Bangladesh economy makes a strong turnaround: World Bank

The economy of Bangladesh made a strong turnaround from the COVID-19 pandemic while policy reforms can help address the surrounding challenges to put Bangladesh back on track for faster growth, said the World Bank (WB).

The World Bank in its twice yearly update also said post pandemic recovery continues to be disrupted by high inflation, a persistent balance of payments deficit, financial sector vulnerabilities, and global economic uncertainty.

Released today, the latest Bangladesh Development Update says that urgent monetary reform and a single exchange rate regime will be critical to improve foreign exchange reserves and ease inflation.

World Bank Country Director for Bangladesh Abdoulaye Seck spoke at the launching ceremony of the update at its office while senior economists Bernard Haven and Rangeet Ghosh jointly made a power-point presentation. Senior external affairs officer Mehrin A Mahbub moderated the update launching.

The World Bank said greater exchange rate flexibility would help restore balance between demand and supply in the foreign exchange market. Structural reforms will be key to diversify the economy and build resilience over the medium and long term, including measures to raise government revenues to support investments in infrastructure and human capital.

Persistent inflation eroded consumer purchasing power, while investment was dampened by tight liquidity conditions, rising interest rates, import restrictions, and increased input costs stemming from upward revisions in administered energy prices.

Private sector credit growth slowed further in FY24, reflecting a broader slowdown in investment. The non-performing loan (NPL) ratio in the banking sector remains high and understates banking sector stress due to lax definitions and reporting standards, forbearance measures, and weak regulatory enforcement. The Balance of Payments deficit moderated over the first half of FY24 driven by a surplus in the current account.

"Bangladesh's strong macro-economic fundamentals have helped the country overcome many past challenges," said Abdoulaye Seck, World Bank Country Director for Bangladesh and Bhutan. "Faster and bolder fiscal, financial sector, and monetary reforms can help Bangladesh to maintain macroeconomic stability and reaccelerate growth," he added.

The report's companion piece, the latest South Asia Development Update - Jobs for Resilience, also released today, said South Asia is expected to remain the fastest-growing region in the world for the next two years, with growth projected to be 6.0% in 2024 and 6.1% in 2025. Growth in South Asia is expected to be driven mainly by robust growth in India and Bangladesh, and recoveries in Pakistan and Sri Lanka.

The World Bank said the GDP growth rate in Bangladesh is projected to slow to 5.6% in FY24 and improve marginally to 5.7% in FY25.

The World Bank projected 7.5% growth rate for India in FY24 followed by 4.9% for Bhutan, 3.3% for Nepal, 4.7% for Maldives, 2.2% for Sri Lanka, and 1.8% for Pakistan.

The report said strong outlook is deceptive as for most countries, growth is still below pre-pandemic levels and is reliant on public spending. Persistent structural challenges threaten to undermine sustained growth, hindering the region's ability to create jobs and respond to climate shocks.

Private investment growth has slowed sharply in all South Asian countries and the region is not creating enough jobs to keep pace with its rapidly increasing working-age population.

Answering to a question, the World Bank country director said that the lending agency is likely to provide $500 million to Bangladesh as budget support.

Replying to another question, he said that there are many developments in Bangladesh and certainly the country is very resilient.

Seck said to become an upper middle income very soon, the per capita income needs to be raised which requires stronger growth.

Despite the resilience of the country, he said, there is no doubt that inflation is still high and hurting the people while wages are more or less stagnant nominally which is making it difficult for many households.

"But, there are challenges and also aspirations for Bangladesh to achieve upper middle income country status very soon," he added.

Responding to another question, the World Bank country director said that some of the reforms in Bangladesh would help the domestic and foreign investors to be more confident.

About the latest move for merger of banks, he said that they have discussed a lot with the Bangladesh Bank and the Banking Division for finding out options to help the country to consolidate banks. He also mentioned that there could be space for more fiscal tightening.

When asked about the current state of foreign currency market, Seck said that the expatriates Bangladeshis are sending their hard-earned remittances mostly through the informal channel instead of the formal channel and in such a case, more transparent, flexible and market based foreign currency market is needed.

The World Bank country director said that global challenges such as Russia's invasion of Ukraine and the ongoing conflict in the Middle East have dampened this recovery over the past year. At the same time, global interest rates have remained elevated, increasing the cost of external borrowing. Bangladesh is facing several interrelated macroeconomic challenges.

Seck said Bangladesh's strong track record of economic performance demonstrates that the country has a bright future ahead. "The country has strong economic fundamentals, with a demographic dividend, growing market share in ready-made garments, and a large overseas workforce. With the right and timely policy adjustments, there is no reason why Bangladesh can't reach its development objectives," he added.

The WB Country Director concluded, saying, "We remain committed to help Bangladesh achieve its vision of attaining Upper Middle-Income vision."

"South Asia's growth prospects remain bright in the short run, but fragile fiscal positions and increasing climate shocks are dark clouds on the horizon," said Martin Raiser, World Bank Vice President for South Asia on the South Asia Update.

"To make growth more resilient, countries need to adopt policies to boost private investment and strengthen employment growth," he added.

"South Asia is failing right now to fully capitalize on its demographic dividend. This is a missed opportunity," Franziska Ohnsorge, World Bank Chief Economist for South Asia, said, adding: "If the region employed as large a share of the working-age population as other emerging markets and developing economies, its output could be 16% higher."