Slow exports, remittance new challenges for Bangladesh

Slowdown in exports and weak remittance growth are the new challenges for Bangladesh's economy, said Mitsuhiro Furusawa, deputy managing director of International Monetary Fund.

Furusawa, who came to Dhaka on Sunday on a two-day visit, talked to The Daily Star in an exclusive interview at the IMF office in the capital.

Bangladesh should implement the VAT law and boost investment to attain sustainable growth as well as to become a middle income country, said Furusawa, who started to work with the IMF as deputy managing director in 2015.

Here is the interview:

How do you see Bangladesh's current macro-economic situation?

The Bangladeshi economy has undergone a major transformation over the past two decades, spearheaded by the rapid expansion of the garment industry, which has helped reduce poverty and acted as a catalyst for women empowerment. This resulted in a significant and sustained increase in per capita income, with Bangladesh now reaching lower middle-income status.

Bangladesh stands out in many development indicators such as poverty, inequality, life expectancy, infant mortality and access to water and sanitation. The authorities have also made good progress in financial inclusion.

However, Bangladesh needs to boost private investment to sustain high growth. A significant increase in public investment is necessary to maintain competitiveness and generate further productivity growth. This much needed increase in investment is conceivable from a boost to revenues and FDI. It is, therefore, important that the already delayed VAT law is implemented. In addition, structural reforms, strengthening institutions and capacity development remain priorities to unleash the full potential of the economy.

Going forward, many of Bangladesh's economic institutions and governing practices will need to be upgraded to support its transition toward middle-income status and as the country becomes more integrated globally.

The IMF will remain engaged, and stands ready to support, wherever possible, the government's reform efforts.

What are the new challenges in the global economy that may adversely affect low income countries (LICs) like Bangladesh? Does the IMF have any new instruments alternative to the ECF program to help these countries?

In LICs, generally commodity and oil exporters continue to face a weak outlook, while prospects in diversified exporters remain solid overall. Risks from both external and domestic sources have risen in light of higher public debt, recent and prospective further tightening of financial market conditions, and increased financial market volatility. Security and/or climatic events add to challenges in some LICs.

In Bangladesh's case, new challenges on the external front include a protracted slowdown in key export markets (particularly the EU), and a further weakening of remittances. The EU and the US account for over 70 percent of exports, and weaker growth, together with retreat from trade liberalisation, could adversely affect export growth, mainly the garment industry, with a negative impact on the balance of payments. A sustained appreciation of the US dollar could erode Bangladesh's cost advantage and harm export competitiveness.

To make its financial support more flexible and tailored to the diversity of LICs, the IMF revised its lending tool kit in 2010. The IMF – through its poverty reduction and growth trust (PRGT), has three concessional lending windows: the extended credit facility (ECF) provides financial assistance to countries with protracted balance of payments problems. In addition, there are the standby credit facility (SCF) and the rapid credit facility (RCF). The SCF provides concessional financial assistance to LICs with short-term balance of payments needs. The rapid credit facility (RCF) provides rapid concessional financial assistance with limited conditionality to LICs facing an urgent balance of payments need. The RCF can provide support in a wide variety of circumstances, including shocks, natural disasters, and emergencies resulting from fragility.

How will the policies of the Trump administration in the USA impact the rest of the world, especially LICs? What is the IMF policy advice for the countries to prepare for shocks stemming from the uncertainty?

As we noted in our latest World Economic Outlook update, US growth is projected to pick up in 2017 and 2018, which is positive for the global economy. At the same time, there is considerable uncertainty on specific policies. We will need to see details of the various proposals to better understand their implications.

That being said, for LICs, near-term policy challenges have become pressing, owing to commodity prices well below the highs seen since mid-2014, continued sluggish global growth, high global financial and political uncertainty, and exchange rate pressures and volatility.

While fiscal adjustment is unavoidable in many LICs, room should be preserved for priority and social sector spending. Other policies should seek to foster resilience, diversify the economy, and promote inclusive growth, including by addressing infrastructure and capacity gaps, while preserving debt sustainability. Low energy prices provide scope for scaling back energy subsidies.

What is the IMF's view on the global outlook going forward? What are your biggest concerns?

As discussed in our latest World Economic Outlook update published in January, global growth will rise to a rate of 3.4 percent in 2017 and 3.6 percent in 2018, from a 2016 rate of 3.1 percent. Compared to our view in October, much of the better growth performance will come from better prospects in the US, China, Europe and Japan.

More specifically, growth in LICs is estimated at under 4 percent in 2016, due to weak conditions in commodity exporters despite stronger growth in diversified LICs. Growth is projected to recover to around 5 percent in 2017. Risks and vulnerabilities remain prominent, and poverty levels are still too high.

At the global level, vulnerabilities include the growing debate on the benefits of trade and multilateral engagement, particularly in the US and Europe; widespread high levels of public and private debt; ongoing climate change—which especially affects low-income countries; and, in a number of advanced countries, continuing slow growth and deflationary pressures.