The World Bank has projected a 6.8 per cent growth, lower than officially targeted rate, for Bangladesh this fiscal year, attributing this to persistent political and security challenges that damage investment confidence.
Also, a WB report says, a slowdown in oil-rich Gulf Cooperation Council (GCC) economies has led to receding remittance inflows into the country, dampening private consumption and investment.
“In Bangladesh, capital formation is estimated to remain weak in 2016, partly as a result of heightened political tensions and security concerns,” the development agency said in its report ‘Global Economic Prospects: Weak Investment in Uncertain Times’ released on Tuesday.
It cautioned that uncertainty about fiscal consolidation, due to increases in public sector salaries and other slippages, could “weigh on confidence in the near-term”.
Economist Hossain Zillur Rahman described the current state of lack of investment confidence despite stability as “new surprise”, which, he said, is a shift from the earlier “paradox” of development in spite of governance problems.
“There’s an enforced stability and there is an absence of violent challenge from the opponents. Still, there is governance deficit. That is not conducive to economic growth,” he explained.
Dwelling on sluggish investment, the former caretaker government adviser said even claims of increase in public investment and its contribution to growth need to be reviewed carefully. “It’s actually not investment, rather inflated project cost and leakage of funds,” he added.
The WB’s flagship report said high levels of non-performing bank loans “make banks vulnerable to financial stress and [thus] weigh on new lending”. Default loans in the country exceeded Tk 1 trillion in recent times.
The report further pointed out that power shortages and poor transport infrastructure have affected investment and productivity.
The WB’s projected growth (6.8 per cent) is lower than the rate of 7.1 per cent attained in the previous year and also the government’s targeted growth at 7.2 per cent for 2016-17.
In view of “weak remittances inflows and subdued consumption”, the global agency made further downward projection of growth at 6.5 per cent in 2017-18.
However, according to the forecast, the growth would rebound to 6.7 per cent in 2018-19 and 7.0 per cent thereafter, supported by infrastructure spending and a pickup in exports. “An improved security situation is also expected to attract private investment and FDI [foreign direct investment],” the report added.
Despite the relative political calm after unrest in 2014 and 2015, the finance minister has admitted, investment has not increased significantly. The 2016 was, however, marked by terrorist attacks on foreigners and bloggers including the most deadly attack in Holey Artisan restaurant in capital’s Gulshan.
As Bangladesh’s infrastructure quality lags behind other countries in the region, the country needs $410 billion in financing--twice the size of its gross domestic product in 2015 GDP -- for developing the required infrastructures, the report said based on estimates made in the 7th five-year plan.
The WB report also said Bangladesh’s high recurring expenditures and a stagnant revenue-to-GDP ratio will likely pose obstacles for the funding of needed infrastructure development.
In South Asia, the report said, security and geopolitical tensions could derail growing regional integration, including in the apparel sector. “Increased spending on security could exacerbate fiscal vulnerabilities,” it feared.
Despite the region’s “limited global integration”, the countries that include Bangladesh might face heightened policy uncertainty in the United States and Euro zone, unexpected tightening of financing conditions, a jump in energy prices, and a prolonged slowdown in key export markets.
South Asia’s regional growth is expected to pick up modestly to 7.1 per cent in 2017 with continued support from strong growth in India. For other countries, the average growth projected is 5.5 per cent.
Global economic growth is forecast to accelerate moderately to 2.7 per cent in 2017 and growth in advanced economies is expected to edge up to 1.8 per cent in the year.
WB chief economist Paul Romer emphasised the need for offering the private sector more opportunities to invest with confidence so that new capital can plug into the infrastructure of global connectivity.
“Without new streets, the private sector has no incentive to invest in the physical capital of new buildings. Without new work space connected to new living space, the billions of people who want to join the modern economy will lose the chance to invest in the human capital that comes from learning on the job,” he noted.