Economy Review of Bangladesh

A leap to become a developing country and GDP analysis:

In a major leap forward, Bangladesh has become eligible to graduate to a developing country
from a least developed one as it has met all the three criteria for the first time for getting out of
the LDC bloc. Bangladesh's graduation will have some implications for its economy. Once the
country gets out of the LDC bloc in 2024, it will probably be given a three-year transition period
before it loses duty-free and quota-free market access to the European Union under the
Everything but Arms initiative for LDCs. The benefits of technical cooperation and other forms
of assistance such as fund support for scholarship, fellowship, participation for special training as
well as for research will be pulled out. The scope of the credit accessibility will also be reduced.
According to a study by the Economic Relations Division in December last year, Bangladesh is
likely to lose about $2.7 billion in export earnings every year once it graduates from the LDC
bracket. But, the World Bank has painted a brighter picture for Bangladesh's economy for the
next two fiscal years, pinning hopes on strong domestic demand, exports, investment and
remittance. The Global Economic Prospects, a flagship report of the World Bank Group, said
activity in Bangladesh would grow at an average of 6.7 percent a year over fiscals 2018-2020,
benefiting from strong domestic demand and strengthening exports. Bangladesh's economy has
grown roughly 6% per year since 1996 despite prolonged periods of political instability, poor
infrastructure, endemic corruption, insufficient power supplies, and slow implementation of
economic reforms. Although more than half of GDP is generated through the services sector,
almost half of Bangladeshis are employed in the agriculture sector, with rice as the single-most-
important product. Garment exports, the backbone of Bangladesh's industrial sector, accounted
for more than 80% of total exports and surpassed $25 billion in 2016. The sector continues to
grow, despite a series of high-profile factory accidents that have killed more than 1,000 workers
and crippling strikes, including a nationwide transportation blockade orchestrated by the political
opposition during the first several months of 2015. Steady export growth in the garment sector
combined with remittances from overseas Bangladeshis - which totaled about $15 billion and 8%
of GDP in 2015 - are key contributors to Bangladesh's sustained economic growth and rising
foreign exchange reserves.
 Table 1: GDP growth rate according to ADB

Table: GDP forecast for the year 2018-2022 (by statista.com)

Using GDP as the parameter, Bangladesh holds 44th position in the world economy. Agricultural
sector possesses 14.1%, service sector possesses 56.5% and industry possesses 29.32%
respectively. The breakdown is given below:

Agriculture Industries Services

Rice, jute, tea, wheat, sugarcane, jute, cotton, garments, paper, Retail, banks, hotels, real estate,
potatoes, tobacco, pulses, leather, fertilizer, iron and steel, education, health, social work,
oilseeds, spices, fruit; beef, milk, cement, petroleum products, computer services, recreation,
poultry tobacco, pharmaceuticals, media, communications,
ceramics, tea, salt, sugar, edible electricity, gas and water
oils, soap and detergent, fabricated supply.
metal products, electricity, natural
gas

Interest Rate is rising due to liquidity crisis

Recently, the financial sector is having liquidity crisis due to the new regulations set by Bangladesh bank,
scams of Farmers bank and Basic bank, expected political instability and sourcing funds to other income
generating businesses. Such events have caused anxiety among depositors and they are feeling unsafe to
keep their money on banks. Hence the demand for ‘Sanchaypatro by Postal Service’ has risen. The
liquidity crisis began from December last year as rumours started floating that the Bangladesh Bank
would crack down on aggressive lending. On December 17, the BB froze Tk 51 crore from ONE Bank's
current account with the banking regulator and Tk 25 crore from Premier Bank's for breaching their loan-
deposit ratio ceilings. The move forced banks to run after deposits to adjust their ratio to a safe zone. As
banks cannot recover loans overnight, boosting their deposits is the practicable way to bring down the
ratio. Then on January 30, the BB has instructed banks to bring down their loan-deposit ratio to 83.5
percent from 85 percent by June, further intensifying the competition for deposits. With the growth of
bank loans to the private sector, the interest on said loans have also grown. Due to an increase in demand
for loans, many banks have started charging 10-12% interest rates, whereas they were charging below
10% only a few months ago. Mainly the private banks have been plagued by the liquidity crisis, months
before general elections, despite reluctance of many entrepreneurs in making investment decision in a
potentially turbulent year. The private banks have slowed down the process of loan disbursement, and
raised interest rate up to 13 per cent in their desperate bid to collect deposits. At least 20 private banks are
currently facing liquidity crisis. The development though will bring cheer to savers, who had been
suffering for more than three years for low returns on their deposits, but big investors have to pay a
maximum of 16-17% interest on both small and long term loans.

Inflation rate is affected by Interest rate and shortage of money supply

The rise of interest rate may be a good news for the savers but, for the investors and consumers it is going
to be a hectic issue. There is a strong correlation between interest rate and inflation rate. For Bangladesh
2017 has been a mixed year of achievements and challenges. Though some macro indicators reflect the
positive trends, the overall strength of the economy is weakening due to a number of developments
toward the second half of the year. One of the major achievements of the economy has been a 7.28
percent economic growth in FY 2016-17 breaking the six percent cycle that continued for a decade or so.
Like previous years, major boost of growth has come from the industrial sector followed by the services
sector. Though average inflation has been around 5.5 percent, food inflation is showing an increasing rate
in recent months, mainly because of agricultural loss due to two rounds of flood.
According to Statisa and ADB, in the near future inflation rate is going to rise as investors need
to pay more money for production due to high interest rate. A simple example can be given,
which recently entails the picture. The prices of rebar and cement sharply increased this month
compared to the last few months which has already impacted the construction industry

Dollar appreciated due to high import

Since June 2017, the market in Bangladesh has been facing challenges with foreign currency
payments as the price of the US dollar is going up. Bangladesh's current account deficit reached
a 15-year high of $5.34 billion in the first seven months of the fiscal year as the country's
capacity to export is failing to keep up with the appetite for imports. At this point last fiscal year,
the deficit was $890 million. The current account deficit has already weakened the exchange rate
of the local currency against the US dollar. The dollar will appreciate further if the widening
trend of current account is not halted in the months to come. Production cost will increase
automatically due to the appreciating trend of the greenback as the country has to import large
amounts of industrial raw materials to produce essential goods. Higher production costs will fuel
inflation, which, in turn, will have an adverse impact on the spending capacity of consumers. The
import of necessary machinery for setting up industries rose by about 35% during this period
while the import of fuel oil and raw material for industries increased by 28% and 15%
respectively. In the first six months of this year, Letters of Credit (LC) worth $40 billion were
opened. The amount is expected to cross $60 billion at the year end. Bangladesh’s foreign
currency reserves stood at $33.01 billion on June 21 last year. It came down to $32.31 billion on
January 17 this year. The country was witnessing a rise in forex reserves over the last few years
but the import cost jumped in the election year, putting pressure on the reserves. However,
remittance inflow and export income are increasing. A good flow of remittance will also play a
key role in containing the current account deficit.

The Bangladeshi Taka is expected to trade at 84.81 by the end of this quarter, according to
Trading Economics global macro models and analysts expectations. Looking forward, we
estimate it to trade at 90.16 in 12 months time.

Employment rate is taking an u-turn

Employment growth in industrial sector slowed further in fiscal year 2016-17 for the second year
in a row, in a sharp U-turn from its previous growth record. Sluggish private investment, rise of
capital intensive sector and adoption of advanced technologies are three key reasons behind this
situation. The economy is yet to reach a saturation point of creating employment. Bangladesh is
now a low-middle income country and its share of industrial sector employment should increase
until it becomes an upper-middle income country. In recent years, countries such as China,
Indonesia and Vietnam are creating more jobs in industrial sector. And although agriculture's
share in the employment pie has shrunk, it still accounts for the highest number of jobs -- 40.6
percent of the total employed population recorded in 2016-17. Service sector employed 2.37
crore people as it added 17 lakh jobs from 2015-16.As a result, the share of service sector rose
2.1 percentage points to 39 percent in 2016-17, as the sector secured the share lost by agriculture
and industrial sectors during the period. Recent results from labor force survey is given below:

Every year a sizeable number of people do enter the labour market. But the number of new jobs
created both in the public and private sectors has been highly inadequate to absorb them. The
rate of unemployment among the educated youth is also very high as colleges and universities
have been regularly churning out graduates in a very difficult job market. The problem of
unemployment concerning the educated youths does however largely originate from a highly ill-
planned system of education. But a growing sense of utter frustration among the victims of the
system is now very much evident. The demonstrations by them in support of the demand for
raising the age-limit for government jobs and for doing away with reserve quotas for some
sections of job seekers are manifestations of a restive situation. Educated women suffer from the
highest level of unemployment in Bangladesh despite a quota for women in public service and
many private organizations’ claim of being equal opportunity employers. The unemployment
rate among female graduates is about 2.5 times more than their male counterparts: 16.8 percent.

Political Risk folding the economy

The national economy has slowed down of late; show some indicators, as investors fear
uncertainty ahead of the next general elections. The country's common people, too, are facing
hardship due to erosion in their purchasing power with rising prices of essentials. Many
businessmen are not getting loans as at least 20 banks are suffering from liquidity crisis,
Historically, analyses of economic data suggest, with some exceptions, key drivers of the
economy remain stagnant in an election year. Bangladesh is scheduled to hold the 11th
parliamentary polls in December. However, this is for the first time investment is being seriously
affected by sudden increase in interest rates. Thus, all major indicators say, any comfort zone for
anyone is missing under the current circumstances. Atmosphere has been plagued by three
factors -absence of conducive atmosphere for investment, surge in interest rates and delay in
loading and unloading of goods at the sea port. The overall interest rate has bounced back to
more than 10 per cent in recent months as the banks have been suffering from dearth of cash to
disburse loans, especially to big players, according to bankers and businessmen. At the same
time, the average inflation was recorded at 5.31 per cent in February, according to Bangladesh
Bureau of Statistics, but, the Trading Corporation of Bangladesh (TSB) found that the price of
fine rice increased 27.45 per cent and coarse rice 18.18 per cent in the past year. Also, the
commoners’ declining purchasing capacity was reflected in the sales during the recent month-
long Dhaka International Trade Fair. It saw sales of goods worth Tk 878.3 million compared to
the previous year’s sales valued at Tk 1.13 billion. Two main players in the country’s commodity
market said seeing hardly any growth in their sales, they would not make further investment
without observing the trends in the coming months. Election-time unrest disrupts import and
export activities, while banks witness large number of irregular transactions, these factors slows
down the economic growth. During general elections, political programs, counter programs,
clashes, violence, strikes and blockades are very common throughout Bangladesh. The unrest
disrupts import and export activities and banks witness a large number of irregular transactions.
Many people transfer their money to overseas bank accounts in a bid to prevent losses, which in
turn slows down economic growth. The move also negatively affects all major aspect of the
economy, such as the currency reserve and remittance.

Population growth and demographics

Bangladesh is a large and heavily densely populated country in South Asia, bordering
Burma, India, Nepal and Bhutan. Bangladesh has an estimated 2018 population of 166 million.
Bangladesh has an estimated 2018 population of 166 million, up from the 2013 estimate of 156.5
million. This makes Bangladesh the 8th most populous country in the world. The country has a
population density of 1278 people per square kilometer,(3310/square mile), which ranks 10th in
the world. The capital and largest city of Bangladesh is Dhaka, which has a population of 19.4
million and a density of 19,447 people per square mile (50,368/square mile). Dhaka is often
called the Rickshaw Capital of the World with more than 600,000 cycle rickshaws on the roads
every day. The next-largest city is Chittagong, with a population of 4 million. Bangladesh has a
fairly young population with 34% aged 15 and younger and just 5% aged 65 and older.

Population Fact Sheet

 The current population of Bangladesh is 165,933,571 as of Saturday, March 25, 2018,
based on the latest United Nations estimates.
 Bangladesh population is equivalent to 2.18% of the total world population.
 Bangladesh ranks number 8 in the list of countries (and dependencies) by population.
 The population density in Bangladesh is 1278 per Km2 (3,310 people per mi2).
 The total land area is 130,170 Km2 (50,259 sq. miles)
 36.5 % of the population is urban (60,649,009 people in 2018)
 The median age in Bangladesh is 26.0 years.
 The Capital city Dhaka has 20 million residents, highest among all cities followed by
Chittagong, Khulna, Rajshahi, Comilla.
Age structure 0-14 years: 27.76% (male 22,283,780/female
21,521,977)
15-24 years: 19.36% (male 15,309,543/female
15,241,971)
25-54 years: 39.73% (male 30,094,014/female
32,614,286)
55-64 years: 6.93% (male 5,405,900/female
5,527,330)
65 years and over: 6.23% (male
4,666,033/female 5,161,744)

Source: Indexmundi.com

Rohinga Issue: There are more than 3,00,000 Rohingyas living in Bangladesh, who fled in earlier
waves of violence from Myanmar since the last three decades. .Rohingyas are a Muslim minority
ethnic group in Myanmar. They have been regarded by many majority Buddhists as illegal
migrants from Bangladesh. More than 600,000 refugees are languishing in Bangladeshi refugee
camps after fleeing a brutal Myanmar army campaign launched in August last year.

Exports from Bangladesh

Bangladesh sets an export target of US$11.50m for the FY2017-18 as compared to US$10.79m
for the previous fiscal year. Exports brought home $3.41 billion in January -- the highest in five
months -- thanks to a spike in shipments of garments, jute and jute goods and furniture.
Below major export areas of Bangladesh have been reviewed:

Garments: Garment exports to non-traditional markets rose 3.77 percent year-on-year to $2.56
billion in the July-January period. Apparel shipments fetched $2.47 billion in the same period
last fiscal year, according to data from the Export Promotion Bureau. Bangladesh considers all
countries as non-traditional markets except for its key destinations such as the European Union,
the US, and Canada. India, China, Russia, Japan, South Africa, Turkey, Brazil, Chile, Mexico,
South Korea, Malaysia, Australia, and New Zealand are among the major non-traditional
markets for the garment sector. Shipments to the emerging markets are rising on the back of
zero-duty benefit granted to Bangladesh, opening of retail stores by global brands, market
diversification by local exporters, and the government's fiscal incentives. Bangladesh receives
the zero-duty benefit to markets such as Japan, India, and China. As a result, shipments to the
markets are rising at a faster rate.

Cement: Bangladesh's cement industry earned export revenues of US$8.8m during the first eight
months of FY17-18 (July 2017-February 2018), compared to US$5.93m earned in the year-ago
corresponding months. This equates to a 49 per cent increase in exports YoY with India the main
destination for cement exports. The export figure also includes a minor amount of salt, stone and
related products, but the country's export promotion bureau has appreciated the rise in cement
exports. The figure substantially exceeds the government’s export target by 17.65 per cent for
this period.

Jute: Bangladesh has the potential to become the main supplier of jute to the global car industry,
which uses the natural fibre to manufacture the interiors of vehicles. The global car industry
needs about 100,000 tonnes of jute a year, of which 12,000 tonnes come from Bangladesh.
Bangladesh started supplying jute to high-end car brands like BMW, Mercedes-Benz, Volvo and
Audi in early 2000s and Hussain is one of the pioneers in breaking this new export ground. Jute
is also used in the manufacturing of furniture, utensils, warm clothes, sofas, paper and hardboard,
according to the Ministry of Textiles and Jute. Demand for these products is on the rise since
they are environment friendly. Currently the growth rate in raw jute exports is 44.35%.

Pharmaceuticals: Bangladesh exports medicines to 150 countries, including the USA, Canada,
Australian and the European Union. Exports of pharmaceutical products registered 14.6 percent
growth in 2011-2016. Pharmaceuticals raked in $60.24 million in the July-January period of the
current fiscal year, up 14.44 percent year-on-year. Bangladesh's pharmaceuticals market doubled
between 2012 and 2017.

Frozen food: Bangladesh’s earning from frozen and live fish exports exceeded target by more
than 10 percent to reach $383 million during the July-February period in the 2017-18 fiscal.
According to Export Promotion Bureau (EPB), in the first eight months of the fiscal year, shrimp
export fetched $326.59 million, which is 83.98 percent of total frozen and live fish export.

Budget Summary

The revenue generation target has been set at Tk 2,87,991 crore leaving a deficit of Tk 1,12,275
crore. The National Board of Revenue (NBR) would generate Tk.2,48,190 crore of the targeted
amount. The target of Non-NBR tax revenue collection has been fixed at Tk.8,662 crore.
The target of non-tax revenue collection has been set at Tk.31,179 crore.
The total size of Annual Development Programme (ADP) has been set at Tk 1,64,085 crore.
The proposed budget seems to has failed to take into consideration the growing middle-class of
Bangladesh with the aggressive taxation policy. Especially the impact of VAT shall directly
affect the people, as it will boost the price hike of consumer products.

Tax structure

The government's move to keep tax-free income threshold and the tax rates on individuals and
firms unchanged in the fiscal year is likely to affect many low and middle income people who
would be new to income taxes. Various quarters, including businesses, have been demanding a
rise of the tax-free threshold since the cost of living is rising with inflation. It is expected that a
reduction in personal income tax will help boost people's disposable income, especially of the
middle-class. Foreign investors in Bangladesh demanded cuts in corporate tax at least 5
percentage points to attract foreign funds and create expansion opportunities for businesses
Recent Infrastructure Projects and Developments

Bangladesh signs $40m development deal with Germany’s KfW bank

Development of Selected Private Secondary Schools with Tk10,649.05 crore.
Emergency 2007 Cyclone Recovery and Rehabilitation Project (ECRRP): LGED Part’ with the
cost of Tk1,618.10 crore
Construction of Flood Shelter Centres at Flood and River Erosion-prone Area (3rd phase)’ with
the cost of Tk1,507.43 crore
Greater Chittagong Rural Infrastructure Development Project-3’ with the estimated cost of
Tk1,290 crore
ADB to provide $260m for infrastructure development in Bangladesh for the fiscal year
77 power plants with 18,905 MW under implementation
3rd span of Padma Bridge to be installed from March
Tk 1,683cr project to transform rail connectivity with India

Summary and Verdict

 Shifting from LDC has some major drawbacks as Bangladesh will lose benefits of LDCs
in terms of DFQF (Duty-free, quota-free) market access, non-compliance of TRIPS
(Trade-Related Aspects of Intellectual Property Rights) flexibilities and patent protection
for pharma products.
 Graduation will not necessarily pose only challenges. It also offers benefits. It will
immediately offer benefits of credit worthiness, more potential for foreign investment,
reduce volatility for flagship project financing, increased investment, job creation and
revenue through protection of intellectual property, and above all, pave the way for
joining the club of developed economies by implementing Vision 2041.
 Bangladesh is focusing more into service sector although most of the GDP comes from
RMGs. There should be diversification as more people are getting educated; in future it
would be difficult to obtain physical labor.
 Bangladesh needs to improve the infrastructure and services of its sea ports, have at least
one or two operational deep sea ports by 2021, diversify its export basket and market,
seek to attract more domestic and foreign investment, properly implement "one step
service", etc. Bangladesh still has some leverage to maintain its competitiveness, but it
 immediately needs to minimize its cost of production and transportation time and cost by
improving various aspects of its supply chain.
 Expected political instability has created anxiety for investors and crisis in the money
market. For such reason inflation rate is expected to rise in the near future. Rise in
interest rate is causing trouble for big and small investors and the cost of production will
see a peak.
 Rohinga issue is expected to pose in the near future if not politically solved with
Myanmar.
 Tax structure to hit middle income group hard as 20% of the population lives into that
category. It will demotivate them to save money on banks.
 Foreign investors will not be encouraged as tax holding structure for non-listed
companies is 35%.
 In local market, pharmaceutical companies are enjoying heavy growth rate. There should
some appropriate budget allocation for health-service sector. The per capita health
expenditure is also quite insufficient in the country, compared to other developing
economies.
 Surge in imports have depreciated the local currency. Good thing is, imports are being
made for machineries and infrastructure equipment. It is expected that, after some period
imports will go down and exports/remittance will help to appreciate the local currency.
 Huge portion of total population is remained unemployed especially women. Mostly the
educated people aged between 22-35 years are having hard time to have proper job. The
reason is no new industry has been created in recent years and appropriate skills have not
achieved to source them to foreign countries.
 Textile sector needs for infrastructure helps to sustain in the future as more competing
countries are coming up with cheap labor.
 Proper legal channels need to be processed to capture remittance and stop declining forex
reserves.
 Capital market is not seeing any development over the years after the collapse and small-
medium investors have lost their trust to restore the market.