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The World Bank (WB) has kept its GDP growth forecast for Bangladesh unchanged at 5.2 percent for FY23 citing tighter financial conditions, disruptive import restrictions, and global economic uncertainty.
Bangladesh made a rapid recovery from the COVID-19 pandemic supported by prudent macroeconomic policies, but the economy now faces considerable challenges, the lender said in its Bangladesh Development Update for April 2023 unveiled at its Dhaka office on Tuesday.
The challenges include global economic uncertainty, rising inflationary pressure, energy shortages, a balance-of-payments deficit, and a revenue shortfall.
Accelerating the implementation of structural reforms, including trade reforms and export diversification, will help Bangladesh navigate the current challenges and sustain growth momentum, it observed.
“Bangladesh’s post-pandemic recovery has been disrupted by elevated commodity prices, rising interest rates, and slowing global growth,” said Abdoulaye Seck, World Bank Country Director, adding that the Ukraine war and global uncertainty have impacted many countries.
In June last year, the lender predicted that Bangladesh’s growth in economic output would expand by 6.7 percent in 2022-23 fiscal year.
But as higher inflation persisted, energy shortage at home and abroad intensified and the war in Ukraine dragged on, the multilateral lender in October slashed the economic growth projection to 6.1 per cent. The growth forecast was slashed further to 5.2 per cent in January.
In December, the government revised down the growth forecast from 7.2 percent to 6.5 percent due to the impacts of the Ukraine war.
Bangladesh’s GDP growth was recorded at 6.9 percent in 2020-21 and 7.1 percent in 2021-22.
Growth is expected to accelerate in FY24 and converge to around 6.5 per cent over the medium term, as inflationary pressure eases, external conditions improve, and reform implementation gains momentum, said the WB.
Higher commodity prices have contributed to inflationary pressure. The balance-of-payments deficit reached $7.2 billion in the first half of FY23, up from $5.3 billion in FY22, creating considerable pressure on foreign exchange reserves, according to WB.
A multiple exchange rate system has contributed to the balance of payments pressure, disincentivizing export and remittance inflows. Moving towards a single market-based exchange rate will help restore external balance.
WB said inflation is projected to remain above the Bangladesh Bank’s 5.5 per cent target in the near and medium term. External and fiscal sustainability will be stressed by elevated global commodity prices, with the pace of recovery contingent on policy reform implementation.
The fiscal deficit is expected to widen in FY23 as subsidy expenditures rise, moderating over the medium term. Downside risks include slowing demand in Bangladesh’s major export markets and unresolved financial sector vulnerabilities, the report says.
A gradual reduction in extreme poverty is expected, from an estimated 10 percent in 2023 to 9.5 percent in 2024, using the international poverty line of US$2.15 in 2017 purchasing power parity.
Risks to the outlook remain elevated. Domestic banks faced challenges with tighter liquidity and increasing non-performing loans. The fiscal deficit widened in FY23, with higher financing from domestic banks. However, the January 2023 joint World Bank-IMF Debt Sustainability Analysis (DSA) assessed that Bangladesh remained at low risk of debt distress.
Improving trade competitiveness for export diversification will be critical to achieving Bangladesh’s aspiration of upper middle-income status by 2031.
“The ready-made garments sector accounts for about 83 percent of Bangladesh’s exports. The COVID-19 pandemic underscored the risk of overreliance on a single sector,” said Bernard Haven, World Bank Senior Economist and co-author of the report. “Diversifying exports and improving competitiveness will help Bangladesh achieve upper-middle income status by 2031.
For this, it will be important for Bangladesh to reduce both tariff and non-tariff barriers. A comprehensive reform program can strengthen regional integration, particularly with South Asia and Southeast Asia.”
The report said structural reforms are needed to support a faster pace of growth over the medium term.
To achieve the vision of attaining upper middle-income status by 2031, Bangladesh needs to create jobs and employment opportunities by creating a competitive business environment, diversifying exports, increasing human capital, building efficient infrastructure, deepening the financial sector, and establishing an enabling policy environment that attracts private investment, WB suggest in the report.
At the same time, Bangladesh will need to implement coordinated policies and investments to address rising climate vulnerabilities, it added.
The Bangladesh Development Update is a companion piece to the South Asia Economic Focus, a twice-a-year World Bank report that examines economic developments and prospects in the South Asia region and analyzes policy challenges faced by countries.
(DS)
