How economic performance of Bangladesh is going behind GDP growth, does it really matter? – Md.Musfiqur Rahman
Recent overwhelming economic growth in Bangladesh not only surprises policy makers but also turns out as miracle to economists and development analysts. But what is the other side of this high GDP (Gross Domestic Production) growh.GDP growth is not the sole factor to weigh up an economy. There are some other indicators that are very important to have a clear view of an economy.
According to the Bangladesh Bureau of Statistics (BBS), Bangladesh’s GDP growth has reached 8.13% in 2018-19 against 7.86 % recorded in the previous fiscal year. Economists however are skeptical about the GDP growth as it does not match with other economic indicators. There is a mismatch and it is difficult to understand how much growth has been achieved. Most of the major indicators which play a vital role in an economy are unsatisfactory with this high GDP growth.
With this high GDP growth there should be significant increase in investment but it does not increase at a satisfactory rate. Private investment has been revolving around 22-23 percent of GDP for long. Why isn’t it changing with this high GDP growth? There exist many causes behind this static position of private investment. The major sources of finance for private investment are share market and banking system and both are not in a good position.
We all are well known about present situation of share market. There exists discrepancy between this high GDP growth and present condition of share market.
Instability of different indicators in share market has been disappointing Investors. They have poor confidence on security exchange commission. Recently, market capital of different companies has fallen by 1 billion which is the worst after downfall in 2010. Due to this unexpected fluctuations, foreign investors left market as well. Foreign investment in the share market was 9,586 crore, which was fallen down to 7,845 crore. Liquidity crisis (scarcity in banks loans and the commercial paper market) in banking sector is also liable for share marker crisis.
Despite gradual rise in the investment GDP ratio over the past decade, in recent years, the share of private investment in GDP has remained static and the share of public investment has risen. During 1995 and 2008 there was a persistent rise in the private investment GDP ratio but between 2009 and 2017 the ratio has increased by only 1.2 percentage point.
Moreover, public investment has increased mostly under the annual development program which is not directly related to employment creation. Investment in factories and firms has not been taking place enough to absorb the growing labor force. Why private investment is not changing with this high GDP growth? It is another sequence of liquidity crisis in the banking sector. To fulfill the 24.2 percent private investment of GDP, Bangladesh needs additional TK 23,000 crore, but in the ongoing crisis of banking system where will this money come from.
The government’s target to borrow more from the banks may tighten the situation further. Though public investment rise to 8.17 percent of GDP from 6.82 percent five years ago, it is not directly related to employment creation. Moreover public investment has increased mostly under the annual development program under some mega project.
Government’s loan from banking system is rising due to poor revenue collection, non-performing loan is rescheduling, and therefore banks do not have enough funds for giving loan to private investors.
According to Bangladesh Bank, default loan in banking sector is 1.16 lakh crore but this amount is around double in international standard.
According to World Bank and IMF, default loan in Bangladesh is about 2.4 lakh crore. Bangladesh’s non performing loan ratio stood at 12.0% in September 2019 compared with the ratio of 11.7% in the previous quarter. We have spent more than TK 17 to 18 thousand crore just for recapitalization alone in the past decade. There exists a nexus between the regulatories, the big borrowers and the owners of the banks. Access to credit is also a problem for many, even for the ones having a good project. Government also should try to lower interest rate on loan for manufacturing sector.
Private sector credit growth has been decreasing. It has fallen from 11.3% in July 2019 to 9.87% in November 2019. Government has decided to take away a portion of money from the fund of autonomous and half autonomous institution to government treasury. If this law is implemented, around 30 thousand crore taka will go to the government treasury from banking sector, it will affect capital market. Besides, money laundering is another problem of our economy; it is another sequence of lack of business environment and lack of surveillance of authority.
Besides, Bangladesh has not been able to attract Foreign Direct Investment (FDI) IN 2016 the FDI share in Bangladesh economy was only 0.9 percent against the LDC average of 3.3 percent. Week infrastructure and poor business environment are critical problems for Bangladesh to overcome for attracting both domestic investment and FDI. According to Doing Business Index of the World Bank, Bangladesh’s rank is 176th among 190 countries in 2019.
There is another problem with income distribution. It moves against the poor. For example, According to the HIES 2016, the poorest one- fifth of the household population received 2.78 percent of the total income in 2010, but in 2016 their share declined nearly 1.24 percent. On the contrary, top 5.0 percent increased their share to 27.9 percent from 24.6 percent during the same period.
Though real per capita income does not rise between 2010 and 2016 and Gini coefficient is also worsening, how can the head count poverty rate decline from 31.5 to 24.3 percent. Consumption and average real income is also falling.
Again Bangladesh is in very lower position in human capital. Education and training is the main way of making human capital. Public spending in education and health is among the lowest in the world. It is also shrinking day by day. According to a report, shareof GDP to health in Bangladesh has fallen from 1.1% in 2010 to 0.8% in 2017,and is the lowest among 21 countries of south, southwest and southeast Asia. Bangladesh spends 2% of it’s GDP in education which is the second lowest share among the countries surveyed. In contrast, Bhutan, Maldives and Nepal all spend nearly 5% of their GDP on education. And education system should be designed in a way so that Students can be skilled enough for the marketdemand. Despite high economic growth, agriculture, industry sectors unable to create enough jos.the youth unemployment has increased over the yearswhereas the overall unemployment remain unstable
Export is one of the most important contributing factors in GDP. But over dependence on a few products or a single product is not a wise decision. Diversification is another factor on which we should give importance. Export diversification has not done well enough.Our exports are very over reliant on ready-made garments. Why we don’t have an alternative to garments even yet even after 50 years.80% of our export earnings comes from RMG. Again 60% of RMG goes to EU Countries. Exportin EU countries isgrowing due to EBA (Everythingbut Arms) benefit.Under EBA system the importers of EU can import from Bangladesh without any duty. If Bangladesh graduates LDC in 2024 then EBA system will not work for Bangladesh. As a result RMG export in EU will fall.It will affect our export earnings greatly.
Export concentration in garments makes the economy, employment and income extremely vulnerableto external shocks arising from changes in global demand or prices.To enhance exportdiversification further efforts are needed to strengthenour production capacity in manufacturing and services. In order to enhance Export basket, new products and new markets should be added.
What will be the scenario, when Bangladesh finally will graduate from LDC countries.We have undertaken some efforts that are not enough and have not completed initiatives. Private sector can help but the initiatives must come from the public sector. The energy supply is not adequate yet. We have to create business environment for the investors so that they can be confident.
In order to ensure inclusive growth, government has to take immediateinitiativeTo create more jobs private investment must beenlarged.There is a need to undertake meaningful and effective steps against the irregularities in the banking sector and to enhance the confidence of the investors in private sector. Export diversification and inequality reduction should be another focus of this time. we should expand our import substitution industries so that we have a better BOP and more employment. Otherwise we will not be able to sustain this economic growth.
The writer is an undergraduate student of Department of Economics at University of Dhaka.