The key to rebuilding Bangladesh

There are a wide variety of different aspects of the society that are being called for reform by the Bangladesh elites. These are law and order, judicial system, banking system, police reform, etc. This article suggests the key to rebuilding Bangladesh is to return to a satisfactory level of economic growth. 

GDP growth has declined to a low level in the past two years with falling exports, falling investment and falling imports. To raise the growth rate the key action is to increase exports and to attract remittances through the banking system. The increase of foreign exchange earnings from these resources will stabilize the economy and reduce inflation. All aspects of society will feel the positive impact of lifting the constraint of limited foreign exchange. 

Most of the other vital reforms will take a long time. But there is some hope for a more rapid acceleration of export and remittance earnings. This article undertakes to set out how this might be achieved.

State of the economy

Growth of exports is negative and there is no real diversification taking place. Apart from woven and knitted garments, no export product exceeds $1billion per year for a substantial period. Production is hampered by energy costs, congested transportation of products, financing, and labour issues.

Imports continue to decline. Breakdown of imports indicates a significant decline of imports of capital machinery This indicates declining investment as imports of capital goods are going to decline based on information on LC openings. Manufacturing output other than garments will decline due to falling imports of intermediate goods and raw materials. It is almost certain that GDP is declining, despite the claims of BBS. The absolute output of manufacturing is certainly negative with garments and textiles declining (together these comprise 50% of manufacturing). In addition, energy supply will continue to be short, further contributing to the problems facing manufacturing.

Inflation is high, at about 12% per annum. Wages are increasing at 7% per annum so the real wage is declining. Deposit rates are negative. Lending rates are negative if the impact of taxes is considered. The government deficit is declining which will tend to reduce inflation. However, exactly how government expenditures will evolve in the next six months is uncertain. On the other hand, we expect revenue collections will weaken over this period. Effort may increase, but the tax base is shrinking under slower growth. On balance, the next six months should show a modest reduction in the government deficit.

The current account of the balance of payments for FY24 is $6.5bn -- an improvement over FY23 of $11.6bn. This was achieved through a large decline of imports, and an increase of remittances, despite a decline of exports. The overall balance declined from $8.2bn to $4.3bn. The exchange rate depreciated from 108 per Dollar to 120 per Dollar. The foreign exchange reserves at the end of July FY25 were $20.4bn. The commercial banks held foreign currency at the end of July FY 2025 of $6.1bn. There is $2bn and $3bn of foreign debt whose payments are overdue. In brief, GDP is declining, exports are declining, remittances show a slight upward trend, inflation is high, real wages are shrinking, investment is declining, interest rates are high. 

The balance of payments is still not stabilized, with continuing loss of reserves and continuing depreciation of the currency.

The one area that is most critical is increasing foreign exchange. This is the only factor that will give a boost to the economy in the short run (the next three years)

Improving the economy

The one area that is most critical is increasing foreign exchange. This is the only factor that will give a boost to the economy in the short run (the next three years). There are two sources of foreign exchange earnings -- exports and remittances. We discuss the prospects for each.

Exports

Table-1: Total exports

FY	2020	2021	2022	2023	2024
Value	32.8	37.9	49.2	43.3	40.8

 

Table-1 shows a rapid growth of total exports, 50% over two years followed by a 20% decline over two years. FY2020 and FY2021 exports were harmed by the disruptions of Covid-19. FY2022 shows the recovery and catching up on orders. The past two years, exports have declined. RMG exports have declined since 2022. The data is flawed but woven has fallen about 20% and knitwear about 15% (the export concept is from reports of NBR).

The only significant exports are in the garment sector. Even here recent years show negative trends. There are good prospects in footwear, leather goods, and shrimp. Unsatisfactory government policies have resulted in limited progress in these three products. 

Proper policies might result in significant increases in three to five years so such actions are worth consideration. For footwear and leather goods, the environmental plant to clean waste must be made to work better so that expanded market access to Europe and the United States is possible. 

Shrimp is more complex, but concepts recently presented by the Thai company CP suggest an approach. 

In both these products the government may appoint a small group to make detailed recommendations on actions to promote the volume of exports. These groups should seek the advice of foreign experts. Further depreciation of the currency is needed to widen the range of potential exports. The poor situation with exports arises from the failure to depreciate the currency in significant amounts from 2008 until 2022. 

The central bank failed to understand the condition of the economy, allowing exports to concentrate on one product, and failed to recognize that the world economy would change one day, putting Bangladesh in a difficult position. The real effective exchange rate appreciated steadily, but this was ignored by the authorities. Everything seemed all right, but then it wasn’t.

Perhaps more important is the lack of a serious industrial policy that would identify potential industries and provide support to start ups. An area that is promising is automobile spares. Medical equipment is another sector that may have potential. These could develop the skills needed in manufacturing.

Forrest Cookson is an economist who has served as the first president of AmCham and has been a consultant for the Bangladesh Bureau of Statistics.