Terror may stymie growth: WB

An escalation of terrorist attacks in recent months in Bangladesh has heightened security concerns and created new types of uncertainties -- a development that could adversely impact investment, growth and inflation, said the World Bank yesterday.

“Security shocks, such as terrorist attacks, have the potential to cause damage to the economy, particularly by weighing on investment and consumer confidence,” said the Washington-based multilateral lender in its Bangladesh Development Update.

In addition to focusing global attention on how prone Bangladesh is to terrorism, the materialisation of security risks could jeopardise the steady economic progress of recent years, it said.

Although individual foreigners have been targeted before, the attack on Holey Artisan Café in July this year was the deadliest to hit Bangladesh in recent times.

It sent shock waves through the expatriate community, many of whom are involved in the garment trade or work for aid institutions.

Economic contraction may result if fear and uncertainty cause tens of thousands of workers to stay at home, depriving them of income and severely affecting consumer spending, which accounts for 70 percent of the economy.

The service sector, including hotels, beauty parlours and restaurants, has been badly affected in the immediate aftermath of the attack, as people are fearful of going to these places.

Consumer transactions and turnout declined. Banks and insurers could also be hard hit: the former on concerns of a looming economic slowdown and the latter on uncertainty about insurance claims.

Apprehension of further attacks could hurt Bangladesh's economic prospects. It will decrease foreign investment and lead to more capital flight as investors feel insecure about making investment decisions in an uncertain security context.

The country's export-oriented sectors, especially the apparel industry, are once again facing an image problem when it comes to foreigners' security in Bangladesh, according to the report.

Another potential economic impact could stem from the counter-measures that are adopted. The installation of security measures is costly.

Terrorist attacks can result in greater spending on unproductive activities such as heightened counterterrorism measures, expanding paramilitary and police forces, and stricter border controls.

The money diverted to extra surveillance and policing rather than investment and trade may eventually pose a drag on growth.

“Over time, this friction in the economic system can have substantial effects,” the WB said.

The economy remains resilient despite internal and external challenges, said Qimiao Fan, WB's country director for Bangladesh, Bhutan, and Nepal, while releasing the report to the media at his office in Dhaka.

He lists stagnant private sector investment, slowdown in remittance, weakness in the financial sector and security concerns as challenges confronting Bangladesh.  

When asked about the coal-based plant in Rampal, Fan said the WB is not financing the project.

He, however, said the government can further explore potential in solar energy, expand existing capacity, exploit different energy resources and explore regional cooperation.

The political turmoil of fiscal 2013-14 and fiscal 2014-15 adversely affected investor confidence; the recent terrorist attacks have only added to the anxiety. 

Bangladesh runs the risk of losing both domestic and foreign investor interest if the fear of more such attacks is not assuaged.

“The government needs to provide a positive message about the security of the lives and property of foreign as well as domestic investors,” the WB said in the report.

Private investment as a percentage of gross domestic product declined to a three-year low of 21.78 percent in fiscal 2015-16, despite macroeconomic stability.

However, a significant rise in public investment led to an increase in total investment in relation to GDP: from 28.9 percent in fiscal 2014-15 to 29.4 percent in fiscal 2015-16.

The increase in public investment is attributable to the government's expenditure on infrastructure projects.  However, these do not necessarily translate into infrastructure assets because of leakage and inefficiency in the public investment process.

As a result of falling private investment, the gap between the actual and the projected figures of private investment rate is widening.

Private investment is clearly not savings constrained: capital flight from Bangladesh peaked in fiscal 2012-13.

“With a friendlier investment environment, the recent gap between projected and actual private investment rates could have been narrowed.”

The report said private investors are discouraged from investing in Bangladesh because of infrastructure deficits, scarcity and high prices of land, corruption, political uncertainty and, of late, concerns about security.

But there is scope to make profit by doing business in Bangladesh, said Zahid Hussain, lead economist of the WB's Dhaka office and also the author of the report. “But the investment climate has to be improved.”

The WB said the government's GDP growth for fiscal 2015-16, provisionally estimated at 7.05 percent by the Bangladesh Bureau of Statistics, has been healthy despite slowing private investment and remittance.

The multilateral lender projected Bangladesh's economy would grow at 6.8 percent in the current fiscal year. 

It said progress on the ease of doing business has been slow. Inadequate infrastructure, financial intermediation, bureaucratic inertia and corruption continue to hinder domestic as well as foreign investment.

The lack of effective alternative dispute resolution mechanisms and slow judicial processes impede the enforcement of contracts and the resolution of business disputes.

The WB said inflation has slowed, benefitting from soft global commodity prices, but remains high relative to global inflation and inflation in peer countries.

The WB report said the management of the current $31 billion reserves is becoming increasingly challenging.

Elevated reserves provide a comfortable cushion underpinning the exchange rate and foreign trade, but they can also lead to inflationary pressures, asset bubbles and pressure for sterilisation. Bangladesh Bank has consistently maintained reserves in safe but low-yielding foreign government securities with high liquidity.

The return on these investments has declined from 1.15 percent in 2011 to 0.61 percent in 2015, although they have persistently exceeded the 6-month USD London Interbank Offered Rate (LIBOR).

The WB said export earnings grew 9.8 percent last fiscal year, in contrast to 3.4 percent in fiscal 2014-15, driven by rebound of garment exports.

But there has been little progress in terms of product and market diversification, Hussain said. 

The WB said the financial sector remains plagued by falling profitability and rising concerns about non-performing loans and capital inadequacy, particularly in state-owned commercial banks.

The SCBs account for nearly 48 percent of total NPLs.

Large loan restructurings have so far failed to produce the intended results, the multilateral lender said.

The government has prioritised seven mega projects under the fast-track initiative, but implementation of the projects needs to be accelerated, the WB said.

Except for the Padma bridge and Rooppur nuclear power plant first phase, work progress in other projects is in the low single digits.

The current allocation levels are inadequate for all except Padma, Payra port, and Rooppur, it said.

On the external side, the WB report said a protracted slowdown in the European Union due to Brexit related uncertainties could hurt exports.

Remittances are vulnerable as persistent low oil prices could further worsen investment and employment in host countries.

If the ongoing fiscal consolidation in GCC countries is sharper than expected, remittance flows could slow sharply, it said.

The lender said greater investment in infrastructure, productivity enhancing technology, and human capital, combined with reforms to enhance financial intermediation efficiency, could lay the foundation for stronger growth.

“In addition, addressing energy bottlenecks remains critical for sustaining Bangladesh's long-term growth.”

It also said carbon taxes could be very positive for Bangladesh given the potential benefits and their ability to help mitigate risk.