarization. Despite foreign grants, budget deficits remain high and are partly financed by the central bank, which contributes to the high inflation levels. The current account surplus has been narrowing and posted a nominal deficit in 2012 and will expectedly deteriorate further in the coming years.
Author: Preethika Kannan
Introduction and update
Bangladesh is located in South Asia, bordered by India and Myanmar. It is densely populated and one of the poorest countries in the world with a nominal per capita income of USD 758. The country's relatively low openness to trade and limited exposure to international financial markets have insulated Bangladesh against deep effects of the global economic crisis till now. However, the high concentration of Bangladesh’s exports in textiles and ready-made garments, and its wide exposure to the European and US markets will keep both exports and industrial production vulnerable in the near term.
In 2012, GDP grew by 6.3%. It is expected to moderate to 6% in 2013. Growth will continue to be supported by steady rises in private consumption (driven by the agricultural & textiles sectors) and investment (driven by infrastructure & energy needs). Workers’ remittances inflows, averaging around 10% of GDP, will remain an important engine of private consumption growth.
The fiscal Balances are on a constant strain owing to heavy fuel subsidy bills, insufficient revenue collections and inability to contain costs on the energy front. On the monetary front, the Bank of Bangladesh has maintained a strict monetary stance to keep inflation at bay. Inflation averaged at 8.7% for 2012, down from 10.7% in 2011.In January this year, the central bank lowered its key policy rates by 50bps for the first time since 2010, in order to support credit growth in a slowing economy.
The widening trade deficit will be the main factor behind persistent shortfalls on the current account. The import bill is expected to go up as stronger private consumption and investment growth will boost demand for a range of imports. On the other hand, the export growth will face bigger challenges from increased competition and changing consumption patterns in western markets. In this light, the fact that the current account is supported by a steady and strong inflow of remittances is comforting.
Major obstacle to Growth – Deepening energy crisis
Bangladesh continues to face a deepening energy crisis, which has become the biggest impediment to its growth. The current demand for electricity stands at 7,518 MW daily, while production is lower at 6,066MW. This continued shortage of energy supply and other infrastructural bottlenecks discourage private investment and put additional pressure on the fiscal balances. The government has recognized these challenges and the budget for FY 2012/13 will allocate 5% of total investment expenditure to power and energy. There are currently 79 power plants operational in Bangladesh and the government plans to add an additional 52 new power plants. The new plants are expected to go into production by FY 2013/14, adding around 13,294MW to the national power grid. This investment, while seeming exceedingly large, is anticipated to take care of future increase in energy requirements. If required, the government is also considering plans to import electricity from India, Myanmar, Nepal and Bhutan to meet its shortages.
Industrial Tragedy - Garment factory fires
The garment and textiles sector is the mainstay of the economy, accounting for over 80% of total export revenues. Despite the troubles faced by western nations, Bangladesh textile exports have held up pretty well in the past few years. One of the main reasons for this is the sector’s cost competitiveness is that the cost or inputs is cheap. During times of economic crisis, consumers prefer to buy less expensive clothes. But there is a downside; in order to maintain their cost competitiveness, producers have been less willing to invest in, among other things, safety measures. Speed is the main objective, while safety standards take a back-seat. This has led to several fire mishaps in Bangladesh. Quoting a recent occurrence, the Tazreen factory fire killed over a 100 people in November 2012. These types of incidents have led to increased global sensitivity to safety standards. Especially global retailers such as Walmart, Zara and H&M, which outsource production activities to low wage countries, are under close scrutiny by compliance watchdogs. Therefore, in the future, we could see increased adherence to compliance standards leading to higher production costs. Additionally, labor protests for wage hikes have also been increasing in frequency. More than 300 ready-made garment factories in the Ashulia industrial zone near the capital, Dhaka, were temporarily closed following violent clashes between workers and security forces, beginning in June 2012, over pay and working conditions. That said, electricity shortages and reduced back linkages with domestic production continue to hamper the sector’s performance as well. Overall, improving social and labor standards will be crucial to maintaining the growth momentum of Bangladesh’s export sector. However the downside is that this will lead to an increase in production costs thus negatively impacting the cost competitiveness of the sector, as well as the competitiveness of Bangladesh’s exports.
The next general elections are scheduled for December 2013. Indo-Bangladesh relations have been generally positive since the ruling Awami League (AL) came to power in January 2009. This has led to increasing levels of bilateral trade and the signing of a historic agreement that settled a long-standing border dispute. However, recently public support for AL has been eroding in favor of the opposition Bangladesh Nationalist Party (BNP), which pursues significantly more nationalistic policies. The opposition party seems to be taking a more pro-China stance in its bilateral relations agenda, which could lead to friction with India. In recent months, there have been riots and street protests questioning the genuineness of the judicial trials of senior opposition members. These trials led to the sentencing of various opposition party members over the war crimes committed during the war of independence in 1971. The main protagonist of these riots is the fundamentalist party Jamaat-e-Islami which is backed by the main opposition party, the Bangladesh Nationalist Party (BNP). It is a general observation that antagonism between the main parties - the Awami League and Bangladesh Nationalist Party - reflects personal animosity between leaders rather than substantial ideological differences. All these incidents together give an indication that further political destabilization can be expected in the run-up to the next general election.