Pressure mounts on Bangladesh’s economy

Pressure mounts on Bangladesh’s economy

Farah Masum,
Workers at the Port of Chittagong – the principal port in Bangladesh

The slump in agricultural production, negative growth of remittances and stagnancy in export earnings is mounting pressure on Bangladesh’s economy. Given the circumstances, it will be difficult to reach the projected growth rate.

Bangladesh’s agricultural sector, particularly in the food grain sub-sector, has seen positive growth over the past decade, but during the current fiscal it is about to witness negative growth for the first time. Production of the three rice crops, aush, aman and boro have fallen way behind target. In fact, no crop has reached the production level of last year. This means a fall in agricultural sector growth. The resulting increase in food grain imports is likely to put pressure on foreign currency reserves.

As it is, the foreign currency reserves are under pressure as remittances have fallen over the past two consecutive financial years. According to the central bank, remittances in 2015-16 fell by 2.52 percent from the last year. It was hoped that the positive trend would be restored the next year, but remittances in the current 2016-17 fiscal have fallen by 16.86 percent. It may go down as far as 20 percent at the year end.

So long the deficit between Bangladesh important and export earnings had been made up by the remittances. This is not happening now. Export revenue growth is also inching down. In 2015-16 export growth had been 9.7 percent, but in the first nine months of 2016-17 this growth has decreased to 3.97 percent. Import growth was in 5.45 percent in 2015-16. It has now doubled to around 10.45 percent in the first nine months of 2016-17.

Imports have increased due to the demand for food grain. Rice production in the first aush season of the financial year was 21 lakh 33 thousand 616 metric tones (2.13 million metric tones approx.), that is, 6.75 percent less than the previous year. According to Bangladesh Bureau of Statistics (BBS), Bangladesh produced 3 crore 49 lakh 68 thousand (34.97 million) metric tones of rice in the 2015-16 fiscal. This was 2 lakh 58 thousand (258 thousand) tones more than the previous year. The target production for 2016-17 is 3 crore 50 lakh (35 million) metric tones, but primary projections see little possibility of production exceeding 3 crore 42 lakh (34.2 million) tones this year.

According to the National Board of Revenue (NBR), in the eight months till February of the current fiscal, about 2 lakh (200 thousand) tones of rice had been imported. But there has been an increase in import LCs for food grain over the following months, indicating that rice imports will go up considerably.

As a disincentive to rice imports, in December 2015 duty was increased from 10 percent to 20 percent. Imports did fall. Now the government is mulling over a cut in duty rates in order to control the hike in rice price spurred by the fall in production. So on one hand while import duty will have to be cut to control rice prices, increased imports will put pressure on foreign currency reserves.  The government finds itself in a dilemma.

Negative agricultural production has had an impact on economic growth, and already IMF and the World Bank have predicted that the projected GDP target will not be achieved. Even the Asian Development Bank has said that towards the end of the 2016-17 fiscal, GDP growth will fall to 6.9 percent, instead of reaching the estimated 7.1 percent. Inflation will go up from last fiscal’s 5.9 percent to 6.1 percent. ADP points to a fall in remittance flow, decreased export revenue and drop in international oil prices as the reason for the slump in GDP growth.

Last October even the International Monetary Fund (IMF) predicted Bangladesh’s 2016-17 GDP would be 6.9 percent. Towards the beginning of 2017 the World Bank had predicted the 2016-17 GDP to be 6.8 percent, but now fears it may fall to 6.2 percent.

Finance Minister Abul Mal Abdul Muhith maintains that the GDP will never fall below 7 percent in the coming days. The World Bank could not share this optimism. Even ADB’s evaluation differs.

The UK-based international ratings agency Fitch also speaks of Bangladesh’s economy coming under pressure. It says that even though the overall economy is stable, remittance flow is falling. As a result, there will be a slump in domestic spending. GDP may fall from 7.1 percent to 6.6 percent by the end of the current fiscal. The agency said that lack of good governance had rendered the banking sector weak. It apprehended political unrest before the 2019 general elections in Bangladesh. This would have a negative impact on investors and the readymade garment buyers.