Cover Story: Economy

A Mixed Outlook

Syed Zain Al-mahmood

Stimulating investment and boosting exports will be key to economic success in 2010.

When the global recession hit in September last year, there were dismal predictions for the Bangladesh economy. Exports would plummet and credit would dry up, feared experts. The readymade garments sector, Bangladesh's biggest export earner, was expected to suffer most and drag the economy down with it. But as the financial markets crashed, jobs disappeared and growth took a nosedive in much of the world, it was clear Bangladesh had missed the script.

Although annual GDP growth dipped slightly compared to previous years, Bangladesh still managed to reach a healthy 5.9 percent in Financial Year 2009 (July 1, 2008 to June 30, 2009). Low level of integration with the world economy helped shield Bangladesh from the negative effects of the global downturn. Although consumers in the developed countries spent less, basic clothing items still sold well, and this helped the RMG sector weather the storm. Lower international food and oil prices, combined with a bumper rice crop, helped bring down inflation. The external current account recorded a large surplus of US$2.5 billion because of strong remittance inflows, double-digit export growth and a declining import bill.

Not only did widespread fears of a surge in unemployment and an increase in poverty and social disorder prove unfounded, by June 2009 Bangladesh was being mentioned in the same breath as a handful of other countries that had defied the recession. The country was not going great guns, but it had still done better than many other nations in coping with adversity.

The RMG sector, Bangladesh's biggest export earner, remained competitive despite the recession.

Any celebrations, however, would be premature. Towards the final quarter of 2009, it was clear that the “recession-busting” Bangladeshi economy was experiencing a delayed downturn of its own. The second half of 2009 saw growth fading in exports and remittances. While total year-on-year exports grew by an average of 20 percent in the first part of Financial Year, 09, export performance dipped to a negative growth by December. Moreover, the overall export data masks the diverging performance of ready-made garment exports and the non-RMG exports -- with the latter registering negative overall growth in FY09. Remittances also show a similar pattern, with growth falling from 30.9 percent in the first half of FY09 to 15.7 percent during the second half.

This tale of two halves highlights several areas of concern. According to Dr Zaid Bakht, Research Director at the Bangladesh Institute of Development Studies (BIDS), the investment climate is less than healthy, which does not augur well for sustained growth in 2010.

“The import of capital machineries and raw materials is very low,” says Dr Bakht. “This means investors are holding back from new investments. The government must move quickly to restore investor confidence or the economy will stumble.”

Experts believe concern about the volatile global economic and financial situation, and political uncertainty during the caretaker government's tenure may have restrained export oriented industries from building capacity during FY09. But since the elections, other factors including policy issues and availability of gas and electricity are dampening the investment climate. Reduced import of capital goods and machineries may affect the ability of the export sectors to respond to a possible rise in external demand in the near future even as the global economic recovery gathers steam in 2010.

“Taking advantage of the global recovery that appears to be underway will be one of the challenges of 2010,” says Professor Mustafizur Rahman, Executive Director of Centre For Policy Dialogue (CPD). “But in order to do this, we need investments.”

The weak investment climate is reflected by surplus liquidity in the banks. According to Bangladesh Bank data, surplus funds stood at Tk. 33,995 crore at the end of September. Although this was down by about 800 crore since June, analysts suggest the decrease may be due to purchase of government bonds by the scheduled banks, rather than any surge in commercial lending.

Ensuring food security may be a major challenge in the post-recession scenario.

“Borrowers are not taking loans, which means they are unsure about the viability of their investments,” says Dr Zaid Bakht. “Fear of a double-dip recession may be partly to blame. But the main reasons are internal. Having a good set of macro fundamentals would be key to restoring investor confidence in 2010. This would include achieving reasonable fiscal balances, realistic exchange rate, low interest rates, and social and political stability. There are major infrastructure issues, and the dismal situation in the power sector is probably the most critical.”

Hossain Khaled, managing director of Anwar Group and former president of Dhaka Chamber of Commerce and Industries (DCCI) argues that a sense of security must prevail if investment is to occur. “We have had instances of mobs burning down factories, and extortionists shooting at businessmen because they wouldn't pay. It is the government's job to provide security for entrepreneurs. But apart from physical security, we need guarantees that we will receive enough gas and electricity to run our factories.”

An improvement in power generation would probably top the New Year's wish list of any businessman in Bangladesh. Power shortages are the most serious and immediate of the infrastructure constraints, with damaging impact on productivity and investment. Hossain Khaled believes it is a lack of initiative rather than a lack of resources that is holding back the power sector.

“We have gas and coal,” says Khaled. “We must take immediate steps to explore and utilise our resources in the best manner possible. There are also various options we can explore to overhaul or replace aging power stations. But delay in taking decisions is costing us.”

“The country has a shortage of 1300MW to 1500MW power,” explains Prof Mustafizur Rahman. “To ease the problem, the power plants that are near completion, including rental ones, must be brought on-stream at once. Tender process for future plants must be rapid and transparent.”

A broad swathe of economists and energy experts believe that Bangladesh's long-term energy policy must rely on rapid and efficient extraction of domestic coal reserves. Five good quality coal deposits, with proven reserves of more than 2.5bn MT have been discovered in Bangladesh.

“National Coal Policy needs to be finalised as soon as possible,” says Prof Mustafiz. “There is a debate going on about the local environmental and social effects of mining, but we should have an open dialogue about this as soon as possible. Coal can be extracted in a responsible way by ensuring the local inhabitants are taken care of. This is vital for sustainable development of the country.”

Experts have also called for speeding up gas exploration in offshore blocks while maintaining transparency. “If there is a lack of transparency then there is bound to be opposition,” says Dr Bakht. “The government must also actively resolve maritime boundary disputes with India and Myanmar to facilitate exploration.”

Following a slew of dismal data, economists are growing increasingly concerned about the sustainability of GDP growth in the years ahead. According to a report by the World Bank, if the energy situation stagnates or deteriorates and global recovery falters then export growth cannot be sustained at FY09 levels and real investment growth could decline further. On this trajectory, GDP growth would be unlikely to reach even 5.5 per cent, let alone the 6+ growth that Bangladesh has seen through much of the decade.

Ironically, the economy is turning sluggish at a time when most of the developed countries are exiting recession. Coupled with strong demand in countries like China and India, this recovery could drive up prices of commodities in 2010, warn experts.

“One challenge for 2010 would be containing inflation, and ensuring food security,” says Prof Mustafizur Rahman. “The Aman crop has not been that good, and now we must look to the Boro. The government must be vigilant about the risk of spiralling prices.”

According to data from the Bangladesh Bureau of Statistics, inflation rose by 46% on a point-to-point basis and stood at about 6.71 percent in October. Rising food prices were to blame, say market watchers. The salary of government employees was raised recently, and this could also feed into the inflation scenario.

“It is vital for the government to stimulate job creation at this stage,” says Dr. Bakht. “For this the investment climate must be boosted, and the government must also implement the Annual Development Programme (ADP) quickly and transparently.”

One of the few consistently bright spots for the economy has been robust remittance inflow. But Bangladesh cannot take remittance for granted. Not only has the international trade of capital, goods and services slowed down during the recession, but so has the international movement of people.

“The number of people going abroad for work has almost halved,” says Prof Mustafiz, “and this is something the government must look at very carefully. There is no scope for complacency here.”

The CPD executive director believes the government must take a number of urgent steps in 2010 to handle the macroeconomic situation. “The economic stimulus package must be spent wisely, and make sure credit is available and affordable. Decisions must be taken quickly regarding the power sector, and in a transparent manner. The health of the RMG sector must be ensured, but we must also diversify our exports. Our exporters are facing challenges because some of our competitors have made exports cheaper by devaluing currency. Provided adequate steps are taken, there is room for cautious optimism going into 2010.”

“The government has spoken of some ambitious infrastructure projects,” asserts Hossain Khaled, “and these need to be implemented quickly to stimulate the economy -- the Dhaka Chittagong highway, the Deep Sea Port, new EPZs. Let 2010 - 2020 be the decade of implementation as we move towards 50 years of our independence.”

The present government came to power on a platform of affordable food prices, and stable jobs. The honeymoon period is almost over and 2010 will be the time to start delivering. Addressing the weaknesses of the investment climate, complemented by appropriate policy reforms and good governance, should therefore be of top concern to enhance the economy's productivity and long-term growth, and contribute to eventual poverty reduction. The road ahead contains challenges that will test the government's resolve. Unfortunately, most of the heartache will be felt by Bangladesh's poor as they continue the perpetual struggle to put two square meals on the table.

Episode one of the global recession may have been a phantom menace as far as Bangladesh is concerned. If there is an episode two, it may not be. The economy, for better or for worse, will take centre stage in 2010.

opyright (R) thedailystar.net 2010