04/05/2024 | Press release | Distributed by Public on 04/05/2024 05:57
While Bangladesh recovered strongly from the COVID-19 pandemic, post-pandemic recovery was hindered by rising inflation, a persistent balance of payments deficit, financial sector vulnerabilities, and global economic uncertainty. Monetary, fiscal, and financial reforms are essential to sustain the growth momentum going forward, says the new World Bank report, the Bangladesh Development Update April 2024.
In the fiscal year 2023, real GDP growth slowed to 5.8 percent, led by weakening private consumption and investment. Private sector credit growth also slowed, indicating a slowdown of investments. In FY24, growth is projected to slow further to 5.6 percent, before improving marginally to 5.7 percent in FY25. Thus, in the short run growth is expected to remain below the average annual growth rate of 6.6 percent experienced over the decade preceding the COVID-19 pandemic. With right policy actions, growth is expected to accelerate FY26 onwards.
Inflation continues to erode consumer purchasing power, impacting the poor people the most. Several factors contributed to elevated inflation, including shortages of foreign exchange resulting in reduction of key imports, depreciation of the taka against the US dollar, energy shortages and increased power prices. To keep inflation in check, Bangladesh Bank continued to tighten monetary policy in early FY24.
The government has undertaken several much-needed policy adjustments, including introducing an adjustable fuel pricing mechanism to reduce spending on subsidies; reducing export subsidies to generate greater fiscal space for development priorities; and adopting a Prompt Corrective Action framework to address financial sector vulnerabilities.
The economy faces several challenges, which require immediate and coordinated policy actions:
To stem the depletion of forex reserves, Bangladesh Bank has taken steps like reducing the size of the Export Development Fund and implementing stringent eligibility criteria, ensuring timely receipt of export earnings, and providing flexibility to banks for transferring capital between their offshore and domestic units.
Bangladesh's growth is expected to remain subdued in the near term, due to inflation weighing on private consumption growth, and shortages of energy and inputs, rising interest rates, and financial sector vulnerabilities dampening investor sentiment. Growth is expected to increase gradually over the medium-term as inflationary pressures ease significantly, input, and foreign exchange shortages are addressed through external sector reforms, and as a result investment sentiment improves.
The following policy adjustments are crucial for Bangladesh to accelerate growth and stay on its path to achieving Upper-Middle-Income-Country status by 2031:
Bangladesh has strong economic fundamentals, with a demographic dividend, growing market share in ready-made garments, and a large overseas workforce. Immediate and strong financial sector, fiscal and monetary reforms will help the country to return to a sustained and faster growth path.