Estudos Económicos
Bangladesh

Bangladesh

Population 164.9 million
GDP 1,749 US$
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Synthesis

major macro economic indicators

  2017 2018 2019 (e) 2020 (f)
GDP growth (%) 7.3 7.9 8.1 2.0
Inflation (yearly average, %) 5.4 5.8 5.5 5.9
Budget balance * (% GDP) -3.4 -4.7 -4.4 -4.8
Current account balance (% GDP) -2.1 -2.8 -1.9 -1.7
Public debt (% GDP) 30.8 31.9 32.8 33.8

(e): Estimate. (f): Forecast. *Fiscal year 2019 from July 1 2018 – June 30 2019 (Budget balance includes grants).

STRENGTHS

  • Competitive garment sector, thanks to relatively cheap labour
  • Substantial remittances from expatriate workers, mainly living in the Gulf States
  • International assistance helps to cover financing needs
  • Moderate level of public debt
  • Favourable demographics: a third of Bangladeshis are under 15 years of age
  • Improving financial inclusion through microfinance and mobile services

WEAKNESSES

  • Economy vulnerable to changes in global competition in the textile sector and to developments in Gulf Cooperation Council countries
  • Very low per capita income and low participation of women despite progress
  • Recurring and growing political, religious and social tensions
  • Business climate shortcomings and lack of infrastructure
  • Recurring natural disasters (cyclones, severe floods, landslides) resulting in significant damage and crop losses
  • One of the most vulnerable countries to climate risk (6th most affected country according to the 2018 Global Climate Risk Index)
  • Fragile banking sector; many non-performing loans on bank balance sheets

RISK ASSESSMENT

Growth will remain brisk in 2020

GDP will continue to grow rapidly in 2020, mainly due to private consumption and capital investment (77% and 31% of GDP respectively in 2019), which are expected to benefit from the growth in remittances from expatriates and the performance of the manufacturing sector (of which the annual growth exceeds 10%). Productivity gains in this sector will also benefit exports, reducing their negative contribution to GDP. Investment (private) will continue to increase, to finance the government’s Annual Development Programme (ADP), which aims to develop infrastructure to fill gaps in transport, education, water and energy, as these constrain production in export-oriented sectors. However, the weakness of the banking system, governance and infrastructure may hinder investment, particularly foreign investment (FDI represents only 1% of GDP). The inclusion of Bangladesh in the Belt and Road initiative will further strengthen the already substantial Chinese investment. The ready-to-wear segment, which accounts for nearly 85% of exports (and 11% of GDP), will benefit from the disruption of global value chains caused by the US-China trade war, as Bangladesh is a good substitute for China in these industries, particularly thanks to the availability of cheap labour. Inflation will remain stable, but relatively high, due to high demand pressures, poor harvests (linked to major floods in mid-2019) and world commodity prices.

 

Sustainable twin deficits thanks to the vibrant economy

Strong GDP growth is expected to keep the budget deficit stable despite increased spending, mainly on infrastructure investments under the ADP, such as the Dhaka metro or the Rooppur nuclear power plant. Expenditure will also take the form of subsidies for liquefied natural gas (LNG), which is imported to compensate for the depletion of domestic resources, and export incentives and subsidies. Tax revenues, which are limited by a narrow income tax base, are below 10% of GDP. The new VAT regime in force since July 2019 should nevertheless make it possible to increase these revenues. International aid accounts for about 20% of revenues. The level of public debt will remain sustainable according to the IMF, as over 60% is concessional debt. Commercial banks are characterized by a high ratio of bad debts, particularly at state-owned banks, where the ratio exceeds 30%. This could threaten financial stability.

The current account deficit is expected to narrow slightly because of the reduction in the trade deficit. Although high, the growth of imports (capital goods, energy and cotton) will be outpaced by that of exports, which will be driven by the competitive and expanding ready-to-wear segment. Exports of agricultural and food products will also grow, albeit at a slower pace. Large remittances from expatriate workers will offset the trade deficit. The current account deficit will continue to be financed by growing FDI and public debt. Foreign exchange reserves provide a satisfactory safety net, representing about six months of imports, in a global context of monetary tightening that increases the risks of capital flight.

 

Fragile political stability despite continuity in the country’s leadership

The country has endured several military coups since its creation in 1971. Political stability is vulnerable to tensions between the ruling Awami League (AL) and the Bangladeshi Nationalist Party (BNP). The AL is associated with independence and has a more secular ideology than the BNP, which is linked to the legacy of the military dictatorship and follows a stricter and more traditional conception of Islam. This could translate into friction between the Muslim majority and minority religious groups, while the risks of labour strikes and terrorist attacks also remain. BNP leader Khaleda Zia is currently in prison for corruption. The AL, which has been in power since 2009, won almost all the seats in the parliamentary elections at the end of 2018. However, this will not end the threat of social unrest, with accusations of fraud being levelled against the party. These risks, combined with widespread corruption, contribute to the poor business climate in Bangladesh, which was ranked 168/190 in the World Bank’s Doing Business 2020 report.

The main governance challenges will remain poverty and development. The Rohingya refugee crisis is a growing issue as the situation drags on. Internationally, Bangladesh will continue to focus on relations with China and India, although claims on the Teesta River and migration issues will hinder relations with India.

 

Last update : Février 2020

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