Dr Selim Raihan is the Executive Director at the South Asian Network on Economic Modelling (Sanem) and Professor of Economics at the University of Dhaka. He has years of experience in teaching international trade, economic modelling, quantitative economics, econometrics, development economics and poverty dynamics. Dr Raihan has also published 17 journal articles, 23 books, 35 chapters in various books and 45 working papers.
In a conversation with The Business Standard's Raihana Sayeeda Kamal and Fardaus Mobarok, he shares his insights about what we can expect from the economy of Bangladesh this year. He also delves deep into the challenges the economy faces and elaborates on the current macroeconomic trends.
1. What are your predictions for Bangladesh's economy in 2020?
There are a few challenges for Bangladesh's economy in 2020. The challenges are not new. They have accumulated over the years. Especially, one big concern I think is how the economy would handle the issues concerning export, remittances, private sector investment, employment generation and revenue generation.
We are seeing a slowdown of export growth, specifically a negative growth in recent months. The remittance front, for the time being, has been good but how long or to what extent this will continue, remains a question. In the Gulf region, a serious crisis is going on. The recent Iran-US tension is escalating. In this regard, we can go back and remember the gulf war crisis when a lot of migrant workers had to return home. Now, if I compare that period with the current situation, the tension is more acute now. A larger number of countries are now getting involved in the conflicts and the politics in that particular region has become more and more complicated. Rising fuel prices is another issue. If the tension escalates, it can go back to the regime when the fuel price crossed $100. All these things are not good news for remittance and exports.
Two major aspects will govern the track of the economy of Bangladesh in the next decade: one is the graduation from a Least Developed Country (LDC) by 2024. However, LDC graduation will bring a lot of new challenges, especially concerning losing trade preferences in major export destination countries. No doubt this is a bad news for our exports.
And the second one is achieving Sustainable Development Goals (SDGs). There are stringent and tough development goals that need to be achieved by 2030. So, to see how the economy performs in 2020, we have to keep our eyes on whether Bangladesh is actually on track to meet the challenges of LDC graduation and to achieve the SDGs. And also if the economy is in a position to handle several emerging new issues at the global level.
So far, the good news is that one indicator is doing well – the GDP growth rate. But in other areas, we have concerns. For example, the credit growth in the private sector is the lowest in recent history, which is no way conducive for energising private sector investment. However, in my view, in 2020, the economy would perform the way it has been performing over the past few years. I don't see the chances of there being any dramatic change, either in forms of improvement or in terms of crises. The status quo will be maintained in 2020.
2. Except for remittance and GDP growth, all economic indicators did not perform well last year. Will we be able to bounce back from that position this year?
Private sector investment is quite stagnant now. Concerning Gross Domestic Product (GDP), the private sector investment has been stagnant at around 22-23 percent over a few years. I don't see any major improvement in private sector investment happening because the factors that have been responsible for slow private sector investment are yet to be solved.
The financial sector, especially banking, is in major problem. Also, the capital market is very weak and is highly volatile. None of these are good news for private sector investment.
The recent tension between the Bangladesh Telecommunication Regulatory Commission (BTRC) and Grameenphone is another issue. I don't think it's giving any positive message to the outside world. This issue needs to be solved prudently.
If we look at the recent trend of Foreign Direct Investment (FDI), there is a slight improvement. In recent years, we have attracted $3.6 billion as FDI, but one of our major competitors Vietnam has attracted more than $12 billion. So, there is no comparison between Vietnam and Bangladesh when it comes to FDI. Even if you look at the composition of FDI, there is little new investment. It is more of the re-investment of major companies who have already invested. If the foreign companies feel insecure due to the unpredictability of the rules and regulations in Bangladesh, I don't think it will give any positive signal to encourage new investors.
Another area of concern, I think, is revenue generation. The tax-GDP ratio is falling. This is not consistent with our GDP growth story. Our growth rate has crossed the 8 percent mark. It means the GDP size is increasing. When the GDP size is increasing, and the tax revenue concerning GDP is falling – it means the incremental GDP is untaxed, which is difficult to understand.
3. Is there any mismatch between the economic indicators and the GDP growth?
It is only the BBS (Bangladesh Bureau of Statistics) that produces national statistical data and there is no other institution with the capacity to provide an alternative. The World Bank and the International Monetary Fund (IMF) provide alternatives based on certain models.
The major macro indicators should be consistent with the GDP growth rate, but in many cases, they are not. Especially, we see that in recent years, while the GDP growth rate is increasing, export and remittances – two major drivers of growth – are experiencing highly unstable growth.
In recent years, public investment has also become a driver of growth. However, there are questions about the efficiency and quality of public investment in big projects. There are concerns about costs and time overrun for most of the projects.
Also, while we are seeing a very positive picture in terms of increasing GDP growth rate, we are seeing a slowdown of the rate of poverty reduction, sluggish job creation and rising inequality. This leads us to think that the ongoing economic growth process is yet to be inclusive.
4. What do you think about megaprojects and government expenditure?
The benefits of the mega projects will be realised if they are completed on time with rationalised costing. The longer time it takes to materialise the projects, the more it will affect private sector investment. The private sector investors must have a clear picture of the completion of mega projects so that they can plan their investments accordingly. Successful operationalization of some Special Economic Zones (SEZs) is also very important for boosting private sector investment. The private sector, under uncertain conditions, feels shy to go to the bank and get the credit because they think if they take the loan from banks, from the very first day they have to pay interest. They cannot start their business unless they get critical facilities. So far, for most of the mega projects, there are concerns about cost and time overrun. The government is also borrowing a lot of money from domestic and international sources. Domestic borrowing by the government from the banks in recent times is certainly squeezing the scopes for the availability of credit for private investors. The government is also borrowing from outside to finance the megaprojects and the interest rate is not low in most cases. This raises the risk of the rise in debt-GDP ratio, which in recent years is seeing a steep rise.
We have two examples in front of us – Pakistan and Sri Lanka. They have seriously fallen into the debt trap. So, we have to be very careful. The thing to remember is that the government can make heavily borrow from foreign sources now and transfer the burden to the future generation, which is not a good policy in any case. Therefore, careful thinking is needed while borrowing from outside.
I think many have already raised questions about the amount of money budgeted for different big projects and whether we could achieve the same goal with a lesser amount of resources. Also, there should be proper financial, economic, social and environmental feasibility studies before undertaking big projects.
On one hand, we can see that the government is trying to spend quite a lot on developing the physical infrastructure. But on the other hand, the government is not making any significant efforts to increase spending on social infrastructure like health and education, which are integral parts of SDGs. I think there is a problem in getting our priorities right. Bangladesh is passing through a phase of demographic dividend. This would last for one and a half decades only. And if we do not invest in young people to equip them with better health and education, and proper skills and training, we will lose the opportunity, and it will be a missed decade. I can mention here that there are cases where many countries failed to reap the benefits of their demographic dividends because of the failure to invest properly in human capital development.
Public spending on health and education is extremely low in Bangladesh. Bangladesh is on the bottom list of public spending on health and education. Less than 1 percent and around 2 percent of GDP are spent as public spending on health and education respectively. However, we should spend 4 to 5 percent of the GDP as public spending on health and education to achieve SDGs, as envisaged in the document on "SDG Financing Strategy" by the General Economics Division under the Planning Commission of Bangladesh. If you look at other South Asian countries, even Nepal is spending more than Bangladesh on public health and education. In Bangladesh, I can see one of the major constraints is that with a very low tax-GDP ratio, which is less than 9 percent, it is extremely difficult to increase public spending on social sectors.
5. What is your opinion on the RMG sector?
The RMG exports have been a success story in Bangladesh. From only $31 million exports in the early 1980s, RMG exports from Bangladesh reached $31 billion by 2018. Bangladesh is now the second largest exporter of RMG in the world. However, Bangladesh is likely to face a stiff challenge of holding the position this year. There is a high probability that Vietnam will overtake Bangladesh. At the six-digit HS code level, there is a high level of similarity in top RMG products exported by Bangladesh and Vietnam. Vietnam is receiving huge investments from China. Proximity is not the only reason to attract large scale Chinese investment in Vietnam. If you look at the Doing Business ranking, Vietnam is much higher-ranked (70th) than Bangladesh (168th). Bangladesh lacks FDI conducive environment and, therefore, could not benefit from the recent US-China trade war in terms of re-directing RMG orders from China or attracting Chinese firms for relocating their business. In contrast, Vietnam has been very successful.
In general, Bangladesh fails to attract foreign investment also because of unpredictability in rules and regulations and complexities in bureaucratic procedures to handle business proposals. Even if investors are willing to invest, one major challenge is the availability of land. The government wants to solve this land issue through the establishment of SEZs. However, the progress of SEZs is not that great yet.
For various reasons, FDI in the RMG sector has also not been welcomed by domestic RMG investors. It is a political economy issue and the RMG exporters association has been quite reluctant to agree on FDI in the RMG sector outside of the EPZs (export processing zones).
In 1985, four countries had almost the same level of per capita GDP. Bangladesh, China, Vietnam, and India – all four countries had less than $300 per capita GDP. And in 2018, Bangladesh had a per capita GDP of around $1,700, China's per capita GDP was close to $10,000, Vietnam's was 1.5 times Bangladesh's and India's was 1.2 times that of Bangladesh. On top of that, during the 1980s, Bangladesh and Vietnam had almost the same size of export. Bangladesh used to export $1.1billion and Vietnam $1.5 billion. Now Vietnam exports around $260 billion and Bangladesh exports only $40 billion. Over the last three decades, Vietnam went far ahead. It is not only the export size – Vietnam also diversified its export basket, whereas Bangladesh remained relying more and more on RMG. Even in the RMG sector, we have not been able to diversify much. Still we are at the lower value end. Therefore, the diversification of the export basket remains a big challenge for Bangladesh.