Bangladesh’s economy needs reform policy and increased investment

Illustration: TBS

Despite lacking apparent new policy measures, the FY25 Budget has set a bold target of achieving 7.5% growth and reducing inflation from about 10% to 6.5%. Critics are concerned about the feasibility of these targets given the current economic conditions. 

Aligned with the Monetary Policy Statement (MPS), the budget emphasises modest development expenditure, but high domestic borrowing may hinder private sector credit growth aiming for 27% investment under the 8th Five-Year Plan (FYP). 

Domestic borrowing stands at 14% and is likely to increase, while the highest allocation goes to public expenditure (22.2%), leaving a mere 0.7% for industry and economic services.

Against this backdrop, the National Board of Revenue (NBR) has already expressed doubts about raising the colossal Tk4.80 trillion revenue from NBR sources. 

Amidst the governance issues like nonperforming loans and rising utility costs posing additional hurdles to economic stability and investor confidence, more investment and policy support is necessary to ensure sustainable development. 

Keeping interest rates and inflation in check

Even though interest rates have been made market-based and the exchange rate has been reformed, economists have critically analysed these changes. They note that while they may eventually work, the implementation has come too late. 

In Bangladesh, consumer lending is significantly lower compared to developed countries; it stands at only 7-8%, whereas in a country like the United States, consumer loans account for about 70-80%. 

Therefore, while hiking interest rates might be effective in the US and similar countries, it may not be as effective in Bangladesh. It is crucial to first identify the underlying reasons for inflation—whether it is cost-push or demand-pull—before deciding on remedial measures. 

The tax collection target from the National Board of Revenue (NBR) is set at Tk70,000 crore higher than before, with most of this revenue expected to come from indirect taxes. Achieving this target seems nearly impossible, especially considering last year's revised budget. 

As a result, the budget deficit could widen, making consumer goods more expensive. Additionally, borrowing from banks and the Bangladesh Bank would require printing more money, further fueling inflation.

Macroeconomic policy reforms

Macro policy reforms have been compromised, with nonperforming loans potentially exceeding 25% of total credit disbursed. The Budget overlooks this issue as electricity and gas prices rise, hindering industries despite higher costs. Import reductions, including capital machinery and raw materials, pose challenges for new investments.

Good governance emerges as a critical prerequisite, as addressed in Chapter 7 of the budget. 

Policies like the adoption of a Zero Tolerance Policy Against Corruption, the Universal Pension System, the development of an investment-friendly environment, economic zones, the National Logistics Policy 2024, the Integrated Budgeting and Accounting System (iBAS++), the Integration of e-GP and iBAS++, the Welfare of pensioners, the Development of government cash management, A-Challan, efficient and people-oriented administration, modern and digital land management, and the launch of digital banking services are required. 

The National Logistics Policy (NLP) 2024, effective April 28, aims to enhance domestic and international trade and attract foreign investment with a technology-driven logistics system.

While foreign investors are interested, limiting Hi-Tech Parks to government zones and Economic Zones hampers private investment. Despite the government's logistics focus to cut costs and boost trade, ADP allocations for crucial sectors like Roads and Highways, Railways, civil aviation, and bridges have seen reductions, except for a notable increase in the shipping sector.

Investment and regulatory challenges

To attract more investment and Foreign Direct Investment (FDI), regulatory streamlining is essential in sectors such as logistics, Ready-Made Garments (RMG) and light engineering. Bangladesh needs to focus on drawing investment into these vital areas with significant potential.  

Currently, foreign shareholding in logistics companies is limited to 49%, and the same limit applies to companies providing maritime cabotage services. 

Additionally, at least 50% of Bangladesh's sea-borne cargoes are reserved for majority-Bangladeshi-owned firms. However, the High Court of Bangladesh recently suspended these cabotage rules for six months. 

In the transport sector, specifically air services, foreign shareholding is capped at 49% for companies offering airport ground-handling services, aircraft maintenance and repair services, and air transport services sales. 

The telecom sector allows 70% foreign shareholding in value-added services and telecom tower operating companies, while nationwide Internet Service Provider (ISP) licences permit foreign ownership. 

However, divisional and district-specific ISP licences are reserved for wholly owned Bangladeshi investors. These restrictions highlight areas where reforms are needed to attract more investment in the logistics sector. 

The National Industrial Policy of 2022 includes several measures to strengthen the industrial policy framework, such as tariff rationalisation and time-bound protection for industries. Despite these measures, there remains a gap in establishing a clear direction towards openness and integrated trade and investment strategies. The policy also encourages import-substitution characteristics.

Articulating an integrated strategy

Among the 100% export-oriented industries, the apparel sector dominates. However, numerous small industries contribute to both domestic supply and exports in new and innovative sectors. 

Bangladesh has the potential to increase exports of more than a thousand products if these SMEs are encouraged and provided with similar benefits as fully export-oriented industries. This support would enable them to produce more value-added products. 

Current import and export policies mention providing bonded warehouse support for partial exporters in exchange for bank guarantees and other upfront conditions. It has been recommended that industries with 70% export orientation be treated as 100% export-oriented. 

Encouraging partial exporters, those contributing 30-60% to exports, could reduce dependency on a single product and diversify the export portfolio.

Bangladesh's economy is at a crossroads and needs to prioritise high-level policy reforms targeting foreign exchange earnings and investment to ensure macroeconomic balance. Investment policies should be reformed to meet the specific needs of various sectors, and increased public-private dialogue can pave the way for achieving these targets. 

Encouraging diverse export activities and supporting SMEs will be crucial for sustainable economic growth and reducing dependency on a single product.
 

Ferdaus Ara Begum, CEO, BUILD Public Private Dialogue Platform, works for private sector development.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.