GET IN TOUCH

Why Bangladesh will soon become a middle income nation

Profile
Zahedul Amin
April 3, 2014
Why Bangladesh will soon become a middle income nation

The Bangladesh economic story exemplifies that of an underdog which had been continuously berated and belittled by the naysayers, as it struggled to maintain its growing population and at the same time, keeping away from myriad obstacles to growth. From being termed a ‘bottomless basket’ to being earmarked as the most corrupt country, Bangladesh still has to bear the ignominy of the Least Developed Country (LDP) tag.

Backdrop

Post-independence, the country was in tatters, as the nine months war had a significant dent on the country’s infrastructure. The situation was exacerbated by instances of famine in mid 70s and political instability didn’t help either. With liberalization of business in 1980s, many entrepreneurs entered the fray starting new ventures. Steady industrialization followed and the formidable RMG sector took root during this period. In 1980s, the economy slowly transitioned from an agro-based economy to the one dominated by secondary sector.

The early 90s saw further liberalization as RMG export expanded on the back of RMG export growth along with growing manpower export market. Several other industries also came up including: Pharmaceutical, Leather, Frozen food etc. Export driven growth was propelled by the availability of inexpensive labor along with favorable tax regime.

Status Quo

Over the last 10 years, the economy has maintained growth within 5-6% range despite spate of natural calamities and political instabilities. In the recent past, the global financial crisis in 2008 also had minimal impact on the country’s progress, despite recessionary phases in US and EU, major markets for Bangladeshi products.

Over the last one year, Inflation has remained stable at 7% despite frequent supply chain disruption due to political unrest. Reining of inflation is attributed to declining growth of non-food inflation e.g. Rent, which has contributed to lower inflationary pressure. Bangladesh Bank has also adopted a tight monetary policy which has further led to lower inflation.
Exports have been riding on the blossoming RMG sector which has clocked USD 23 billion over 2013.  Remittance revenues have grown to the tune of USD 12 Billion, albeit at a slower pace. However, import growth has declined at a relatively higher rate which contributed to positive current account balance.

Why Bangladesh is forging ahead?
Bangladesh economy has undergone rapid changes over the last decade with growing export driven by RMG sector, along with flourishing manpower export, culminating in higher economic growth. These two economic drivers have been inclusive, given that the main economic agents are drawn heavily from the lowest rungs of the country’s socio-economic strata. This has resulted in higher disposable income for population at the ‘bottom of the pyramid.’

  • Booming RMG sector currently employs 4 million workers, mostly women, who are generating almost 80% of the country’s export. Mckinsey in its recent study on Bangladesh’s RMG sector has predicted export earning nearing USD 40 billion mark within 2021. Sector growth is precipitating due to increasing labor costs in China and other competitors, leading them to move up the value chain. Bangladesh, providing the most inexpensive labor, has been the natural beneficiary of some shifting export orders. Despite rising minimum wage of c.77% this January, Bangladesh has managed to retain their least cost status. 
  • Many international investors have expressed strong interest in setting up factories in Bangladesh. Government is in talks with Chinese investors for setting up another special economic zone specifically for Chinese companies. Other companies also have expressed interest in investing in Bangladesh, especially considering country’s large consumer base of 160 million and close proximity to China and India. 
  • The incumbent government has been investing heavily in infrastructure developments, especially in the field of power generation, as frequent power outages have historically been a major hindrance for economic activities. Government has tackled the demand-supply gap by directly involving the private sector.  Entrepreneurs have established quick rental power generation plants which have been regularly supplying to the national grid, contributing to lower electricity shortage. 
  • There also are long term plans of establishing a deep sea port in Sonadia and Chinese and Indian investors have expressed interest in developing the sea port. Establishment of seaport, expected to be completed in 10 years, can significantly reduce export lead time and earn steady flow of revenue for the government.

Achievements so far
According to latest Human Development Index (HDI), prepared by UNDP, Bangladesh has performed exceptionally well with respect to life expectancy, education, and income indices; in some cases, surpassing the achievements of its economically advanced neighbor, India, even. Consequently, Bangladesh has successfully achieved most of the Millennium Development Goals (MDG) set by the UN and is on course for achieving the Sustainable Development Goals (SDG).
Despite fears of losing market share post MFA regime, the RMG sector has performed exceptionally well by steering ahead of its competitors. Export growth trend continued despite global economic downturn and major industrial accidents (Rana plaza & Tazreen Fashion). Currently, Bangladesh has maintained the position of the second biggest exporter, after China, in the global apparel market.
Bangladesh has been receiving attention from international domain over the years due to steady performance despite global economic upheaval. Goldman Sachs has included Bangladesh as part of the Next Eleven countries, which have potential for continuing growth in the coming years. JP Morgan has identified Bangladesh as part of Frontier Five countries having the potential of achieving phenomenal growth.
Two international rating agencies, Moody’s and S&P, have been conducting Bangladesh’s sovereign rating for the last four years. In all the years, Moody’s has rated Bangladesh BB – better than all neighboring countries, except India. Similarly S&P has also given favorable rating of Ba3, which is higher than all other neighboring countries, except India.
 Upcoming Challenges

  • Political instability looms large in the horizon considering the context of the Jan 5 election, which was boycotted by major political parties. Political unrest may flare up any time, severely hampering economic activities. 
  • RMG sector generates almost 83% of country’s export. A sudden structural sectoral shift may spell danger for overall macroeconomic stability. Given BGMEA’s current impasse with international apparel buyers on compliance issues, it may not be surprising if buyers shift at least some export orders to competing countries. 
  • Natural gas is the main source for electricity generation in Bangladesh. With depleting natural gas reserves, the country is headed for cataclysm unless some concrete strategic plans are undertaken. New gas fields need to be identified and a comprehensive coal policy must be devised for reducing dependence on natural gas. 
  • Change in India’s ruling authority may bring some unexpected roadblocks in regards to international relations. Bangladesh’s foreign policy makers must steer clear from confrontations while at the same time, look to meet their demands. 
  • Given burgeoning population, Bangladesh must find ways to feed them. With declining cultivable land propagated by population growth, focus should be more on catalyzing another green revolution. In addition, government should spearhead efforts encouraging private sector to lease cultivable land internationally, especially in Africa and South East Asia.

Concluding Remarks
Bangladesh has long operated under the wings of major regional players. It’s about time they come out of their shell and exert themselves economically. The conditions are ripe for catapulting the country as a middle-income nation.
 
 


Profile
WRITTEN BY: Zahedul Amin

Zahedul Amin is the Co-founder and Director of Finance at LightCastle Partners, an emerging market specialized business planning and intelligence firm. Earlier, he worked as the Assistant Vice President, Risk Analysis Unit, in HSBC. He completed his E-MBA at the Institute of Business Administration (IBA), University of Dhaka, and completed his undergraduate degree from the same institute. He can be reached at [email protected], Twitter: @amin_zahed

For further clarifications, contact here: [email protected]

Want to collaborate with us?

Our experts can help you solve your unique challenges

X

Join Our Newsletter

Stay up-to-date with our Thought Leadership and Insights