Private sector paves the way: Bangladesh's remarkable rise and what lies ahead

In the immediate aftermath of gaining independence, Bangladesh emerged as the world's ninth-poorest nation. With a nominal income per capita of only $95, an infant mortality rate of 210 per 1,000 births, and an average life expectancy of 46.6 years, the challenges were immense.

Fast forward 50 years to FY2022-23, and Bangladesh has undergone a remarkable transformation. Boasting a GDP of $460 billion, it now stands as the 35th largest economy globally, with per capita GDP of $2,765. Infant mortality has drastically declined to 23 deaths per 1,000 births, and life expectancy has soared to 72 years.

Internationally, Bangladesh is recognised as a model for poverty reduction. Originally designated as a Least Developed Country (LDC) by the United Nations in 1975, it achieved lower-middle-income status in 2015 and is on track to graduate from the LDC status in 2026.

Economic indicators vividly depict the nation's evolution from an agrarian subsistence society to a global hub for garment manufacturing. Industry now constitutes over 30% of the GDP, with manufacturing alone contributing 22%, up from 9% post-independence. Simultaneously, services have surged to represent 50% of GDP, while agriculture's share has decreased from over 60% to around 20%.

From having to import steel and cement in the 1990s, Bangladesh is now self-reliant in these sectors and more, including pharmaceuticals and electronics. The pharmaceutical industry, for instance, meets a staggering 98% of the local market demand.

Projections from PricewaterhouseCoopers (PWC) indicate a promising future for Bangladesh, foreseeing it as the 28th largest economy by 2030 and further climbing to the 23rd position by 2050.

This unprecedented progress can be attributed to a dynamic private sector that employs over 90% of the 70 million-strong workforce. Government policies and financial support have played a pivotal role, nurturing the growth of various sectors. For instance, incentives for ready-made garment exporters, which were initially at 25%, have now reduced to 0.5%. Similar policy support has propelled the growth of the pharmaceutical and electronics sectors.

The economic growth, coupled with rising purchasing power, has catapulted numerous small companies into multi-billion-dollar conglomerates, including Meghna Group of Industries, City Group, Abul Khair Group, Akij Group, Square Group, and more.

At this stage of its development, Bangladesh faces considerable challenges both from global and domestic fronts. The complex global economic landscape comprises a number of internal risk factors, including rising non-performing loans (NPLs) in banks, limited domestic resource mobilisation capacity, substantial external financing dependence and over-reliance on a single export sector.

What next?

Experts say if Bangladesh wants to level up further and sustain the development, the country needs to undertake massive reforms, especially in the financial sector that is struggling with high NPLs, now standing at nearly 10%. NPLs would be much higher if the figures of rescheduling loans and pending court cases are taken into account.

"It is not only banks, the whole economy is feeling the pressure of NPLs," said Kamran T Rahman, president of the Metropolitan Chamber of Commerce and Industry (MCCI) at a programme on Wednesday (31 January).

Dr Ashikur Rahman, senior economist at the Policy Research Institute of Bangladesh, said establishing good governance in banks should be a top priority. Also, he has advocated for independence of the central bank so that it can focus on long-term economic goals, such as price stability and low inflation.

FDI required for development

Bangladeshi companies should enhance their innovation endeavours and assume a more proactive role in nurturing the growth of a domestic innovation ecosystem. Leveraging the burgeoning startup landscape and strengthening ties with academic and research institutions could prove advantageous.

The private sector in Bangladesh has a crucial role to play in steering a growth trajectory driven by innovation. This involves enhancing traceability, elevating quality standards to meet international benchmarks, and boosting investments in research and development (R&D). To facilitate this transition, the government must revamp its policy approach and update incentives to encourage increased innovation and responsibility within the private sector.

According to an OECD report on Bangladesh published in September, foreign direct investment (FDI) could play a bigger role in fostering diversification, learning and innovation. Although attracting FDI is among the top government's priorities, FDI to Bangladesh remains limited and concentrated in traditional sectors. FDI accounts only for 0.7% of GDP in the country, versus 6% in Vietnam and 2% in Morocco (data refers to 2018-20). During 2018-22, Bangladesh's remittances were seven times higher than FDI.

"Bangladesh has an untapped innovation potential," says the OECD report. Only 1.2% of firms invest in R&D — less than half the rate invested by firms in India and only 2.6% of Bangladeshi companies employ technologies licensed from foreign counterparts.

Experts say Bangladesh should shift from a policy approach mostly focused on tariff management, to a more sophisticated one. This could involve implementing diverse schemes, such as establishing matching funds for innovation, wherein state support is contingent upon private sector investment.

Need to come out of cheap labour economic model

It is imperative to move away from an economic model reliant on cheap labour, with wages lower than even in South Asian nations and Myanmar. For Bangladesh to sustain its success, there is a need to overhaul its current economic approach rooted in price competitiveness. This involves addressing the dual nature of its industrial model, characterised by an export-oriented RMG sector and highly protected industries serving the domestic market.

To achieve this transformation, diversifying the export base, forging strategic international partnerships, and promoting innovation- and quality-driven industrial development are crucial steps, experts say.

LDC graduation challenge

The 27-nation European Union has been Bangladesh's largest export market for years, with half of its exported Ready-Made Garments (RMG) destined for this bloc. As Bangladesh approaches graduation from LDC status in 2026, which will lead to a shift in EU market access fully taking effect around the end of 2029 with a three-year transition period, and given the complex global economic landscape, the country stands at a critical crossroads.

To retain GSP facilities, it is crucial for Bangladesh to embark on reforms. Updating institutional arrangements, enhancing transparency and accountability, and advancing labour and digital regulations are indispensable measures. These actions will play a pivotal role in determining eligibility for post-LDC support, including access to the EU's Generalised Scheme of Preferences Plus (GSP+), an updated preferential trading scheme after 2029.

The author is a deputy editor at The Business Standard.