Higher growth hinges on speedy projects: Citibank

Speedy implementation of infrastructure projects and business and investment-friendly regulations will determine whether Bangladesh would be able to attract more foreign investors and raise GDP growth to a new level, Citibank said in a report yesterday.

The US-based bank made the observation in its economic update on Bangladesh for 2016.

Bangladesh's economy grew at an impressive rate of 7.11 percent in fiscal 2015-16, which signifies strong macroeconomic fundamentals, the bank said.

There were promising signs as private investment's share in gross domestic product increased to 23 percent in the last fiscal year from 22.1 percent in fiscal 2014-15 along with stable public investment.

For fiscal 2016-17, the government has set the GDP growth target at 7.2 percent.

Easing business setup and investment regulations and rapid execution of infrastructure projects will be the driving factors that will decide whether Bangladesh can increase foreign direct investment to $9.6 billion by 2020 and GDP growth rate to 8 percent. 

At present, foreign direct investment is $2.2 billion.

“Some progress has been made by the government in helping to ease doing business. However, there is still some way to go if the country is to attract large investment from local and foreign investors.”

The government is working on creating 100 special economic zones in the country and has also classified a number of mega development projects into fast-track category to ensure rapid completion.

While public investment is crucial for building private investment, revenue mobilisation is the most important aspect that will drive public investment in coming years, according to the report.

At present, the revenue-GDP ratio is only 9.9 percent and the government has a target to increase the ratio to 16.10 percent by 2020.

“Broadening the taxpayer's base and revenue sources as well as focusing on income from service providers and self-employed are the primary challenges in attaining the target.”

The successful rollout of the new Value Added Tax and Supplementary Duty Act 2012 will determine the success of revenue mobilisation to a large extent.

The implementation of the law has been set for July 2017. The act will introduce an integrated online system for VAT registration, return submission, refund and payment.

The analysis said growth in imports is partly attributed to increased imports for expediting different infrastructure projects of the government as well as capital machinery and raw materials imports, which could be a boon for the country's economic progress.

Capital machinery import growth has come from all sectors including apparel, leather, pharmaceuticals and power and energy.

The apparel sector has been importing the bulk of machineries as part of their expansion and modernisation phase.

As the rapid completion of the fast-track mega development projects is being emphasised by the government, capital machinery imports could see further growth in the coming months, according to the analysis.

It also touched upon external challenges confronting Bangladesh.

With major changes in the global geopolitical scenario including the Brexit, the rising trend in trade protectionism, uncertainty regarding US trade policies and Bangladesh's graduation from the least-developed countries status, the policymakers would need to be proactive and cautious at the same time to identify and strike favourable trade agreements.

About the fall in remittance flow, Citibank said as slowdown in money sent by migrant workers can have undesirable implications concerning foreign currency reserves and financing development projects.

“Immediate measures are required to bring the overseas remitters into the formal channel.”

The bank called for setting up training institutes and information centres to build and export skilled workforce, which would reap the benefits in the medium- and long-term through building a more sustainable remitter base.

The economic update said higher foreign direct investment, portfolio investment and higher net foreign borrowing resulted in a surplus in the financial account.

Although the FDI is increasing, it still comprises only 0.9 percent of GDP, which is crucial to creating jobs and building sustainable foreign currency reserves, it said. 

Citibank said there are encouraging signs as investment registration with the Bangladesh Investment Development Authority has increased substantially to $14 billion during the July-November period, which is higher than the total amount of proposed investment registered in fiscal 2015-16.

There are increasing demands of better utilisation of foreign currency reserves to check on inflationary pressure and growth in reserve money.

The bank said as all major currencies except Japanese yen and emerging market currencies have depreciated significantly against the dollar recently, the taka has appreciated against them in real terms.

“Prudent exchange rate management is required to strike the right balance to help protect export competitiveness and boost wage earners remittance inflow and at the same time encouraging investors to import more capital machinery to enhance the country's productive capacity.”

The bank said the Dhaka Stock Exchange delivered a stellar performance in the first half of fiscal 2016-17, picking up from a jaded performance in the previous fiscal year.

Sluggish credit growth and poor dividend declarations were the major drags on the performance of the capital market in fiscal 2015-16.

From July, the stockmarket started to recover as upbeat macroeconomic indicators and a steady political situation boosted investor confidence.

“Investor sentiment was largely aided by the policy support extended by Bangladesh Bank to banks in adjusting their capital market exposure without selling shares.”

In addition, as the deposit rates in banks dropped sharply, people were more eager to enter the capital market in search of higher returns, which has driven up the turnover in the stockmarket.

The premier bourse also witnessed major improvement in terms of foreign portfolio investment. In 2016, the capital market amassed $1,341 crore of net overseas investment, an increase of more than sevenfold over 2015.  “While portfolio investment accounts for a very small percentage of the bourse's market capitalisation, such growth exudes confidence in the economy.”

Market analysts believe that if the interest rate available on national savings certificates is brought down in alignment with bank deposit rates, more money would flow into the capital market making it more vibrant, Citibank said.

On the cautionary side, the bank said the recent rise in stockmarket warrants strong vigilance from the securities regulator to detect and prevent any anomaly in order to help the market function efficiently and uphold investor confidence.