Why Bangladesh? – The Upswings, The Challenges & The Future

What Sets Bangladesh Apart?

Bangladesh is reeling from the headwinds of post-pandemic global aftershocks. The negative balance of payments and pressure on forex reserves are key concerns. However, while these trends are being globally observed  – Bangladesh also has exhibited impressive growth in the last couple of decades.

This sustainable growth is often attributed to the country’s demographic bulge (60% below the age of 35), density dividend (1,200 people / sq km), growing middle class (expected to reach 34 million by 2025- equivalent to larger than the current population of Malaysia), mobile and internet connectivity (80%+, 60%+), and increasing remittance and exports.

Bangladesh is also on track to become a middle-income country by 2026 and the country’s GDP per capita crossed that of India, in 2021. However, one particular factor that also sets Bangladesh apart from its neighbours – is female participation in the workforce.

In Bangladesh, 38% of the female working population is actively engaged compared to 20% in India and 22% in Pakistan. The RMG/Textile sector which contributes 80%+ to exports employs a 4 million workforce, 65% of which are female. There has been a direct correlation between the country’s inclusive and sustainable economic growth and female empowerment leading to growing investments in health and education at the household level. This is also exhibited by Bangladesh’s improvement in the UN Human Development Index.

What are the Major Challenges Bangladesh Faces?

• Balance of Payments: Increasing and widening the gap between import and export. The largest export basket is RMG/Textile (80%+) which has to import both cotton and accessories. Apart from that, Bangladesh has large import baskets on everything from Pharmaceutical APIs to commodities to consumer goods and durables. Electricity generation is also fossil fuel dependent and given BDT depreciation against USD – fuel import is also becoming more and more expensive. Additionally, worker remittance is also decreasing since the demand for unskilled or semi-skilled workforce is decreasing as well as the RMG sector not being able to move to more value-added items plus intense competition from India and Vietnam is putting pressure on export earnings. Bangladesh would need to work on export diversification and import substitution at the same time.
• Geo-Politics: While Bangladesh is at a very favourable strategic position geographically – between India and China with – the Bay of Bengal as the port gate-away – it is also a sensitive position. Between being landlocked by India on three sides, while China identifying Bangladesh as part of the One Belt One Road (OBOR) initiative – Bangladesh has to play a balancing game. While the country has done that pretty well till now – the future path needs to be carefully thought out. Bangladesh also buys nuclear tech from Russia, has Japan as the largest bilateral donor, Europe and the US as the major export destination for goods and the Middle East for worker remittance. In the absence of a solid foreign relations strategy, Bangladesh will face challenges in the future. 
• Financial Sector Reform and Corruption Both in the Private and Public Sector: Bangladesh has 60+ banks and 34+ non-bank financial institutions – possibly too many for a USD 400 billion economy. In the absence of proper governance, a large part of the credits disbursed has become classified (often due to undue influence from the board and name lending). Officially the number is around 10%. However, if you adjust for rescheduling of loans and exception approvals the number would significantly increase to even between 20 to 30%. So a financial sector reform accounting for capital flight would be prudent to implement. Lastly, corruption is a recurring theme in emerging markets and Bangladesh is no exception and better governance and law enforceability would be needed to take the country to the next decade.
• Creating Meaningful Employment and Having Inclusive Growth: Bangladesh is often said to be going through the Jobless Growth Conundrum. While unemployment rates in the country are low – ~< 5%, the underemployment rate would be significantly higher and estimated at double digits. Right now agriculture employs half the population, while RMG/Textile creates around another 4 million in employment. However, to create jobs, Bangladesh needs to work on two fronts – (A) Creating high employment industries including verticals like Leather/Footwear, and consumer goods/durables manufacturing as well create service jobs whether in the gig economy or more skilled sectors like ICT /ITES and (B) Develop strong reskilling and up-skilling programs to support the industrialization labour growth. Essentially, Bangladesh will need more economic engines besides RMG/Textile and worker remittance. This also needs to be coupled with government safe net programmes and ensuring basic healthcare and education for all.
• Combating Climate Change: Bangladesh contributes less than 1% to global greenhouse gas emissions. However, the country ranks 7th and 9th in the global climate risk index and number of deaths, due to climate-induced disasters, respectively. While Bangladesh’s high population density (~1200 people/sq. km.) – is conducive to building businesses, in the case of climate vulnerability, it further exacerbates risks for the nation. Given the current trajectory, the rapidly changing climate conditions will trigger annual GDP losses, in the range of 1 to 2%. Beyond these macro implications, there are lasting consequences for food security due to the loss of arable land (up to 1.75% per year), for education due to the breakdown of school infrastructure, for health due to high salinity and waterlogging, and for livelihood due to loss of income and assets.

What Needs to Happen?

The RMG sector has been important for the historic development of the country. However, Bangladesh would need to reimagine and transform to stay competitive. RMG/Textile needs to move into more high value not just basic knit and woven but more high-end products like sports and intimate wear, winter wear and business wear.

With over-reliance on imported raw materials and increasing competition from economies like India and Vietnam – Bangladesh needs to up its game to give more value-add including design inputs, creating its own brand where relevant while benefiting from China plus 2 policy.

Bangladesh also needs to diversify into other export verticals. Sectors that seem potential and show early track records include Leather/ Footwear, ICT, Pharmaceuticals, Agriculture and skilled human resource.

As Bangladesh goes onto the path of becoming a middle-income nation and LDC graduation we would need mainstream investors to come in. A few things would help: 

• Solve the persistent branding problem. Sri Lanka receives much more FDI than Bangladesh with less than 25% of the GDP size. Consistent branding and promotion events with high quality are the need of the hour. Maybe start with making a good Invest Bangladesh website.
• Improve the business climate – though discontinued last year in the Doing Business Index that the World Bank did yearly before Bangladesh was ranked 168 compared to 63-India, 70-Vietnam, 98-Sri Lanka and 128-Pakistan. Bangladesh is considered at the same rank as Afghanistan – which until recently was at war. 
• Streamline regulations – easier repatriation with set guidelines, open exchange rates, and open interest rate regimes. Essentially not only make it easier to invest but make it easier to take money out.
• Get a new airport – which is finally happening with construction well underway but also make the VISA and immigration process easier (just take a look at Singapore).
• One-stop solutions from BIDA – Bangladesh Investment Development Authority should actually work and streamline inter-regulator workings – not just for show.
• Ensure a level playing field for the businesses. Standard regulations for everything from forming a company to tax filing to repatriation without the need for speed money or red tape. 
• Develop a stronger Non-Resident Bangladeshi (NRB) network and leverage them. We need to engage with our diaspora and make them brand advocates rather than perpetuating the story of everyone leaving because of a better life (even if it is partially true). 
• Encourage circularity and sustainability both at the industry and individual levels. Streamlining incentives of decarbonization and greening would go a long way. At the same time, private investments in these spaces are critical and PPP initiatives here would add value.
• Lastly, a broader, more efficient and transparent tax system, that grows wider to improve the tax-to-GDP ratio (currently ~ 8% is one of the lowest in the region). However, to do so it would be imperative to implement good practices and provide transparent public good investments. 

Summing Up – If We Think About Bangladesh, Which Country Do We Resemble an Early Version Of?

• Since Bangladesh and Pakistan were the same country pre-1971, the comparison between these two comes up a lot. In terms of broad economic indicators, Bangladesh is already ahead – USD 400 billion compared to USD 350 billion in Pakistan, GDP per capita for Bangladesh is USD 2500 compared to Pakistan’s USD 1500 with a comparable population. On the other hand, Pakistan possibly has a higher tech and management talent base – many even ex-employees of companies like Careem – the leading UAE-based ride-sharing startup which exited to Uber. 
• India, on the other hand, is in a different league – with a USD 3 trillion GDP and almost 8 times Bangladesh’s population. While the cultural similarity due to geographic proximity cannot be denied along with business laws and systems – I think Bangladesh best benefits if you compare it to early Indonesia.
• Indonesia has 2.8 times the GDP of Bangladesh with 1.8 times the population and 1.7 times the GDP per capita. The middle-income population is around 50 million compared to 12 million in Bangladesh. However, the density, the growth initially starting from RMG, and the telecom penetration are similar and consumers seem to adopt similar products like bike ride-sharing is immensely popular in both countries. In terms of time, Bangladesh is almost a decade behind but with infrastructure investments and talent management can bridge the gap in a shorter time.

Author

Bijon Islam, CEO at LightCastle Partners, has prepared this write-up with editorial support from Fariha Kabir, Senior Business Consultant and Project Manager at LightCastle Partners, and Zahedul Amin, Director at LightCastle Partners. For further clarifications, contact here: [email protected]