Inclusive approach needed to tackle LDC graduation fallout: Sanem
Bangladesh needs an inclusive approach to harness effective investment policies, efficient resource allocation among sectors and better governance to tackle the risk of the country's graduation from the least developed countries category, said a think-tank yesterday.
“Bangladesh needs surge of investment to accelerate its economy,” said the South Asian Network on Economic Modeling (Sanem).
The Sanem organised a roundtable styled “Looking beyond LDC Graduation” to present the stipulated major benefits and challenges Bangladesh would face. The event was organised to mark the fourth anniversary of its flagship monthly digest 'Thinking Aloud'.
Bangladesh has successfully met all three criteria for LDC graduation in the first review in March 2018. It is expected that the country will be able to meet the criteria in the second review in 2021 and will finally graduate from the LDC status in 2024.
Benefits of the graduation are cited to include an improved country image and higher rating for investment by international rating agencies which may attract larger foreign direct investment. However, there are a number of risk factors associated with the graduation.
The Sanem said the loss of preferences in the markets of the European Union, Canada, Australia, Japan, India and China in 2027 might lead to an annual reduction in total exports of Bangladesh by 11 percent.
The loss would be equivalent to about $6 billion given the current projection of growth in exports, it said in a statement yesterday.
Bangladesh will see the end of the preferences in 2027 if the country can officially graduate from the LDC status in 2024.
Many of the exemptions of the World Trade Organisation provisions, including the cut in tariff and subsidies and adherence to intellectual property rights will no longer be available after 2027.
As Bangladesh has already graduated from the World Bank's “low-income” category to “lower-middle income” category, the scope for loans at lower interest rates would be limited and this may result in balance of payments problems.
“Furthermore, the graduation could have a more significant effect on access to official development assistance and other concessional financings,” the Sanem said.
According to the research organisation, the prospective benefits are not “automatic” as the country has to work quite a lot to avail the preferences. In contrast, almost all of the possible losses would be “automatic”.
It also said Bangladesh's private sector investment and foreign direct investment remains sluggish due to a lack of investment-friendly policies, weak competitiveness, delay in implementation of critical projects, institutional inefficiency, rent seeking, costly projects and poor physical and social infrastructures.
Although the seventh five-year plan targets 8 percent real GDP growth by 2020 and there are aspirations to have 9 percent growth by 2030, the investment requirements differ significantly with the assumptions of the incremental capital output ratio.
In order to meet the aspiring growth, the investment-GDP ratio has to be increased annually by 0.7 percentage points which is more than two times higher than the current annual rise of 0.3 percentage points, said the Sanem.
It said the country needs to attract large volumes of private sector and foreign direct investment through enhancement of trade competitiveness, improvement in physical and social infrastructures, improvement in the quality of economic and political institutions, and reforms in trade policy, monetary and fiscal policies.
According to the statement, the public expenditure on health and education sectors is one of the lowest and out-of-pocket health expenditure is the highest in South Asia.