By P.K.Balachandran/Ceylon Today
Bangladesh, which had an 8.2% GDP growth rate prior to the COVID-19 pandemic, and was hailed as the “South Asian Tiger” to boot, is now struggling to keep its head above water. Bangladesh’ recovery depends heavily on the recovery of the economies of the West because its exports-based economy is abjectly dependent on European and US markets which are still in the vice grip of the virus.
But the Asian Development Bank, the IMF and the Bangladesh government itself, are sanguine about recovery, given the country’s inherent strengths and its prudent developmental approach.
Let’s take the bad news first: Writing in The Daily Star Prof. Barkat-e-Khuda, former head of the Department of Economics, Dhaka University, quoted the IMF’s World Economic Outlook Update (June 2020) to say that global growth will be down to minus 4.9% in 2020 with the advanced economies registering minus 8% growth; the oil-exporting countries such as Saudi Arabia registering minus 6.8% growth; and the Middle East, minus 4.7%. Even China will grow only by 1%. Although there will be a recovery in 2021, it will not match 2019.
According to the Organization for Economic Cooperation and Development (OECD), consumption and services have declined sharply with consumer expenditure declining by a third. The World Trade Organization (WTO) says that global trade will show minus 13% growth. Finally, prices of almost all commodities have declined sharply, especially crude oil prices, which have come down from US$ 60 per barrel in October-December 2019, to US$ 30 per barrel in May 2020.
This has affected the income of oil-rich countries which provide employment to millions of Bangladeshis. About 12 million Bangladeshis work abroad. In 2019-20, Bangladesh received US$ 18.20 billion in remittances. But it will be down to about US$ 14 billion now, says the World Bank. Tens of thousands of workers have already been sent back to Bangladesh swelling the ranks of the unemployed in the country to 10 to 15 million. In 2017, it was only 2.7 million. The Ready Made Garment Sector, which accounted for 13% of the GDP and 84% of the exports of the country, is facing lack of orders to the tune of US$ 3 billion (some reports US$ 6 billion).
Given the global economic downturn, Bangladesh’s foreign exchange reserves will come down. Increased expenditures at home to feed the new and old poor and prevent the spread of COVID-19 will put a heavy strain on the country’s finances. The World Bank projected that the economy would grow at just 1 per cent in fiscal 2020-21.
IMF and ADB Hopeful
But the IMF and the ADB are more hopeful, with the IMF putting the growth in fiscal year 2020-21 at 5.7% and the ADB even higher, at 7.5%. The Bangladesh government is the most optimistic, predicting 8.2% growth, which may not be too far from the truth as despite COVID-19, Bangladesh is currently doing better than its South Asian neighbors as the following ADB table shows:
In fiscal 2020-21, Bangladesh’s GDP growth would be the second-highest in the continent, second only to the Maldives. In its report of June 12, 2020 the IMF said that to help Bangladesh during the COVID-19 crisis, it has approved emergency loans totaling around US$ 732 million.
Fortunately, Bangladesh’s external debt situation is good with low risk of overall and external debt distress, the IMF says. The crisis-related borrowing will raise the public debt-to-GDP ratio to about 41% GDP over the coming years, down from 36% at end of 2019. This will be manageable.
Giving credit to the Bangladesh government for its financial management, the IMF said: “In a way, this is a testament to the sound economic and fiscal policies implemented in recent years, with limited aid dependency, prudent borrowing and, up until the crisis, adherence to a deficit ceiling of 5 percent of GDP.”
In fact, Bangladesh cancelled some Chinese projects saying that it would get them done with aid from other international agencies at a more affordable interest rate. The Sheikh Hasina government has proved to be a competent negotiator. Chances of getting into debt traps are less as compared to, say, Sri Lanka.
At any rate, Bangladesh is eligible for a one-year debt relief from G-20 nations. Presently, Bangladesh has to repay, yearly, US$ 90 million to China, US$ 95 million to Japan, US$ 90 million to Russia and US$ 15 million to India.
Stimulus For Development
Since March, several stimulus measures were taken by the Bangladeh government to sustain economic activity and protect the most vulnerable, IMF says. There is a package of US$ 600 million to support the wages of workers in the ready-made garment sector, provided in the form of subsidized loans to companies so that they can pay wages for three months. Additionally, US$ 150 million will be provided as cash assistance to about five million families displaced by the pandemic. There are also measures to protect the homeless and for food distribution. Cash allowances for the elderly, widows, and disabled individuals are also being expanded.
In June, the Bangladesh central bank announced a number of policy relaxations to attract foreign investments. Foreign investors would be allowed to park their dividends in Foreign Currency (FC) accounts opened with the country’s banks. They would be allowed to remit the funds either to the destination country or in Bangladesh. Encashment from the FC account in local currency would be treated as inward remittance, while crediting to the FC account would be treated as outward remittance. Besides, the investors would be allowed to invest the balance with the FC account for purchasing securities and shares, adding that such investments would also be treated as FDI again.
International investors have taken note of the opportunities.Since 2018, net FDI had increased by 42.9%. Most of that had gone to the production of electricity, food, and textiles. Top investors came from China, the United Kingdom, the Netherlands, and South Korea. Recently, Saudi Arabia’s energy behemoth, ACWA power, agreed to set up a gas-powered, 3,600 megawatt plant. ACWA will invest a total of $3 billion in Bangladesh’s energy development sector.
China’s Big Presence
Bangladesh is now seeking Chinese funds for nine new projects worth US$ 6.4 billion. During the Dhaka visit of the Chinese President Xi Jinping, both the countries signed memo for implementing several infrastructure projects worth over US$ 25 billion. Bangladeshi Prime Minister Sheikh Hasina’s visit to China saw the two countries sign nine instruments covering a range of sectors including power, investment, culture, tourism, and technology. There were two agreements for Chinese loans to the tune of US$1.7 billion for the power sector.
Together with the US$ 13.6 billion invested in joint ventures earlier, Chinese investment in Bangladesh is said to be worth over US$ 38 billion, making China, Bangladesh’s single largest investor.
China is playing an important role in Bangladesh’s infrastructure development. It has upgraded Chittagong port and is building an industrial park there. It is also constructing road and railway lines linking this Bay of Bengal port to Kunming in China’s Yunnan province. China has also built eight friendship bridges in Bangladesh. Additionally, China is investing in a $1 billion project to improve digital connectivity. China is investing heavily in Bangladesh’s power sector with 14 coal-fired plants lined up.
But there could over-investment in power, especially, expensive coal-fired power plants. A recent study done for the Institute of Energy Economics and Financial Analysis (IEEFA) says that Bangladesh will have the capacity to generate 58% more power than needed in 2029-30. Domestic industries would not be vibrant enough to use the full capacity. And un-utilized capacity has to be paid for. That means more subsidies and/or higher retail tariffs.