Bangladesh Economy: Passing the Point of no Return?

2nd July 2015

Dr. Stuart Davies

Headline: ‘Fairly good given the circumstances’ •Growth of between 5.6% and 6.1% is expected, BBS past the upper end at 6.5% (these are somewhat below FY15 budget and 6th 5YP)•Investment at 28% of GDP (22% private) is below 6th 5YP target (32.5%) – tough doing business and conservative lending practices •Inflation – downward trend 6.6% from 7.3% in June FY14

•Public finances – revenues are reported to have exceeded target FY15; spending in the main has been contained (helped by the fall in commodity prices).•Budget deficit up – as expected – but manageable at 5% of GDP•Annual development programme – In first 10 months of FY15 ADP was around one-half of planned spend (capacity issues)

Reflections on the Economy in FY15…

•Trade – Political turmoil and BDT appreciation affected exports. Imports have remained strong in spite of weaker commodity prices.

Widening trade deficit (in the first three quarters of FY15).

•Balance of payments remains in surplus; foreign currency reserves provide a comfortable 6/7 month cushion; [trade-weighted] exchange rate has appreciated over the past year

•Monetary Policy – Targets unchanged. Lending rates have declined but remain high due to weak credit quality on Banks’ BS•Financial Stability – NPLs still problematic in SOCB. Private banks have had governance issues (appointment of now 6 observers)

Reflections on the Economy in FY15…

Headline: ‘Sustained, pervasive and more damaging campaign than in FY14’

•CPD - Estimated total losses suffered by selected sectors from January to mid March of 2015 were about BDT 49 billion (about ‐0.55% of GDP) for FY2015 if the 6.5 GDP growth projection for FY2015 by the Bangladesh Bank is taken as a reference point. •World Bank - Political turmoil led losses in the 3Q2015 about 1% of GDP or $ 2.2 billion. • In the absence of political turmoil economic growth would have

between 6.4 and 6.6 percent in FY15. • With turmoil reduced WB growth estimate to 5.6 percent – World

Bank (2015).• Industries faced 25%, service sector 68% and agriculture 7% loss.

•Losses were compounded by BDT appreciation

Reflections on the Political Turmoil…

Quick recap: ‘Ambitious with inconsistencies’•Bigger budget – NBR to mobilise an extra 0.451 trillion BDT in FY16 •Macro assumptions have been reigned in for FY16 – 7% growth and 6.2% inflation•Heavily reliant on increasing the tax base – 1.2 million to 3 million – but also cigarettes, private education, mobile comms. •Winners & Losers – power & energy as well as general services (CS pay structure) vs. human and rural development•Deficit – an expected 5% of GDP•Financing the deficit – reliant on domestic sources (3.6 p.p.) mostly commercial banking sector and savings certificates.

Not a costless exercise – interest servicing and crowding out!

•Tax/GDP ratio still very low in global terms (circa 10%)

Reflections on the FY16 budget...

Quick recap: ‘will the roll back cause problems for NBR?’•No major changes to the budget delivered on the 4th June•Some revisions announced…

– Tax exempted income limit from Poultry and Fisheries is BDT 1.9 million (rather than 1m)

– Export Sector including Ready-made Garments Sector will be charged 0.6% tax at source (rather than 1%)

– Use of mobile phones and internet services will incur 3% supplementary duty (rather than 5%)

– Private universities will incur VAT at 7.5% (rather than 10%)

•Roll back put a greater reliance on NBR to increase the number of tax payers

If FM aims to meet the LDC graduation criteria in 2018 (as outlined in budget speech), more needed on human development (health, education outcomes)

Reflections on the FY16 budget revisions...

Bangladesh is progressing…

Headline: ‘Bangladesh is on its way!’•Against development milestones:

– Middle Income Status confirmed last night• FY14 Income per capita above $1,045 threshold.

– 2015 LDC review was a close call

• Two out of three criteria need to be met to begin the graduation process• Finance Minister has high aspirations for 2018

– MDG performance respectable in 2013 assessment• Already met several targets of the MDGs, notably poverty gap ratio.

Economic Vulnerability Human Asset Per capita Income

25.1 63.8 $943

Less than 32 Greater than 66 3-year average above $1,242

Headline: ‘Formidable challenges remain’•Leave no one behind – still work to do on MGDs•Addressing obstacles to investment – Power, Skills, Contract Enforcement, Land, Transport, Political Stability…

– Improve doing-business (173 out of 189)– Improve sovereign credit rating

•Create enough jobs – 2 million entering the jobs market each year– 1.3 million jobs (plus 0.5 million abroad) were generated between 2010 –

2013…but between 2005-2010 the corresponding figures were 1.7 million (0.6 million resp.)

•Build institutional capacity – utilisation of the development budget just one example•Diversify both production and destination of exports …and, of course, do this all in a climate resilient way!

Though still many challenges...

Headline: ‘We’re here to help’•We have recently diagnosed the problems…

– now working on the therapy.

•Current Growth and PS programmes… KATALYST – improves productivities and competitiveness of small farmers and enterprises PROSPER – delivering microfinance services to the ultra poor; supports a new Microfinance Regulatory Authority; and promotes knowledge development and dissemination, through the institute of Microfinance RISE – Through Bangladesh Investment Climate Facility, DFID supports Bangladesh to improve the investment climate. Skills & Employment – Still at inception phase, aims to strengthen the PS provision of training, certification

and employment services in Garments and Construction. Business Finance for the Poor – aimed at enabling micro, small and medium enterprises access to the

financial services they need to grow. Strengthening Economic Systems in Bangladesh – aimed at increasing dialogue on economic reforms Supporting the National Action Plan on Fire & Building Safety – working with other donors and the

Government to improve the inspection regime and working conditions of garments factories.

•To help Bangladesh pass the 7% point of no return!

Programming for Economic Development...

Thank you

and

Ramadan Mubarak

Stuart Davies

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