FEATURE STORY April 4, 2019

Bangladesh Development Update: Regulatory Predictability Can Sustain High Growth

STORY HIGHLIGHTS

  • Bangladesh economy continues to be among the fastest growing economies in the world, thanks to stable macro and export-oriented industry-led growth
  • But, private sector investments remain insufficient along with declines in Foreign Direct Investment (FDI)
  • To sustain growth, the country needs continuity in priority reform areas: financial sector, fiscal, infrastructure, human capital and business regulation

Dhaka, April 4, 2019: Driven by industry, Bangladesh’s economy continues to grow at an impressive rate said a new World Bank report, The Bangladesh Development Update 2019 “Towards Regulatory Predictability.” Bangladesh is among the five fastest growing economies of the world, in spite of insufficient private sector investment.

Bangladesh’s growth outlook remains strong and stable. Sound macroeconomic policies – such as keeping the budget deficit below 5 percent of GDP – and resilient domestic demand have led to growth in manufacturing and construction industries on the supply side. 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 grow faster. In addition, the country has substantially improved its electricity generation and a bumper agricultural harvest has further stimulated growth.

Private Sector Investments Remain weak. Foreign Direct Investment (FDI) remains low at less than 1 percent of GDP. Net FDI inflow amounted to $910 million in the first half of FY19, compared with $823 million in the first half of FY18. The share of machinery in total imports for leading industries such as textiles, garments, pharmaceuticals, packing and leather has also declined, reaching 31.8 percent in July-November 2018 from 55.6 percent in 2009. For Bangladesh to be an attractive destination for industries, it is critical to make resources such as land, electricity and gas available.

Lack of Regulatory Predictability. Businesses face regulatory uncertainty on various fronts. Regulatory predictability matters because it makes property rights insecure, thereby constraining investment. This leads to uncertainty for businesses – medium-size firms seem to bear the brunt more than large or small firms – and with inconsistencies in policy implementation, it can adversely affect employment growth. Based on a survey of 72 businesses operating in Bangladesh, the following issues were marked as critical to address:

-          Use regulatory assessment

-          Review and overhaul of existing laws, rules and Statutory Regulatory Orders (SROs)

-          Create a website and automatically publish all new laws, SROs

-          Introduce online feedback mechanism and business-to-government feedback loops on regulatory service quality

Bangladesh’s regulatory system needs the establishment of a technical regulatory oversight body at the center of government to oversee, lead and report on regulatory reforms.

 


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Rise of non-performing loans (NPLs).  Directed lending, poor risk management, and weak corporate governance lead to the rise in NPL. The practice of loan rescheduling and write-offs also increased, creating further stress on banks. Bangladesh Bank (BB) approved loan rescheduling of BDT 191 billion in 2017 and BDT 200 billion in 2018. NPLs are increasing despite these wholesale approvals of loan rescheduling. NPLs are not evenly distributed among banks with five banks accounting for almost half of the total NPLs.

How can Bangladesh continue to grow?

In order to become an upper middle-income country by 2031 and achieve high income country status by 2041, Bangladesh will require huge investments in physical capital, human capital, and innovation enabled by reforms in areas such as financial sector, business regulation, and addressing the infrastructure gap.  
The World Bank continues to support the government’s reform efforts to create large-scale, inclusive jobs, besides addressing the needs of other development challenges. Sustained reform efforts are needed in the following areas:

-          Banking sector

-          Tax structure along with addressing bottlenecks in public financial management

-          Infrastructure financing strategy in partnership with the private sector

-          Skills for jobs growth starting with a skills development strategy

-          Ease of doing business

 


Contacts:

In Washington:
Elena Karaban
1 (202) 473-6768
ekaraban@worldbank.org


In Dhaka:
Mehrin Ahmed Mahbub
(880-2) 8159001
mmahbub@worldbank.org



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