Bangladesh has stood among the fastest growing economies in the world for over a decade, and has experienced consistent growth rates of over five percent since 2004. For 2020, the Asian Development Bank (ADB) forecasted a growth rate of eight percent, the highest among all countries in the Asia and the Pacific. Bangladesh has come a long way since its independence in 1971, on the back of a robust Readymade Garment (RMG)-led manufacturing growth, strides towards food sufficiency, and accelerated remittances from Bangladeshi citizens working abroad. The country is expecting to receive “developing country” status from the United Nations in 2024. However, while economic forecasts painted a rosy picture, performance in key economic indicators illustrates that Bangladesh must be wary of complacency, and exercise caution moving forward. The coronavirus crisis may also reveal foundational cracks in the country’s key economic sectors, as Bangladesh braces for a hard brake to its remarkable growth rates.
From “Bottomless Basket” to “Next 11”
Bangladesh must be wary of complacency, and exercise caution moving forward. The coronavirus crisis may also reveal foundational cracks in the country’s key economic sectors, as Bangladesh braces for a hard brake to its remarkable growth rates.
The war for independence in 1971 left the Bangladesh economy in a fragile state, plagued by chronic malnutrition, food shortages, crumbling infrastructure, an untrained workforce, a weak manufacturing sector, and an unstable banking and financial sector. In the subsequent decade, the country was ravaged by famine, natural disasters, and an ill-executed strategy of nationalizing industries, which caused international experts to doubt the country’s self-sufficiency.
Despite former US Secretary of State Henry Kissinger infamously dubbing Bangladesh a “bottomless basket,” today, Bangladesh has grown into the 41st largest economy (by GDP) in the world. It is projected to be the 25th largest by 2035. Bangladesh has been a model for realizing the Millennium Development Goals (MDGs), as the country prepares to move beyond the Least Developed country (LDC) status in 2024. The percentage of Bangladeshis living in poverty has dropped significantly over time, partially as a result of an emergency operation partnership with the World Food Programme. Goldman Sachs has also listed Bangladesh as one of the Next 11 economies with the potential to become a major economy.
A Growth Driven by Readymade Garment & Remittances
Bangladesh has leveraged its population — the eighth largest in the world — to develop its manufacturing sector. It has particularly developed the RMG industry, and is currently second only to China as the largest exporter of RMGs in the world. The country’s exports have risen steadily in recent years, including a 14.30 percent growth rate in fiscal year 2018-2019, and was set to surpass the USD $50 billion in FY 2019-20. The RMG sector alone accounts for almost 84 percent of the country’s exports and employs around 4.5 million people.
An inflow of remittances has also contributed to Bangladesh’s growth. Around 10 million Bangladeshis currently work abroad, and have sent over USD $18 billion to Bangladesh in FY 2018-19. Only four countries have sent more migrant workers abroad than Bangladesh. Remittances have helped Bangladesh maintain healthy balance of payments and foreign exchange reserves as it utilizes the foreign exchanges to source raw materials for the manufacturing sector and support its trade imbalance. More importantly, remittances from unskilled/semi-skilled workers have significantly reduced Bangladesh’s job-creation burden and have helped guarantee a steady flow of income for a large section of the country’s poorer citizens.
Potential Cracks in the Economy
Even before COVID-19 wreaked havoc in the global economy, Bangladesh’s RMG sector had been struggling, with exports dropping by 6.61 percent between July and November 2019. Observers have attributed the cause of the slump to weak global demand, U.S.-China trade tensions, price declines, and devaluation of currencies in competitor countries. Consequently, Bangladesh’s export earnings saw year-on-year declines since August 2019.
The banking sector has been a major tension point for the country in recent years as non-performing loans continued to grow and widespread systematic corruption and scams came to light. Non-performing loans rose steadily in recent years, standing at 11.99 percent in September 2019. Some glaring examples of corruption within the sector include the financial irregularities of Farmers Bank and the state-owned Janata Bank which resulted in over USD $400 million and USD $1.1 billion respectively in fraud in 2018.
In other areas of the economy, the growth has been far from inclusive and all encompassing: income inequality has been at an all time high, with the Gini coefficient steadily rising (signaling greater inequality) since 1992. In addition, Bangladesh’s collection of tax revenue has not met expectations, with the total amount 24 percent less than projected in the first quarter of FY 2019-20. This has caused the government to borrow from banks to meet its budget deficit. The government has been using funding from international bilateral and multilateral donors to finance its deficits and its major infrastructural projects. This has caused Bangladesh’s external debt to GDP ratio to more than double in last 10 years. While the figure stood at a healthy 12.5 percent in 2019, the country is now bracing for a sharp rise in international loans to finance its coronavirus stimulus packages.
Bracing for the Impact of Coronavirus
As the world faces its worst economic recession since the Great Depression, the coronavirus has already started wreak havoc on Bangladesh’s economy. The country’s RMG sector has already seen order cancellations or postponements of over USD $3 billion, while more than a million workers have been fired or furloughed. Consequently, exports are expected to fall significantly, while foreign remittances will dry up as the Bangladeshi migrant importing nations themselves try to make their own recovery. Forecasts from the World Bank, IMF, and ADB suggests that Bangladesh’s GDP growth is expected to be around 2-3 percent in 2020 — its lowest in 33 years.
The coronavirus is expected to take its toll most on the daily wage earners. Bangladesh accounts for around 87 percent of its overall labor force in the informal economy which includes wage laborer’s, self-employed persons, unpaid family labor, piece-rate workers, and other hired labor. With no income or savings, these workers now rely on food aid from the government, private sector, and individual contributions.
Bangladesh accounts for around 87 percent of its overall labor force in the informal economy which includes wage laborer’s, self-employed persons, unpaid family labor, piece-rate workers, and other hired labor. With no income or savings, these workers now rely on food aid from the government, private sector, and individual contributions.
The Bangladesh government has announced various stimulus packages worth USD $11.78 billion, which is around 4 percent of the country’s GDP. These packages include paying salaries for export-oriented industries, working capital loan facility for industries, small and medium enterprises (SMEs), cottage industries, subsidized interest rates on these loans, and ration cards for 5 million poor families. However, financing these packages is a major concern as tax revenue will take a significant hit, and the credit support from the banks may not be able to fully support these additional cash requirements. The government has already begun seeking USD $1 billion in foreign funding, including making a case at the World Bank and International Monetary Fund (IMF).
While Bangladesh focuses on addressing the impacts of coronavirus in the short-run, deep-rooted inefficiencies and inadequacies in key economic areas, including the banking sector, export diversification, and inequality, signal a grim picture for the country moving forward. Bangladesh is expected to become a middle-income nation in 2024, which means it will lose many privileges delegated to LDCs, including duty-free access, concessional credits, and exemption from intellectual property rights enforcement. While the country may recover from the coronavirus pandemic—the IMF predicts a GDP growth of 9.5 percent in 2021—the recovery may be short lived unless the government takes measures to seal these corruption and poor governance cracks.
This piece was also published on Stimson’s South Asian Voices.