Tracing the origins of Bangladesh’s economic woes

Bangladesh’s economy is overwhelmingly dominated by informal sectors. The informalisation stems from deindustrialisation, which has set in prematurely in the country.



March 30, 2023

The ongoing downward pressure on Bangladesh’s economy originated before the Covid pandemic, which only exposed the existing structural fractures and institutional fragilities. The Russia-Ukraine war, diminishing foreign exchange reserves and, most importantly, the continuous rise in living costs only added to the woes.

Bangladesh was already facing certain structural challenges before the pandemic broke out. Poverty reduction had already started to slow down. According to the Bangladesh Bureau of Statistics (BBS), the poverty rate declined by 1.8 percentage points per year between 2000 and 2005, by 1.7 percentage points between 2005 and 2010, and by 1.2 percentage points between 2010 and 2016. It rose to 29.5 percent from the pre-Covid levels of 20 percent in recent years.

The country has also been experiencing jobless growth. According to the last Labour Force Survey of 2016-17, the unemployment rate is 4.2 percent. The rate of youth unemployment, comprising the population aged between 14 and 24 years, is high at 12.3 percent. The rate of long-term unemployment (that is, jobless for more than a year) is 15.2 percent.

Inequality has also been increasing at an accelerating pace due to higher returns on capital vis-a-vis labour. According to the Household Income and Expenditure Survey (HIES), which was conducted before the pandemic, the Gini coefficient, which is generally used as a measure of equality, stood at 0.482 in 2016, up from 0.458 in 2010 – a worrying trajectory. The top five percent has taken over 95 percent of the total income.

The pandemic has severely impacted the lives and livelihoods of marginalised segments of society, particularly low-income groups, women, children, the elderly, the unemployed, and the informal sector workers. In the absence of universal social security, the inflationary pressures have further caused many to cut down on essential food intake, forcing a reduction in nutrition levels. Some have been compelled to reduce expenditures such as medical and children’s education.

Bangladesh’s economy is overwhelmingly dominated by informal sectors. The informalisation stems from deindustrialisation, which has set in prematurely in the country, with negative employment creation in manufacturing. The capacity to generate employment in the formal sector, particularly in manufacturing, has shrunk, and export has been concentrated to one sector, putting the economy at the risk of high vulnerability and shocks. The paralysed policy process has failed to induce and unleash the capacity of the private sector to expand and diversify the sector with more competitive products.

A lack of foresight has put pressure on our energy security as well. The sector is not foreseeing an immediate solution due to import dependency for the supply of basic energy, lack of gas extraction, timid progress in renewable energy use, and inadequate investment in transmission systems despite the high rent-accruing production setup.

Bangladesh’s economy is overwhelmingly dominated by informal sectors. The informalisation stems from deindustrialisation, which has set in prematurely in the country, with negative employment creation in manufacturing.

There has been no significant breakthrough in agriculture in terms of innovation and technological advancement in the post-green revolution period. Productivity in agriculture has sunk and costs of production have soared. The fertiliser market is also volatile. Farmers need financing, despite having the best track record in loan repayment. The conventional land reform and small farmers’ policy is not tenable against the backdrop of diseconomies of small scale and the associated coercion and distress. Small and cottage industries are still neglected despite creating the most employment opportunities. The service sector is facing a critical shortage of skilled manpower.

The fiscal balance is in shambles. There is no sign of improvement in our tax-GDP ratio, one of the lowest in the world, which is pushing the country towards an increasing reliance on borrowing and further accumulation of debt. The government’s loan from the central bank has risen to a record of more than Tk 1 trillion. Printed money is entering the market as the government borrows from the central bank. Inflation is on the rise again due to further escalating consumer price levels. The public sector credit stands at Tk 3.34 trillion. Then there are questions about capital expenditure. Some projects have become burdensome with cost overruns. Foreign debt repayments have spiralled due to the appreciation of the US dollar.

The sluggish growth in the collection of value-added tax (VAT) indicates a slowdown in economic activities, and the paltry addition in the consumption tax is due to a rise in prices. The collection of import duties has started to decelerate, with the tightening of imports and lack of availability of foreign currency in the banks to underwrite letters of credit.

When the price of goods surges, so does tax evasion – particularly in trade – with higher intensity. There are reports of money laundering in the form of overinvoicing. The best way for the government to gain fiscal leverage is to curb the rampant tax evasion in the country, focusing on an endogenous tax reform programme. It will build the fiscal space if the espoused goal of collection from income tax as the number one source of domestic resource mobilisation is attained.

The financial sector has been in disarray for quite a while. Most of the enterprises are not defaulters, but the lion’s share of non-performing loans (NPLs) is in a few hands. The recovery, in spite of many cushions, of large defaulted loans is yet to happen, with politically intrusive rentier governance in public and private banks. Thus, the NPLs in the country have increased three-fold in the last 10 years.

Depletion of forex reserves began in Bangladesh months before the Ukraine war broke out. Reserves are decreasing due to lower forex earnings, having dropped from $45.99 billion in March last year to $32.30 billion as of March 1 this year, despite belt-tightening measures to stall the fall. After excluding the investment, the net reserve can at best cover three months of import.

The IMF loan of $4.7 billion is not enough to mitigate the risk of the current cash crisis for three units of the economy – households, firms, and the government. The 42-month IMF programme, which has taken away some of the government’s policymaking sovereignty, may not be able to rescind the root cause of the downward pressure, which is embedded in political settlement. Yet, the conditionalities have led to the median citizens being taxed through rising utility bills.

Businesses are facing the brunt of the depreciation of the dollar, escalating prices of raw materials, and mounting utility charges. With the rising costs, bank loans of the firms are proliferating. On the other hand, deposit growth in the banking sector has almost halved.

The gradual corrosion of institutions has hindered allocation of resources to productive sectors. Together with regulatory dilapidation due to deinstitutionalisation, stagnation in the ratio of private investment to GDP, and rise of capital flight have become major challenges. Effective investigation of money laundering and adoption of a zero tolerance policy is a much-vaunted demand.

Although the country’s economic development is considered by certain quarters as a “miracle,” the growth has largely been led by consumption, not due to a rise in savings or investments. It is not a sustainable path of development. In a consumption-based economy, import demand remains very high, and such import pressure could cause problems in balance of payments, as has been the case in Bangladesh.

A country cannot withstand any external shock if it is plagued by patron-client politics, power asymmetry and rent-accruing by the powerful quarters at the cost of limited access orders for ordinary masses. When the political settlement does not belong to most of the people (median, not majority), clientelism takes root, amassing resources (rent). The resource-dependent syndicate eats away systems through deinstitutionalisation and political centralisation. As a result, institutions falter to provide services to citizens, and the idea of a citizen-state becomes a far cry.

Dr Rashed Al Mahmud Titumir is professor and chairman of the Department of Development Studies in Dhaka University, and chairperson of Unnayan Onneshan.

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