Bangladesh needs to come up with reforms at the earliest to sustain the growth momentum which has landed it among the five fastest growing economies in the world, the World Bank said yesterday.
The Washington-based multilateral lender tipped the Bangladesh economy to grow at 7.3 percent this fiscal year, which, however, is lower than the prediction of the government (8.13 percent) and the Asian Development Bank (8 percent).
As per the WB projection, only four countries other than Bangladesh will achieve more than 7 percent economic growth this year. They are India (7.5 percent), Bhutan (7.6 percent), Rwanda (7.8 percent) and Ethiopia (8.8 percent).
And yet, Bangladesh faces several short and long-term development challenges, the WB said in its Spring 2019 edition of the Bangladesh Development Update.
One of the immediate challenges is to address the issues of banking sector vulnerabilities, revenue shortfall and pressure on foreign exchange reserves, according to the report unveiled at the WB office in Dhaka yesterday.
“The banking sector is struggling with non-performing loans, and private sector credit growth has slowed down too,” WB Country Director Robert J Saum said while unveiling the report with a special focus on regulatory predictability.
High non-performing loans (NPLs) compounded by an eroding capital base continue to pose financial stability risks, the WB said.
Directed lending, poor risk management and weak corporate governance — stemming from lack of enforcement and regulatory independence — lead to the rise in NPLs.
At the end of last year, the banking sector’s total NPLs stood at Tk 93,911 crore, up 26.38 percent year-on-year, according to Bangladesh Bank data.
At the same time, the practice of loan rescheduling and write-offs also increased, putting further stress on banks.
Last year, the central bank approved loan rescheduling of Tk 20,000 crore.
“Despite these wholesale approvals of loan rescheduling, default loans are increasing,” the report said.
Last week, Finance Minister AHM Mustafa Kamal announced an easy loan rescheduling scheme for defaulters from May 1.
The defaulters will be able to reschedule their loans for 12 years by making 2 percent down payment of the total dues. At present, defaulters can reschedule their loans for at most 3 years by providing 10 to 15 percent down payment.
Speaking at the programme, Zahid Hussain, lead economist at the WB’s Dhaka office, said frequent and wholesale rescheduling of bad loans is not sustainable for banks.
“We will end up killing the goose that lays the golden eggs. If the goose dies, then where will further rescheduling and fresh loans come from?” he noted.
In its report, the WB called for tightening regulation on loan rescheduling and stopping special rescheduling.
It also recommended ensuring true autonomy of the BB as the sole regulator of the financial sector and also full regulatory oversight on the state-owned banks.
The WB country director said another matter of worry for Bangladesh is that the domestic revenue mobilisation was well behind the target so far this year.
In the first six months of fiscal 2018-19, the revenue growth was only 6.4 percent higher than the corresponding period of the previous year — the smallest in recent memory, the report mentioned.
About slow revenue growth, Zahid said, “How will development expenditure be increased for higher growth without increasing the revenue.”
The report also highlighted the pressure on the exchange rate, which can pose a macroeconomic risk.
“The foreign exchange reserves have been stagnant for a while, which was not the case before,” Zahid said.
And yet, Bangladesh’s growth outlook remains stable and strong, thanks to the stable macroeconomic front and export-oriented industry-led growth, according to the WB report.
Sound macroeconomic policies — such as keeping the budget deficit below 5 percent of the GDP — and resilient domestic demand have led to growth in manufacturing and construction industries on the supply side, it said.
On the demand side, growth is led by private consumption and exports.
After a modest performance last year, export earnings and remittances have bounced back, helping the rural economy to grow faster.
In addition, the country has substantially improved its electricity generation, and a bumper agricultural harvest has further stimulated growth, the WB pointed out.
However, sustaining the rapid economic growth will require significant reforms, including increasing the predictability of regulation.
Measures are needed to address several challenges, particularly in boosting private investment and diversifying exports.
The WB country director said reform initiatives are also required to continue Bangladesh’s extraordinary trajectory of reducing extreme poverty, which fell from 31.5 percent in 2010 to 24.3 percent in 2017.
Despite strong progress, some of the drivers of poverty reduction appear to be weakening, he mentioned.
“In this context, Bangladesh has shown remarkable generosity in sheltering and providing for the basic needs of nearly one million Rohingya in two of the poorest upazilas in Cox’s Bazar,” Saum said.
The WB report mentioned that Bangladesh will require huge investments in physical and human capital and also in innovation to become an upper middle-income country by 2031 and achieve high-income country status by 2041.
“Any reform effort requires a clear strategy, political champions supported by a capable reform team, and well-established consultation and coordination mechanisms to ensure a high level of coordination among all relevant stakeholders,” it added.