How to fast-track Bangladesh’s economic recovery

Graphics: TBS.

The tale of Bangladesh is one remarkable growth story, growing at an average of 6.5% in the last decade and with no contraction in 40 years. Bangladesh's success story through global economic thick and thin is due to its few shock-absorbing factors.

Of growth and resilience

At the core of Bangladesh's economic strength lies its population, which totals 17 crore individuals and ranks as the 7th highest recipient of remittances globally. This demographic powerhouse not only drives one of the largest consumer markets, particularly among the middle-to-affluent (MAC) segment but also fosters a thriving entrepreneurial ecosystem. 

The creativity and innovation of local Bangladeshi entrepreneurs are also key drivers for the growth of the formal as well as informal economies. With 2,500 active startups and an annual addition of 200 new ventures, Bangladesh showcases its dynamism and innovation on the global stage. Furthermore, Bangladesh boasts highly fertile and arable lands, ensuring essential food security for its population. 

This self-reliance on food is crucial to mitigating inflationary pressures and sustaining the well-being of the populace. In addition to that, Bangladesh has solidified its position as one of the premier destinations for garment goods, boasting a Compound annual growth rate (CAGR) of 8.4% over the past decade. 

This growth is propelled by ongoing investments in capacity expansion, the strategic establishment of Export Processing Zones (EPZs) and access to a vast labour market, ensuring a robust foundation for further development. Moreover, Bangladesh's commitment to infrastructure development is evident in its efforts to enhance domestic and regional connectivity, driving advancements in trade. 

Notably, the manufacturing sector has flourished with a significant CAGR of 15.1% over the last decade, surpassing many counterparts in Asia. 

There is also a large informal economy that thrives and helps drive the economy. This includes but is not limited to, technology-driven offshore outsourcing, employment and money flowing to the economy via informal sources that directly and indirectly benefit individuals, as well as improving general purchasing power. These flows are diversified across the economy, which further insulates Bangladesh from economic shocks.

These underlying dynamics are diversified, adaptive and resilient and have thus far provided a strong foundation for growth. What is even more surprising is that much of the growth has been realised without any material foreign direct investment (FDI) and with material challenges and headwinds in the financial sector so far.

Wasted opportunity?

Economic resilience is crucial for countries to withstand and recover from various challenges, such as economic shocks, natural disasters or pandemics. Bangladesh, like many other nations, faces its own set of challenges in building economic resilience. 

While it has made significant progress in areas such as garment manufacturing and agriculture, there are undoubtedly areas where opportunities may have been missed or not fully capitalised on.

Some potential areas where Bangladesh could focus on enhancing its economic resilience include diversification of the economy. Reducing reliance on a few key sectors, such as garments, by diversifying into other industries like technology, services and manufacturing. This can help buffer against shocks that affect specific sectors. Progress on this priority has been below average at best.

Then there is investment in infrastructure. Building robust infrastructure, including transportation networks, energy systems and digital infrastructure, can improve the country's ability to withstand disruptions and attract investment. There has been some progress on this but a lot more is required.

Additionally, human capital development is another viable scope. Investing in education, healthcare and skills training can enhance the productivity and adaptability of the workforce, making the economy more resilient to external shocks. 

Unfortunately, the quality of our workforce remains a challenge, and in many cases, trends are not encouraging. Upgrading our most valuable asset, human capital can have a multiplier effect and must be our top priority.

Identifying and addressing these areas of opportunity can contribute to enhancing Bangladesh's economic resilience and its ability to navigate future challenges effectively.

What can derail the future?

The financial sector lagged as a notable exception, marred by regulatory shortsightedness, governance lapses, and the limited depth and breadth of financial products. Along with the long-standing challenges, the recent additions are the dollar shortage in the foreign exchange market and rampant price levels.

Foreign exchange reserves dwindled by 45%, and the local currency faced a depreciation of 30% in less than two years, creating instability in the foreign exchange market. While the forex reserves stand below $20 billion, a whopping $8.3 billion deficit in the financial account underscores the struggle to balance the external account. 

Adding to the array of challenges, inflation has been sticky above 9% since March 2023, with a two-year average rate of 9.04% due to global commodity price hikes, supply disruptions and currency depreciation. The prolonged elevated price level has been eroding the purchasing power and savings of households, deepening the liquidity shortage in the financial sector, which is already squeezed by financing the government.

Banks and financial institutions are impregnated with growing bad assets, a prime headwind in developing an efficient credit market in Bangladesh. Total distress assets of the banking sector, including non-performing loans (NPL), rescheduled loans and written-off loans, amount to a colossal Tk3 lakh 78 thousand crore in December 2022. The NPL alone Tk1 lakh 45 thousand crore comprised 9% of total loans as of December 2023, along with a capital shortfall of Tk37,506 crore.

The capital market, another integral part of the financial market, is currently developing a reliable source of long-term financing. Investors' confidence is yet to be restored in the capital market. 

From attracting promising IPOs to establishing a foundation for a bond market and launching platforms like SME Board and ATB, BSEC's efforts are laying the groundwork for sustainable growth. Despite regulatory initiatives to fundamentally solidify the market, investors' participation and liquidity in the market remained poor and transitory.

The financial sector, as the beating heart of the economy, needs to be healthy to pump economic activity and accommodate the growth opportunities lying ahead, defying all the challenges. 

The deep-seated issues may not be solved overnight, but a fast-track strategic approach combining both our opportunities and challenges could ensure considerable progress with immediate impact.

The ways forward

To address challenges across all spectrums of financial markets, inward remittances (our major external financial lifeline) can be leveraged. Approximately half of the remittance (~$20 billion) comes through informal channels, which, if redirected, can ease the breathing of the foreign exchange market and restore reserves to a comfortable level. 

Hence, the inflow of remittances needs to be boosted by redirecting them from the unofficial channel to the official channel, and the most productive uses of remittances must be ensured.

First, to attract more remitters to the formal channel, they should be offered a special exchange rate with 5–10% more devaluation of the local currency, along with the other incentives that are already in place. Moreover, special savings and investment vehicles need to be created and offered to the expatriates, which will give them tax-free, beneficial rates of return (12%–14%) backed by some form of guarantee from the government or a well-capitalised institution.

Second, two special-purpose financial stability funds can be created through the investment vehicles issued to the NRBs, one for the recapitalization of banks where needed and the other for listed companies that require growth capital.

The bank fund will be used solely to restore stability and confidence in the banking sector, recapitalizing banks in financial distress and facilitating market-based takeovers of banks, and inventors or remitters will receive proper risk-adjusted returns.

The capital markets opportunity fund will be used to take advantage of opportunities, including but not limited to undervalued securities and somewhat distressed companies that can be turned around successfully for substantial gains. 

Implementing this strategic approach to maximise the potential of remittances offers a pathway to accelerate the recovery of the financial sector while effectively addressing long-standing challenges and seizing previously untapped opportunities. 

However, no initiative will bring its expected result without robust corporate governance within the financial sector, aiming to eliminate financial imprudence, misallocation and corruption.
 

Sketch: TBS.

Reaz Islam is the Chief Investment Officer at LRG Asset Management Company

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.