Political unrest, vulnerability in the banking sector and low investment stand in the way of higher GDP growth and economic development, the World Bank said.
“The central risk is the prolongation of the political instability,” the multilateral lender said on April 13 in a report, 'Making the most of cheap oil', for the WB-IMF spring meetings.
The GDP is forecast to grow by 5.6 percent this fiscal year, as the protracted political unrest might have shaved off one percentage point.
The resurgence of political unrest on January 5 has taken a heavy toll on economic activities, in particular the services sector, agriculture, exports and non-formal sector. Subsequently, outlook for the near-term is “mixed”.
Assuming sustained political stability, Bangladesh's strong domestic demand base, gradually improving investment climate and continued macroeconomic stability, a GDP growth of 6.3 percent can be expected next fiscal year.
Recovery in export growth and private investment is expected to boost aggregate demand, while contributing to capacity creation.
The growth forecast, which is way below the government's estimate of 6.5 percent, would be the fourth highest in the South Asia region this fiscal year.
It is above Pakistan's growth forecast of 4.4 percent and Nepal's 5 percent, but below India's 7.5 percent and Sri Lanka's 6.9 percent.
The report said the South Asia region is among the biggest beneficiaries from cheap oil, as all countries in it are net oil importers. In the last quarter of 2014, South Asia was already the fastest-growing region in the world.
“The biggest oil price dividend to be cashed in by South Asia is one yet to be earned, but it is not one that will automatically transit through government or consumer accounts,” said WB's South Asia Chief Economist Martin Rama.
“Cheap oil gives the opportunity to rationalise energy prices, reducing the fiscal burden from subsidies and contributing to environmental sustainability,” he added.
WB Vice-President for South Asia Annette Dixon said the savings from reduced subsidy bills could be used to address the “crying needs of the region” in terms of infrastructure, basic services and targeted support for the poor.
As for Bangladesh, domestic factors dominate the risks to the near-term outlook, the paper said. Other than the prolongation of political instability, there are also concerns about financial sector vulnerability, which have potential fiscal implications.
The financial sector is still shaky because of limited actions to improve corporate governance and accountability. The sector remains vulnerable to potential term shocks and economic slowdown.
A protracted depreciation of the Euro could hurt exports, compounding the weaknesses due to real exchange rate appreciation. Even though international financial linkage is growing, Bangladesh's vulnerability to global financial volatility remains small, it said.
Growth remains below what is needed for Bangladesh to be in a comfort zone of middle-income by 2021.
The average annual GDP growth rate needs to rise to 7.5-8 percent to accelerate the pace of poverty reduction through the creation of more and better jobs in the domestic economy.
This will have to be coupled with increases in female labour participation rate to cushion the shrinkage in the demographic dividend due to declining rate of growth of working age population.
The biggest, though not the only, challenge in increasing investment and female labour participation is ensuring durable political stability.