Policy reforms needed to avert slowdown: WB

There are signs that Bangladesh's stellar growth, which catapulted it among the 10 fastest growing economies over the past decade, may be losing steam soon unless critical reforms are undertaken to counter the decline, said a recent World Bank study.

"There was a period from the late 1980s to the mid-2000s when Bangladesh harvested the low-hanging fruits, but it has yet to move to the next phase of economic transformation," said the report styled 'Bangladesh Country Economic Memorandum: Change of Fabric'.

Without a new round of structural improvements, growth will likely decline to below 4 percent on average between 2035 and 2039, less than half the growth envisioned by the government.

Subsequently, the Washington-based multilateral lender called for reforms to address the three main growth constraints: declining trade competitiveness, the weak and vulnerable financial sector and unbalanced and inefficient urbanisation.

"Successful urbanisation will be crucial for Bangladesh to reach the next level of development," it said, adding that experiences of economic development around the world show that the level of urbanisation and the economic status of a country go hand in hand.

But Bangladesh's urbanisation during the past decades has been unstructured and unbalanced.

Dhaka, which is at the centre of Bangladesh's urban hierarchy with an outsized influence on the economy, is highly congested and polluted and ranks far below cities in the peer countries on the Mercer Quality of Living Index.

Secondary cities are underdeveloped and do not yet provide a conducive environment for more spatially balanced development.

The United Nations Department of Economic and Social Affairs (UNDESA) predicts that Bangladesh's population will reach a peak of 185 million in 2041 and the urbanisation rate will reach about 60 percent in 2050.

For this massive urbanisation to generate economic growth and lift Bangladesh to high-income country status, the process of urbanisation must solve two critical challenges: how to enhance and maintain the productivity advantage of Dhaka city in the face of this massive population surge, and how to make cities other than Dhaka and Chittagong attractive to formal firms and skilled workers to create productivity advantages.

In the short term, the focus should be on the creation of jobs in tradable activities for all types of cities.

Dhaka and Chittagong have the experience of nurturing a dynamic garment industry. These cities need to diversify their portfolio of tradable activities, which will require national-level policy reforms to enhance trade competitiveness, the report said.

City-level leaders should focus on reforms to ensure affordable housing and equitable access to city services.

In the medium term, improving connectivity both within and across cities as well as some measures of climate change mitigation and adaptation should be the focus.

In the long term, the focus should be on dealing with the infrastructural challenges of climate change mitigation and adaptation since sea level rise or warming is happening at a slower pace.

Bangladesh's financial sector performance will be a key determinant of its future economic development but the formal financial sector is not deep enough, the report said.

"Vision 2041 aims to increase national savings significantly but raising the level of savings and efficiently channelling them to productive investment will require major restructuring and greater efficiency of the financial system."

Credit to the private sector remains low in Bangladesh compared with most of its structural and aspirational peers.

Bangladesh needs to continue to build better financial sector infrastructure, improve its legal and regulatory frameworks, and phase out the existing distortions to enable a larger and more efficient flow of financing to the private sector, including to underserved segments.

Developing capital markets should be among the top policy priorities to unlock long-term finance for infrastructure and green investments.

Preserving financial sector stability will become more challenging in the future.

While Bangladesh was not affected much by the Asian Financial Crisis and the Global Financial Crisis given the relatively small and isolated nature of the country's financial system, this will not be the case going forward.

The reason being the high investment needs must be partially financed by external borrowing and the financial sector will become more integrated into the global financial system.

At the same time, the domestic financial sector (primarily banks) faces longstanding vulnerabilities that have been magnified by the COVID-19 shock.

"Weaknesses in the regulatory and supervisory framework do not properly equip the authorities to deal with potential internal and external shocks in a timely and cost-effective manner."

With the impending end of preferential access to markets due to graduation from the least-developed country bracket, Bangladesh will need to find new drivers of exports and growth.

In a worrying development, the share of exports in GDP has been declining since 2011, raising doubts about the sustainability of Bangladesh's growth model.

Besides, Bangladesh's exports are low compared with the country's peers.

The overreliance on garment exports and the perpetuation of a protective tariff regime challenge must end if the country must level up.

To accelerate and sustain export growth, Bangladesh needs to diversify its export basket, the report said.

Modernisation of Bangladesh's tariff regime is the first crucial step to supporting export diversification.