Economical Development of Bangladesh
Introduction
The
major objectives of planned development have been increased national income,
rural development, self-sufficiency in food, and increased industrial
production. However, progress in achieving development goals has been slow.
Political turmoil and untamed natural hazards of cyclone and flooding have
combined with external economic shocks to persistently derail economic plan
n
1991, with the reinstitution of elected government, a new economic program was
initiated that included financial sector reform and liberalization measures to
encourage investment, government revenue improvement efforts (realized largely
through implementation of a value-added-tax), and tight monetary policy. Income
transfer measures, Food-for-Work, and other programs were also implemented to
help protect the poorest segments of the population from the transitional
effects of structural reform.
Fiscal
year 2000 was marked by a sharp increase in monetary expansion due to
unprecedented borrowing from the banking sector (though the sale of treasury
bills) to cover budget shortfalls due. Domestic
borrowing increased primarily due to the reduced availability of external
concessional financing.
For
2001/02, however, the IMF predicted a sharp decline to around 3.5% due to the
global economic slowdown and the contractions after the terrorist attacks of 11
September 2001 on the United State
Economic Environment
During the early 1990s, Bangladesh made
considerable progress in stabilizing and liberalizing its economy. As a result,
inflation was much lower than previously, and average annual real GDP growth in
1992-98 was above 5%, largely led by exports involving ready-made garments
(RMGs). Indeed, one of the most striking features of Bangladesh’s trade is that
textiles and particularly clothing dominate exports: their combined share grew
from 70.4% in 1992 to 83.5% in 1998; by contrast, jute, which had previously
been Bangladesh’s main export, comprising around half of total exports through
the mid-1980s, accounted for only 6% in 1998. This dramatic change in the
composition of exports is the consequence of Bangladesh’s increased integration
into the multilateral trading system.
Agriculture still accounts for 30% of GDP while
employing 63% of total labour force. The RMG-dominated manufacturing sector and
services, accounting for 9% and 61% of GDP, respectively, have been the sources
of the economy’s growth.
A major development, in March 1994, entailed
the liberalization of the exchange regime for current international
transactions. However, an appreciating real effective exchange rate has
threatened to undermine Bangladesh’s export competitiveness, particularly
vis-à-vis South-East Asian garment manufacturers, and therefore constitutes a threat
to future export-led growth.
Unfortunately, real annual GDP growth, averaging
around 5% during the review period, has not been sufficient to make much of a
dent in the poverty that pervades Bangladesh; GDP per capita in 1998/99 was
only US$345, among the lowest in the world. More than one third of Bangladesh’s
population of 127 million still lives below the poverty line, and more than
half is classified as poor. Given Bangladesh’s high incidence of poverty, its
dense population, and its vulnerability to natural disasters, including
periodic flooding and cyclones, food security is a major policy objective of
the Government. Bangladesh is a large recipient of foreign aid, a substantial
portion of which entails food.
Growth Development
in Bangladesh
Growth averaged 5.4% per year over
the FY01-05 period, which has been the highest 5-year average since the
country’s independence. Growth was underpinned by:
- Resurgence in private investment, which grew at an annual average rate of 10% and increased its share in GDPfrom 16% in FY01 to 18.5% in FY05.
- The share of public investment fell from 7% to 6% during the same period.
- Growth has been fairly broad-based, although it has benefited from strong exports, mainly in the garment exports.
- Large remittance inflows fueled growth in construction and services sectors.
- In agriculture, growth has been rather anemic, averaging just 2% over the same period.
On the policy side, a good record on
growth seems to have benefited from impressive macro stability. Inflation
hasn’t touched double digits for almost two decades, while public and external
debt situation is fairly comfortable.
Saving and investment rates,
currently at about 24%, are relatively high compared with other countries at
similar income levels.
The pace of human development, which
is a key contributor to growth and includes progress in health, education and
social protection, has surpassed that of most low income countries (LDCs).
Constraints to Growth:
Bangladesh ’s growth challenges are
two-fold:
- How to ensure sustainability of the 5-6% growth over the long-term
- How to raise growth to the 7-8% range, which is desirable and needed to meet the government’s poverty reduction goals
The key constraints to improved
growth performance include:
Inadequate infrastructure,
especially power and ports.
There hasn’t been any increase in
generation capacity of power supply for a few years, mainly due to
governance-related problems. Bangladesh ’s main port, Chittagong port, is among
the most inefficient and cost ineffective in the region.
Governance:
Many important aspects of governance
are very weak. Transparency International has ranked Bangladesh last in its
corruption ratings for five years in a row. This extracts a significant price
in terms of lost growth potential.
Urbanization:
Urbanization has been rapid and
largely imbalanced. A quarter of the population now lives in urban areas, while
in 1960 the number was just 5%. Fifty percent of GDP is spent on urban
activities. Urbanization has been skewed toward Dhaka, making it among the
fastest growing metropolises in the world. This is adding to growing concerns
about congestion, lagging urban planning and management, and skyrocketing real
estate prices.
The financial sector:
Financial depth (measured as
M2/GDP) is quite low and the range of financial services quite rudimentary.
Many of the important contractual savings institutions are absent, while capital
markets are extremely shallow. There is a problem of the “missing middle,”
those people who aren’t covered neither by the micro finance institutions nor
the formal banking sector. The public banking sector remains riddled with non
performing loans, despite recent improvements.