BANGLADESH: A basket Case?

Is Bangladesh on the cusp of an economic and social breakthrough?

Syed Zain Al-Mahmood Dhaka 

Once derided as an ‘international basket case’ by Henry Kissinger, Bangladesh has maintained a respectable six per cent growth rate for the last two decades. It showed resilience during the global economic downturn of 2008-2009, with strong textile exports and a steady inflow of remittances from migrant workers tiding it over the rough patch.

However, as 2012 draws to a close, the outlook is decidedly mixed for the South Asian nation of 160 million people. Economic expansion has slowed while inflation has spiked amid political instability, poor infrastructure, corruption, insufficient power supplies, and slow implementation of economic reforms. The International Monetary Fund (IMF) warned earlier this year that growth would dip below 6 per cent in the current fiscal, for the first time since 2004. Despite the difficulties, Dr Atiur Rahman, the governor of Bangladesh Bank, the country’s central bank, remains bullish. “We received $1.13 billion of FDI (foreign direct investment) in 2011—a record. Remittance is projected to hit $14 billion at the end of the year — another record. We have more rice right now than we know what to do with—if the power situation improves a little, we should be over the hill,” he says.

Rahman, who was a professor of development studies at the University of Dhaka before he took over the top job at the central bank in 2009, admitted that the never-ending power shortage was one of the main problems holding Bangladesh back. “We will need to grow by 7 to 8 per cent a year in order to achieve our goal of becoming a middle income country over the next decade or so. But we need to sort out the power situation,” he said.

Power generation was one of the main election pledges of the government led by Prime Minister Sheikh Hasina, which took over in 2009. Bangladesh, where more than half of the population doesn’t have access to electricity, plans to spend $10 billion, or 11 per cent of its gross domestic product, in a decade to increase power capacity.

According to World Bank estimates, power consumption in Bangladesh is 144 kilowatt hour per capita, behind war-ravaged countries like the Ivory Coast. Ageing thermal power plants, dwindling supplies of natural gas with which to produce electricity and lack of diverse power sources have left the country with a large gap between power supply and demand, estimated at over 1,200 megawatts (MW).

Experts say perennial power shortages and unreliable supplies have perpetuated underdevelopment with nearly half the population living below the extreme poverty line of $1.25 a day. The government of Sheikh Hasina has been heavily criticised for relying on a scheme of oil-based rental power plants which have proved to be expensive and unreliable.

“Instead of going for a long-term solution with large base-load power plants, the government opted for rental power which has proved to be a white elephant,” said Dr M Tamim, Professor, Department of Petroleum and Mineral Resources Engineering, at Bangladesh University of Engineering and Technology (Buet) in Dhaka.

With wages of $50 per month and double-digit inflation, garment workers who sew clothes for global brands such as GAP, Walmart, Nike and Marks & Spencer, say they are finding it hard to make ends meet 

The country’s fuel import bills have ballooned in large part due to the oil-guzzling rental power plants. Rising fuel imports and slow exports have widened the trade deficit. In April, the government was forced to borrow $1bn from the IMF after reserves dwindled and the nation’s currency, the taka, lost more than a 10th of its value against the US dollar.

Rahman said the central bank had “tightened up” its monetary policy to maintain stability. He said the conservative policy would help maintain the country’s foreign exchange reserves while containing inflation, which remains stubbornly close to double digits. Under the terms of the IMF loan, Bangladesh has committed to increase taxes and reduce expensive subsidies on fuel, electricity and fertilizers.

Help may be at hand from Asian neighbours. Bangladesh signed a deal with the Power Grid Corporation of India Ltd (PGCIL) for the import of 250 megawatts of electricity while another Indian company, the National Thermal Power Corporation (NTPC), is due to set up a joint-venture 1,320 MW power plant in southern Bangladesh. Malaysia’s Genting Bhd is also bidding to build power plants.

But concerns remain over foreign aid flows, on which Bangladesh depends for half of its development spending. Last year, a drop in aid flows, in part because of donor concerns over corruption in the Padma bridge project, led to a widening of the budget deficit. The ballooning deficit pushed the government to borrow heavily from the central bank and commercial banks, sparking double-digit inflation and crowding out private investment.

“Availability of power and affordable funds are crucial factors for apparel exports to continue growing,” said Shafiul Islam Mohiuddin, president of the Bangladesh Garments Manufacturers and Exporters Association (BGMEA). Otherwise, production as well as export will suffer and we will be overtaken by rivals.”

 

This story is from the print issue of Hardnews: DECEMBER 2012