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Amirul Rajiv

Amirul Rajiv

Expansion in GDP over the year was also driven by strong trends in workers remittances ($4.8 billion in FY 06, about 30% rise from previous year, forecast for FY07 above $6 billion) and strong performance in export. Despite widespread doubt about the fate of Bangladeshi RMG exports after the end of MFA, our export performance, specially the RMG, was fabulous, with 22% growth. We are significantly increasing not only knit exports but also the woven segment.

Goldman Sachs, a US-based investment banking and securities firm, in a report on the world's potential economies placed Bangladesh on its "Next Eleven" list as a key member. Comparing the 22 economies of the G-7, BRICs and Next Eleven, the report said that Bangladesh would grow faster than predicted earlier. The other countries on the list are Egypt, Indonesia, Iran, South Korea, Mexico, Nigeria, Pakistan, the Philippines, Turkey, and Vietnam.

Amirul Rajiv

Agriculture -- Poised for an upturn: Despite frequent floods, and other natural disasters, the agriculture sector of the economy is poised for an upturn. Marked improvement in crop production has been observed in FY06, with total food grain production targeted at 30 million metric tons, 15% higher than last year. Proper distribution of fertilizers and their route to the appropriate destination have been the main problem areas for decades. It is a challenge for the government to maintain strict discipline for proper flow of these very essential commodities.

Industry -- Strong trends in manufacturing to further support growth: Growth over the first six months of FY07 averaged 13.5%, compared with 8% growth during the same period in FY06. Strong growth in manufacturing can be observed in impressive export performance, specially in the textile and RMG sector. Other sectors are also coming up fast to increase their contribution to total exports. In this respect, the pharmaceutical sector has to be specially mentioned. The industrial sector has also shown growth due to rise in local consumption. With headline growth in FY06 coming in at 6.7%, Bangladesh has countered the impact of lower growth in agriculture (0.3%), due to natural disasters, remarkably well. Given that the industry comprises more than a quarter of Bangladesh's GDP, we find strong trends in production over recent months encouraging, with the latest data pegging growth over July-October 2006 at 13.3% -- indicating that trends remain healthy.

Much of this growth has come from paper products (21 %), wooden products (20%), non-metallic products (15%), and the food and beverage industries (13 %). I believe that strong and relatively stable growth in the industry is likely to help tide over lower growth in agriculture over the long term.

Services: Rising consumerism in Bangladesh Population dynamics: With a population of close to 140 million, and an average of 5 people per household, Bangladesh has approximately 28 million households, of which urban households constitute close to 7 million. With 35% of the population aged 15 and below, demographics are favourable as the working population could soon see a jump.

Concentration in Dhaka and Chittagong: For a country once described as the "poorest of the poor," Bangladesh has been drawn into a wave of consumerism, helped by rising incomes and increasing urbanization. However, with 72% of the urban population concentrated in the two major cities, Dhaka and Chittagong, the rise in consumerism is most apparent in these areas. Estimates suggest that 80% of the total sales of consumer durables are in Dhaka and Chittagong.

What is important to note is that the up-trend in consumerism is also an indication of a widening gap between the rich and the poor, as it is concentrated in the top 10% of the population where income levels are above Tk 35,000 per month. Growth in consumerism is also suggestive of the existence of a sizeable informal economy. While the number of taxpayers has increased to 1.5 million, under-reporting of incomes is widely prevalent.

Key areas for growth in consumerism Automobiles: While there are no domestic manufacturers, the entry of key international players, such as Volvo, Mercedes Benz and BMW, has further fuelled growth in this segment. With Nissan now proposing to set up an assembly plant in the country, the number of assemblers could rise to two, thus encouraging further competition.

Consumer durables: Even while sales of colour televisions, refrigerators, mobile phone handsets, and other consumer durables continue to rise, they remain below per-capita consumption levels seen in other developing countries. This indicates that significant market potential exists.

Leisure and lifestyle: An emerging trend has been increased spending on leisure and lifestyle development. Five-star hotels continue to mushroom in Dhaka, while over twenty shopping malls have been set up over the last three years in Dhaka and Chittagong.

Real estate: This is another booming sector, with 7,000 apartments and 6,000 plots sold each year in the organized market. With 15 major developers, including local players such as HBFC, National Housing Finance, Islami Bank, Agrani Bank, and Rupali Bank, housing finance is easily available and is contributing to the growth.

Telecommunications: Reforms have been fuelling rapid growth in this segment. Currently, there are four key operators with a major share of the market, with a base of over 18 million mobile phone and 850,000 fixed-line users. The market for cellular phones has been growing at 90% over the past 6 years, but with teledensity at three per hundred people, Bangladesh has one of the lowest telecom penetration rates in the world, indicating much potential for growth.

Medicare: Medical and healthcare services are also an emerging market. In 2004, Apollo Hospitals set up an arm in Dhaka in collaboration with STS Holdings Ltd, a business group in Dhaka. With Square and United Hospitals already in place, and American Hospitals group and Escorts India also developing JVs, the healthcare services segment continues to witness rapid growth.

Education: Education is another key area for growth. Each year, 4, 000 students enroll in programs costing an average of Tk 400 million at private universities.

Banking Sector: Consumer products of the banking sector are also growing rapidly. Credit cards and loans offered by foreign and local banks for consumer durables including auto loans, education, holidays, marriage, etc are aiding growth in this segment.

What are the challenges?

With all the above potential visible to us, the next obvious question that comes to our minds is: What do we have to do to attain this potential? What would be the challenges for us to take our economy to the next level of development? I would like to pin-point four major issues that I feel are critical in meeting the future challenges for our economy.

* Capacity building
* Strengthening of institutions and governance
* Infrastructure building
* Expediting financial sector reform

Capacity development: In my opinion, the single biggest challenge that we are facing in taking our economy to the next trajectory is capacity development. To attain the potential growth we need to enhance our overall managerial skills. In our economy there is serious lack of management capability in both the public and the private sector. Every year we see that most of the funds of ADP (Annual Development Program) remain unused. Too much time is used up in project planning and implementation. The main reason is lack of effectiveness in selecting a proper plan and implementing it. If we can effectively implement ADP our economic activity would increase a great deal. The government officials have to be trained and motivated so that they can implement projects effectively. What is expected from the officials has to be made clear, and in that way they can be guided in a proper manner. It will also ensure that many different bodies of government work together. Lack of knowledge and effectiveness creates an obstacle in managing a situation with creativity and sincerity.

In terms of management skills, the private sector is not much better than the public sector. In the last two decades, we have seen an entrepreneurship class growing. However, they are still very much dependant upon policy support from the government They are not preparing themselves to face international competition. Most of the business houses have not been adequately corporatized as yet. Also, the private sector is not acting adequately upon the future requirement for efficient managers.

Institutions and governance: Lack of institutions and governance is a big disadvantage in our economy. The absence of credibility of most of the institutions of our country creates non-confidence among the investors. Also, it creates a barrier to equitable distribution of growth. As a result, corruption rules the entire country, as we are witnessing now. Only the powerful and the wealthy take away everything, and the proper allocation of resources is seriously dented.

All of this will destroy the very basic fabric of our society, and the majority would lose trust in the system to take care of them. We have to believe strongly in the culture of accountability, and establish strong institutions, be it judiciary, civil service, commercial enterprises or law enforcing agencies, that will be able to provide adequate check and balance. Without this accountability, we will not be able attain the desired sustained economic growth and development.

Infrastructure: While infrastructure coverage in Bangladesh has improved considerably since the early 1990s, much more remains to be done. Today, inadequate and weak infrastructure continues to impose substantial costs on the economy, and could hinder growth. Inadequate financing and the poor financial performance of public sector entities are key constraints to infrastructure development. Access and reliability are also major concerns, as government support has not sufficiently targeted rural areas. For instance, only 31% of the country has access to electricity, and a majority of these is in urban areas. One World Bank study finds that erratic supply of electricity forces firms to rely on power from captive generators at 2.5 times the cost per kilowatt-hour.

On a positive note, growth in roads and telecommunications is encouraging. Particularly in telecommunications, the growing role of the private sector has resulted in rapid growth, and initiatives to provide access to rural areas (for instance, through Grameen's Village Phone concept) have proved successful. While progress on ports is also positive, post quota dismantling, it is imperative that overall infrastructure facilities be improved further to reduce product-delivery times and sustain export growth. Infrastructure services are also critical to reducing poverty and achieving the Millennium Development Goals in Bangladesh.

Power -- Unreliable supply remains a concern:

Although the power sector has grown significantly over the last decade (from 1900 MW in 1996 to 4000 plus MW currently), the sector continues to suffer from shortages with only 35% of the population having access to electricity. Moreover, since timely maintenance and replacement of antiquated units is not possible due to unavailability of funds, supply is unreliable with frequent power outages and blackouts. The major utility enterprises the Bangladesh Power Development Board (BPDB), Dhaka Electric Supply Authority (DESA), and the Rural Electrification Board (REB) --suffer from poor financial performance.

Reforms are encouraging: Power sector reform began in the 1990s, with the key instruments guiding reforms being the vision and policy statements on Power Reforms 2000 and the Three-Year Sector Reform Road Map 2003. Recommendations of the policy include electricity for all by 2020, un-bundling of the sector, corporatization of the entities, and the establishment of an independent energy regulatory commission to attract private investment, encourage competition and increase fiscal responsibility. Although the pace of reform has been slow, what is positive is that progress is finally being made in operationalizing the Energy Regulatory Commission (ERC) which will be responsible for overseeing the energy sector as a whole.

Ports and inland waterways: Bangladesh has only two gateway ports, the Chittagong Port and the Mongla Port, which together account for 87% of imports. The Chittagong port handles 85% of the country's trade, but is plagued by poor management and labour problems, and is a major bottleneck for Bangladesh's export segment. Modernization and upgradation of ports is crucial for Bangladesh to sustain a comparative advantage in textile and other exports.

Other issues that need to be addressed include restructuring of the port authority, and the implementation of labour reform programs. Moreover, the inland waterway network is rarely used to full capacity due to the silting of waterways, obstructions caused by bridges, and a lack of berthing facilities.

Civil aviation: The Civil Aviation Authority of Bangladesh (CAAB) and Biman Bangladesh Airlines (Biman) are responsible for all air-space regulatory functions, airports, and related infrastructure. Bangladesh has nine operational airports, of which the CAAB maintains eight. Three airports -- Dhaka, Chittagong, and Sylhet -- operate international flights in addition to domestic flights. However, most of the traffic is handled by Zia International Airport at Dhaka, which opened to traffic in 1980.

Biman, the national carrier of Bangladesh, has direct links with eight domestic and 26 international destinations and operates as both a cargo and passenger carrier. Although domestic airlines are open to private sector operators, of the three carriers that entered in 1998, only GMG Airlines is still in operation, and provides daily flights between Dhaka, Chittagong, Sylhet, and Jessore. Key concerns include insufficient funds for airport upgradation, high cost of aviation fuel, and the deteriorating financial health of key organizations (for instance, Biman has been facing considerable losses over the years on account of poor management, high overhead expenses, and lease costs).

Railways: Like in India and Sri Lanka, the railway network in Bangladesh is owned and operated by the state-owned Bangladesh Railways (BR). Primarily a passenger railway, BR handles 10% of the country's passenger and freight traffic, carrying the maximum number of passengers between Chittagong and Dhaka. With a total track length of 4,880 km, the railway was divided administratively and operationally into two zones, but the opening of the Jamuna multi-purpose bridge in 1998 allowed trains from the broad-gauge system to cross into the system's eastern zone for the first time.

Key issues facing the railway network primarily concern maintaining market share in the face of increasing competition from a developing road network and high-capacity trucks. In the National Land Transport Policy, 2004, the government aims to allocate a greater share for freight transport, and increase financial efficiency. To this end, BR has embarked upon a comprehensive Railway Recovery Program with the ADB. However, the program involves creation of a new corporate entity for the BR, which has met with resistance from employees. Finally, opening rail traffic with Nepal and Bhutan would also improve regional integration.

Financial sector reform

With the expansion of the economy of the country, the scope for the financial sector has also increased. We can definitely find more professionalism prevailing in the management of commercial banks. At the macro-level, we can also see some evidence which supports that. We no longer see the huge bad loans that we used to see in the mid 80's burdening the whole banking system. Commercial banks are extending their products and services in a more structured manner and with greater far-sightedness.

However, the compelling question is; has this development been enough? Has the banking sector been able to reap optimum benefit from the opportunity created by all the deregulation for improving their product range and service quality? One suspects that the answers to these questions are not always very positive. The present structure of our banking system is still not yet robust enough to take our economy to the desired path of growth.

The primary function of the financial system is to establish linkage between savings and investment. The strong linkage between savings and investment would ensure optimum allocation of resources and create pace in generating economic activities of the country. To strengthen the process of converting savings into investment, the banking sector requires more products. New products would create new processes which would enable the commercial banks to expand their base for savings as well as investment.

Unfortunately, we have not been able to show much success in this area in the last two decades. It is more unfortunate, because we have been further ahead in liberalizing our economy than many other countries. However, we have not been able to take benefit of these liberalization processes by developing new products and enhancing the depth and breadth of our financial markets. Many similar countries, including some of our neighbours have deregulated their economy at much slower pace, but still were able to develop a robust financial market.

We have not been able to develop a visible yield curve and term structure of interest rates for our financial market. In continuation with the age-old system, our banking system is still presenting deposit collection and extending of loans to be the primary products. For this structural weakness, it has become impossible to finance any long-term development projects. A transparent yield curve and term structure of interest rates would create strong linkage between the banking sector and the capital market. In absence of those, both the capital market and the banking sector have been unable to draw a plan for long-term financing availability.

Without the strong linkage between capital market and the banking sector the allocation of resources has not been optimum, and access to credit for critical investment sectors has not been sufficient. Not only we have failed in developing a long-term bond market, we have also failed to develop a secondary market for more short-term treasury bills and other government securities. Lack of adequate products, and a market, has made our capital and financial markets vulnerable to any unstable market behaviour. This is not only applicable for money and capital market, but also for our foreign exchange market and its risk management.

In the last decade we have seen many bold steps from the regulators. We have also seen some effective, positive and future-oriented deregulation. This deregulation in monetary management and exchange control should have enabled us to introduce many modern, innovative products for risk management. Unfortunately, we have failed miserably in taking advantage of this opportunity. When the other countries are moving toward introduction of more modern and complex derivative products to enhance their financial market's ability to manage risk, we are still pondering whether we have moved too far. Countries like Pakistan and Sri Lanka, which were deemed to be economically weak and fragile, have overcome this obstacle and have moved very strongly in developing a robust financial market.

To enhance the deepening of the financial market, and to introduce new products in the banking sectors, we have to really focus on two major issues -- utilization of modern technology and long-term planning for human resources development. There is no other way of improving the standard of products and services of the banking sector without increased use of technology. And the implementation of new technology requires an adequate mixture of creativity and talent. To achieve this, planning and investment in long-term human resources is essential.

We are passing through a very critical time in the history of our country. A great opportunity has come our way to change the economic fate of millions of our people. At this moment, as a nation, we cannot afford to make any mistakes in taking advantage of this great opportunity. Our future generation will not forgive us such failure. I have full conviction, courage and belief that the next generation will destroy all barriers in front of them to lead our country to the desired level of prosperity and development.

Mamun Rashid is a banker. This article is the keynote speech given by him on the occasion of the Orientation Ceremony of Executive MBA Program, Department of Banking, Dhaka University.