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.”

 

Bangladesh is banking heavily on strong exports led by the garments sector to overcome the challenges in infrastructure and power. In 2009, Bangladesh used its price advantage to overtake India to become the world’s second largest exporter of readymade clothing. Garments exports, which made up $18 billion of Bangladesh’s total export earnings of $23 billion in the last fiscal year, offer a crucial lifeline to the poor South Asian country, where per capita income is just $850.

But Bangladesh’s garments industry is facing challenges in keeping its wages low. In June, owners closed 300 private garment factories in the Ashulia industrial area outside Dhaka after clashes between workers and police. The factories resumed production after almost a week of clashes, following three-way negotiations between owners, workers and the government.

With wages of around $50 per month, or a sixth of those in India, and double-digit inflation, garment workers who sew clothes for well-known global brands such as GAP, Walmart, Nike, Marks & Spencer and H&M, say they are finding it hard to make ends meet.

Factory owners say they are being squeezed by falling prices in the global market, a never-ending power crisis and high interest rates. They would like security guarantees and cash incentives from the government to raise wages and keep the factories running.

As Bangladesh’s economy liberalises, the informal sector has also been expanding. According to a 2006 survey by the Bangladesh Bureau of Statistics, out of a total workforce of 49.5 million, roughly 37 million people—nearly 80 per cent—were working in the informal economy. This included workers employed in agriculture, fishing, construction, waste removal, transportation and domestic helpers. Earlier this year, the government, with financial assistance from Japan, launched an ambitious project to boost growth by incorporating its informal sector workers into the formal sector.

The overall macroeconomic climate hasn’t been helped by the country’s politics which remains unstable, with the prospect of street violence ahead of elections due in early 2014. Last year, the ruling Awami League scrapped a law allowing a neutral caretaker administration to oversee elections. Sheikh Hasina’s opponents accuse her of abusing power while the prime minister blames opposition parties for trying to destabilise the country.

Nearly half the population is living below the extreme poverty line of $1.25 a day… an equal number does not have access to electricity

A finance ministry study conducted last year found that black money—undisclosed or untaxed money—may amount to 80 per cent of GDP, or about $110 billion. In an indication of the massive amount of black money in the economy, the Bangladesh government has allowed ‘whitening’ of undisclosed income by paying a 10 per cent tax. Despite the challenges, Bangladesh is on track to meet many of the Millennium Development Goals, including impressive gains in pulling people out of poverty, ensuring that more children, bopth girls and boys, attend school, and have access to clean water. Considerable progress has been made in reducing maternal and child mortality rates.

Rahman believes Bangladesh has found a better model of inclusive growth, compared to many of its neighbours. “In the villages, I see an entrepreneurial spirit, an energy that fills me with hope. People are healthier and living longer. I see government and NGOs working together to tackle socioeconomic problems.
I think Bangladesh is on the cusp of an economic and social breakthrough.”  

The writer is a journalist based in Dhaka.

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