Jumpstarting sustainable growth

Bangladesh is facing some challenges as well as opportunities from the global and regional economies. Global economic growth remains modest and uneven; while momentum in advanced economies has picked up, several major emerging markets have lost steam. This takes place in the context of falling oil prices and sharp variations in the exchange rates of major currencies, producing winners and losers across the globe. In addition, the prospect of a new mediocre for the world economy lingers, with medium-term growth forecasts being marked down again and concerns about declining potential growth.

Against these cross currents, Asia remains the world's growth leader. According to our latest Asia and Pacific Regional Economic Outlook, growth in the region is expected to hold steady at 5.6 percent in 2015, easing slightly to 5.5 percent in 2016. Domestic demand is forecast to remain strong, supported by healthy labour market conditions, historically low interest rates, and more recently, the fall in oil prices. Exports will continue to benefit from the recovery in advanced economies and weaker exchange rates in some economies.

Growth momentum in the largest economies in Asia and the Pacific is expected to be mixed. China's economy is slowing to a more sustainable pace, with GDP projected to expand by 6.8 percent in 2015 and 6.3 percent in 2016 as the correction in the real estate sector continues to compress investment. In contrast, growth in Japan is expected to recover to one percent in 2015 and 1.2 percent in 2016, buoyed by consumption and exports. Thanks to recent policy reforms and lower oil prices, India will be one of the fastest growing economies in the world, expanding by 7.5 percent in 2015 and 2016. Across most of the region, lower commodity prices are expected to boost incomes and reduce inflation, although commodity exporters such as Australia, Indonesia, and Malaysia will be adversely impacted.

These developments have spill-overs for the Bangladesh economy. As an oil importer, the country is benefiting from lower global oil prices, while rapid growth in India provides opportunities for expanding exports. On the downside, a sustained real exchange rate appreciation (as the taka strengthens against the euro) could undermine export competitiveness. The China slowdown could hurt export growth potential at the margin, but rising real wages in China also bring the prospect of increased Chinese investment in Bangladesh.

Similarly, Bangladesh is facing tailwinds and headwinds at home. While economic activity bounced back after the January 2014 elections, the resumption of political unrest since January 2015 is taking a toll on the economy, and several activity indicators have slowed. Nevertheless, macroeconomic stability has been preserved. Monetary policy has remained prudent and inflation has generally abated but faces upside risks from unrest-related disruptions. The external position remains strong, with foreign exchange reserves steadily increasing. While tax collections remain weak, the fiscal deficit is contained, supported in part by lower energy subsidies (resulting from lower oil prices), and public debt remains sustainable. Assuming that calm is restored and political tensions abate, Bangladesh's economic growth is expected to improve from around six percent in the fiscal year 2014-15 (FY15) to about 6.5 percent in FY16.

There are, however, important home-grown risks to the growth outlook. Intensification and persistence of political unrest would undermine activity as well as confidence. Continued weaknesses in the banking sector could have fiscal and financial stability implications over the medium term, and undermine growth.

Over the past few years, the IMF has worked closely with Bangladesh in strengthening macroeconomic stability and implementing the government's reform agenda, with support from an Extended Credit Facility arrangement that now approaches completion. Going forward, continued prudent fiscal and monetary policies would support stronger growth and sustained poverty reduction. Increasing the tax to GDP ratio, one of lowest in the world (8½ percent of GDP in FY14), remains a priority. Increasing fiscal revenues will provide the much needed resources to boost spending on critical infrastructure in power and transport, and well targeted safety net programs.

The new VAT law, approved by the Parliament in 2012, is a key tool to achieve this much-needed boost in fiscal resources. In addition, the new VAT is designed to protect poor households by exempting basic consumption items and to shield small businesses through a high minimum threshold, while its simple, single-rate system and automated filing and payment mechanisms will help reduce taxpayer harassment and compliance costs for businesses.

Continued efforts to improve the business environment and strengthen financial sector supervision and governance will also be critical for sustained, inclusive growth. The IMF, as a partner to Bangladesh, stands ready to continue working closely with the government in support of these policy priorities.

The writer is Mission Chief for Bangladesh, International Monetary Fund.