Bangladesh’s economy needs reform policies and increased investment

Despite the lack of visible new policy measures, the fiscal year 2025 budget set an ambitious target of achieving 7.5% economic growth and reducing inflation from around 10% to 6.5%. Critics have doubts about the feasibility of these goals in the current economic climate.

In line with the Monetary Policy Statement (MPS), the budget emphasises moderate development spending, but high domestic debt may hamper growth in credit to the private sector, which is targeted at an investment level of 27% under the 8th Five-Year Plan (FYP).

The national debt is 14% and will probably grow, while the largest part of the funds is allocated to public spending (22.2%), leaving only 0.7% for industry and economic services.

In this context, the National Board of Revenue (NBR) has already expressed doubts over the increase in the colossal revenue of Taka 4.80 trillion from NBR sources.

With governance challenges such as non-performing loans and rising utility costs posing additional obstacles to economic stability and investor confidence, greater investment and policy support is needed to ensure sustainable development.

Keeping interest rates and inflation under control

Even though interest rates were set on market principles and the exchange rate was reformed, economists have critically reviewed these changes. They note that while they may eventually work, implementation came too late.

In Bangladesh, the level of consumer lending is much lower compared to developed countries and is only 7-8%, whereas in a country like the United States, consumer lending is around 70-80%.

Therefore, while raising interest rates may be effective in the US and similar countries, it may not be as effective in Bangladesh. Before deciding on remedies, it is crucial to first identify the underlying causes of inflation – whether it is cost or demand.

The tax collection target of the National Board of Revenue (NBR) has been set at Tk70,000 crore higher than before, with most of this revenue expected to come from indirect taxes. Achieving this goal seems almost impossible, especially considering last year’s revised budget.

As a result, the budget deficit may widen, which will result in higher prices of consumer goods. Moreover, borrowing money from banks and the Bangladesh Bank would require printing more money, which would further fuel inflation.

Macroeconomic policy reforms

Macroeconomic policy reforms have been compromised, with nonperforming loans potentially exceeding 25% of total credit disbursed. The budget ignores this issue as electricity and gas prices rise, hampering industrial development despite higher costs. Reductions in imports, including capital machinery and raw materials, pose challenges to new investment.

Good governance is a key prerequisite, as discussed in Chapter 7 of the budget.

Actions such as adoption of Zero Tolerance Policy towards Corruption, Universal Pension System, development of investment-friendly environment, special economic zones, National Logistics Policy 2024, Integrated Budgeting and Accounting System (iBAS++), integration of e-GP and iBAS++, welfare of pensioners, development of government cash management, A-Challan, efficient and people-oriented administration, modern and digital land management and launch of digital banking services are necessary.

The National Logistics Policy (NLP) 2024, effective from April 28, aims to boost domestic and international trade and attract foreign investment through a technology-enabled logistics system.

While foreign investors are interested, the limitation of Hi-Tech parks to government zones and economic zones hampers private investment. Despite the government’s focus on logistics to cut costs and increase trade, ADP allocations to key sectors such as roads and highways, railways, civil aviation and bridges have seen reductions, with the exception of a noticeable increase in the shipping sector.

Investment and regulatory challenges

To attract more investment and foreign direct investment (FDI), it is essential to improve regulations in sectors such as logistics, ready-made garments (RMG) and light engineering. Bangladesh needs to focus on attracting investment in these key areas with significant potential.

Currently, the share of foreign capital in logistics companies is limited to 49%, the same limit applies to companies providing maritime cabotage services.

Moreover, at least 50% of Bangladesh’s seaborne cargo is reserved for companies with a majority of Bangladeshis. However, the Bangladesh Supreme Court recently suspended these cabotage regulations for six months.

In the transport sector, and in particular aviation services, the share of foreign capital is limited to 49% in the case of companies offering ground handling services at airports, aircraft maintenance and repair services and the sale of air transport services.

The telecommunications sector allows 70% foreign ownership in companies providing value-added services and in companies operating telecommunications towers, while domestic internet service provider (ISP) licenses allow foreign ownership.

However, ISP licenses for individual divisions and districts are reserved for wholly owned Bangladeshi investors. These restrictions highlight areas where reforms are needed to attract more investment into the logistics sector.

The National Industrial Policy, 2022 includes a number of measures to strengthen the industrial policy framework such as tariff rationalization and time protection for industries. Despite these measures, there is still a gap in establishing a clear direction towards openness and integrated trade and investment strategies. This policy also encourages import substitution features.

Development of an integrated strategy

Among the 100% export-oriented industries, the apparel sector dominates. However, numerous small industries contribute to both domestic supply and exports in new and innovative sectors.

Bangladesh has the potential to increase exports of over a thousand products if these SMEs are supported and provided with similar benefits to fully export-oriented industries. This support would enable them to produce more value-added products.

The current Import and Export Policy mentions the provision of bonded warehouse facility to partial exporters in exchange for bank guarantees and other preconditions. It has been recommended that industries with 70% export orientation should be treated as 100% export oriented.

Encouraging partial exporters, i.e. those responsible for 30-60% of exports, could reduce dependence on a single product and diversify the export portfolio.

Bangladesh’s economy is at a crossroads and needs to prioritize high-level policy reforms focused on foreign exchange earnings and investment to ensure macroeconomic balance. Investment policies need to be reformed to meet the specific needs of different sectors, and increased public-private dialogue can pave the way to achieving these goals.

Encouraging diversified export activities and supporting SMEs will be key to sustainable economic growth and reducing dependence on a single product.

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Ferdaus Ara Begum, CEO of the public-private dialogue platform BUILD, works for the development of the private sector.

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Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views and views of Business Standard.