Download Bangladesh economy performed better than most South Asian

02 February 2013
CHAMBER NEWS
Editorial
Bangladesh economy performed better than
most South Asian countries: UN report
According to a UN Report on recent
global economic performance and short
term prospects for the world economy
released last month, Bangladesh
fared better than most South Asian
economies in 2012. The Report titled
“World Economic Situation and
Prospects 2013” – produced jointly
by UNCTAD’s Development Policy
and Analysis Division and the five UN
Regional Commissions – notes that the
world economy weakened considerably
in 2012 and was in the brink of another
major recession. A growing number of
developed countries have already fallen
in a double-dip recession. Growth
also slowed down in most of the large
emerging developing economies like
China, India and Brazil, facing homegrown problems generated by weak
investment demand.
The economic woes of the developed
world and emerging economies are
spilling over to other developing
countries through weaker demand for
their exports and heightened volatility
in capital flows and commodity prices.
Most low-income countries and LDCs
have done relatively well so far, but
are now facing the adverse spillover
effects from the slowdown in both
developed and major middle-income
countries. According to the Report,
the prospects for the next two years
continue to be challenging, fraught with
major uncertainties and downside risks.
If, for example, economic growth in
China would slow down to 5 percent
per year (caused by a further decline in
investment growth and absence of new
fiscal stimulus), developing countries
as a group could suffer a cumulative
output loss of 3 percent during 20132015, and the world as a whole of about
1.5 percent.
World GDP growth stagnated at 2.2
percent in 2012 and is forecast to remain
well below potential at 2.4 percent in
2013 and 3.2 percent in 2014. GDP in
South Asia grew by only 4.4 percent in
2012, its lowest level in a decade, after
growing by 5.8 percent in 2011 and a
robust 8.3 percent in the year before
(2010). Looking forward, the Report
projects economic growth in the region
to accelerate to 5.0 percent next year
(2013) and 5.7 percent in 2014, led by a
gradual recovery in India.
Growth in South Asia was in fact pulled
down by the slowdown in India’s
economy, which represents almost
three-fourths of the region’s GDP.
India’s economy slowed markedly in
the past two years. Its annual growth
declined from 9.6 percent in 2010 to 6.9
percent in 2011, and then further to 5.5
percent in 2012, the slowest pace in 10
years. The slowdown primarily reflects
weaker consumption and investment
demand as a result of persistent inflation,
high nominal interest rates, large fiscal
deficits and political gridlock. These
factors will likely remain a drag on
India’s economic growth in the outlook
period. The country’s GDP growth is
forecast to accelerate moderately to 6.1
percent in 2013 and 6.5 percent in 2014,
as a result of stronger growth of exports
and capital investment.
Economic prospects for Bangladesh
and Sri Lanka, in contrast to the rest of
South Asia, remained favorable despite
a moderate slowdown in 2012, the
Report observes. While growth in Iran
remained negative, and Pakistan and
Nepal grew at or less than 4 percent,
Bangladesh’s GDP grew by 6.2 percent
in 2012. The rate was second to Sri
Lanka’s, which grew at 6.5 percent in
2012, the fastest in the region.
The Report projects Bangladesh’s GDP
to grow by 6.3 percent in 2013 and 6.4
percent in 2014, while Sri Lanka’s GDP
will grow by 6.7 percent in 2013 and
6.4 in 2014.
The observations made in the Report
about
Bangladesh’s
economic
performance are quite encouraging.
Despite the world economic slowdown
and
some
internal
challenges,
Bangladesh has made tremendous
strides in economic and social
fields over the past few years. It has
achieved successes in areas of food
security, macroeconomic stability,
and in building a comfortable foreign
exchange reserve. It has managed to
grow consistently at above 6.0 percent
per annum and has already achieved or
is on track to achieve most of the MDG
targets, although it has not received
adequate support from the donors.
It has already reached the target of
halving poverty, and also improved
its record in school enrolment and
gender parity in primary education. The
country’s success in bringing down the
child mortality rate has earned global
admiration and an award from the
United Nations. At present the country’s
deficits in MDGs are mostly related to
hunger, water supply and sanitation, but
the country is diligently striving to meet
these goals ahead of the 2015 timeline.
Bangladesh can definitely take pride
in these achievements, which boost
people’s confidence to believe that
the country can attain accelerated
growth of 8 percent a year to emerge
as a middle income country by 2021.
But government, policymakers and
the people must ponder over how
much better the economy could
perform if problems of weak physical
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CHAMBER NEWS
infrastructure,
poor
governance,
corruption in administration, labor
indiscipline, high cost of credit,
mounting burden of subsidy on
government budget, and, above all,
political unrest that thwart economic
growth could be solved.
The Report provides lessons for lowincome countries about policies and
actions they will need to adopt to sustain
their past achievements. A prolonged
global recession will affect exports,
aid and investment in these countries
and thus worsen their income growth.
This implies a much slower pace of
poverty reduction and a narrowing of
fiscal space for investment in education,
health, and other critical areas needed
for accelerating the progress toward
achieving the MDGs. This holds true
particularly for the least developed
countries (LDCs) that remain highly
vulnerable to commodity price shocks
and receive less external financing as
ODA declines in the face of greater
austerity in donor countries.
Low-income countries in such
a situation will need to rely in a
substantial measure on domestic
sources for accelerating their economic
growth. This UN Report also mentions
that strong growth in private investment
and consumption, backed by a steady
increase in remittances, contributed
to economic expansion in Bangladesh
during the period of the recent global
economic slowdown.
However, while remittance growth
remains robust in 2013, recent research
by a local think-tank has found signs
of a significant decline in the growth
of domestic demand for consumption
and investment in Bangladesh. It cites
several factors such as lower income of
farmers due to lower prices of rice in the
local market, the bursting of the stock
market bubble, falling prices of land
and real estate, slower private sector
activities in construction, and slow
export growth, which have dampened
domestic demand for consumption.
The demand for private investment,
too, remains subdued due to poor
investment climate manifest in weak
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02 February 2013
physical infrastructure, inefficient and
politicized administration that fails to
deliver the desired services to investors,
and deteriorating law and order
conditions. FDI inflows, in particular,
have remained small due to problems in
governance like policy discontinuity, red
tapes, administrative hassles, corruption
in public services, and ineffective
implementation of the legal system,
high and growing investment-related
costs, for example, high corporate tax
rates and expensive internet tariffs,
an uncertain political environment,
unsatisfactory law and order situation,
poor conditions of infrastructure (roads,
ports etc), shortage of skilled labor, and
trade policy-related impediments, all of
which vitiate the investment climate.
The quality of infrastructure services
is poor, which increases the cost
of doing business. Inadequate and
erratic supply of electricity and gas
discourages investors to invest in the
country. Port services in Bangladesh
should be improved substantially.
Chittagong, the largest port of the
country, is plagued by labor problems,
poor management and lack of
equipment. The telecommunication
network is inadequate, inefficient
and expensive although a welldeveloped telecommunications sector
is very important for business and
industry. Much faster progress in these
infrastructures will be needed to attract
foreign investment. The presence of
a skilled workforce with adequate
knowledge is essential for a healthy
investment climate. Firms, whether
domestic or foreign, will be more eager
to invest when they know they will be
able to draw on a skilled workforce
to make their investment productive.
Government should take appropriate
action to address these problems
to improve the investment climate,
and make the country an attractive
destination for overseas investors.
In order to consolidate achievements
in socio-economic fields, Bangladesh’s
economic development is proceeding
in accordance with the Vision-2021
that aims to convert Bangladesh into a
middle-income country by 2021. But
with GDP growth staying around 6
percent it will be difficult to attain the
middle-income country status by 2021.
The growth rate must be increased
to 8-10 percent to reach the middleincome target.
In the event of the external impetus to
growth remaining weak due to slow
export growth and declining inflows
of ODA and investment, prospects of
GDP growth seem to lie in increased
domestic demand through appropriate
monetary and fiscal policy. Obstacles
to investment, both local and foreign,
mentioned in the foregoing, should
be removed. The recent fire accidents
in RMG factories have worried
foreign investors as well as the US
government and the EU. Government
and RMG leaders should be proactive
in tightening compliance standards at
their factories. Proper policy should be
framed and implemented focusing on
skill development of workers in major
sectors like RMG and shipbuilding.
The recently announced monetary
policy for the second half of FY13
is seen as investment friendly but it
should be properly complemented
by fiscal policy. Public expenditure
on infrastructure facilities should be
increased. A faster implementation of
the ADP will increase the cash flow
to the economy and raise consumer
demand, and at the same time remove
the physical impediments to growth.
Concerns over budget deficit should
not deter government from raising
expenditures on social sectors, such as
education and health, as well as safety
net programs. All these expenditures
will stimulate aggregate demand in the
country.
Steps should be taken to maintain the
growth of crop agriculture and to ensure
fair prices to farmers for their products,
and at the same time protect the interest
of consumers by providing selective
subsidies. The most important challenge
is to shun political violence and solve
the present political uncertainty, which
harms the economy.