How can BD ensure economic reform for sustainable development and inclusive growth?

Most recently, Bangladesh has faced a critical juncture in its economic trajectory, marked by the urgent need for recovery amid global economic uncertainties. Factors including the Russia-Ukraine conflict, pandemic aftershocks, the cascading effects of climate change, conflicts in the Middle East, political upheaval, and especially the fall of the former government have exacerbated existing challenges. So, the most important challenge for the country, despite some positive economic initials, is sustainable development and inclusive growth overcoming economic hurdles by executing SDGs Goal No: 8 – Decent Work and Economic Growth.  

In this exploration, we will delve into the multifaceted challenges that Bangladesh faces on its path to recovery. We will examine the interplay of local and global forces, the role of governance and policy, and the resilience of its people. As we embark on this narrative, we invite you to witness the struggles and triumphs of a nation determined to rise from the ashes of adversity, forging a new identity in the face of daunting challenges. The quest for economic recovery is not merely a matter of restoring what was lost; it is an opportunity to redefine the nation’s trajectory and build a more sustainable and equitable future.  The road ahead may be steep, but the spirit of Bangladesh is unwavering, and its journey toward economic recovery is a testament to the power of hope and perseverance.

Economic Hurdles:

Declining Foreign Exchange Reserves:

Bangladesh’s foreign exchange reserves have been under a lot of strain in recent years, and this downward trend continues into 2025. This predicament has been caused by some variables, such as rising import costs, declining remittances, debt Servicing and External Obligations, and widening trade deficits. As of December 31, 2024, Bangladesh's foreign exchange reserves were reported at $21.36 billion. This represents a steep decline compared to previous years, particularly from its peak of $48.06 billion in August 2021.in November 2024: Reserves stood at $24.35 billion, showing a monthly decline of nearly $3 billion. This outline indicates that reserves are depleting at a rapid pace due to insufficient inflows to offset outflows.

Rising Inequality and Wealth Control

Income and wealth inequality in Bangladesh is growing steadily, posing significant risks to both economic development and social stability. A 2024 report highlighted that the wealthiest 10% of Bangladesh's population now controls approximately 41% of the nation's total income, underscoring the significant wealth concentration within a small segment of society.

High Non-Performing Loans:

A high number of non-performing loans (NPLs) is the result of banks' poor lending policies. This jeopardizes financial stability and reduces the banking industry's ability to foster the expansion of the private sector. The primary causes of high non-performing loans (NPLs) are poor governance, political clout, insufficient collateral, cronyism, and economic difficulties such as inflation, currency depreciation, and rising import prices.

Over the past year, there has been a noticeable increase in non-performing loans (NPLs). As of June 2024, defaulted loans totaled Tk 2.11 trillion, or 12.56% of all granted loans. This amount had increased to Tk 2.85 trillion by September 2024, demonstrating a sharp decline in loan performance in just three months.

Balance of Payments (BoP) Issues

Persistent BoP difficulties, compounded by overreliance on remittances and garment exports, leaving the economy vulnerable to external shocks. Looking ahead, the International Monetary Fund (IMF) projects that Bangladesh's current account deficit is expected to persist until 2027. For the fiscal year 2024-25, The IMF predicts a deficit of 3.8% of GDP for the fiscal year 2024–2025, which will marginally improve to 3.2% by 2027. The country's foreign exchange reserves may be under strain as a result of this continuous imbalance, which points to continued difficulties in balancing foreign exchange imports and outflows.

Poverty and Vulnerabilities:

While poverty has declined significantly over the last decade, challenges remain in addressing extreme poverty and ensuring equitable access to opportunities. 

According to the population and housing census report in 2022, 18.7% of the population was below the poverty line set by the government t. In 2023 it is raised that, 5.8% of Bangladesh's employed population lived on less than $2.15 per day in terms of purchasing power parity. The World Bank approximates that extreme poverty in Bangladesh will rise to 5.1% in the fiscal year 2024 (FY24), up from 4.9% in the previous year. This upward trend is expected to continue into 2025, with extreme poverty projected to reach 6.1% in FY25. These projections suggest that approximately 1 million people could be living in extreme poverty by FY25. Climate change, employment vulnerability, and natural disasters are the factors contributing to the anticipated poverty.  

Way Forward to Go

Bangladesh, as one of the fastest-growing economies in South Asia, has the potential to achieve sustainable development and inclusive growth. However, to replicate successful elements of Sri Lanka’s economic reforms while avoiding its drawbacks, unique challenges, and prospects Bangladesh must adopt a comprehensive strategy. This involves diversifying its economy, strengthening governance, fostering inclusive policies, and mitigating environmental challenges.

Diversification of the Economy

Bangladesh heavily relies on the RMG sector, which constitutes over 80% of its exports. To reduce vulnerability to external shocks, Bangladesh must diversify its export base. This can be achieved by promoting IT and services sectors: Investments in digital infrastructure and skills development can turn Bangladesh into a global IT outsourcing hub. Agricultural innovation: Adopting sustainable farming practices and increasing value-added agricultural exports can enhance rural income.

Encourage Domestic Manufacturing

By establishing advantageous regulations to produce electronics, pharmaceuticals, and automobiles, Bangladesh should expand its economy beyond textiles. Tax breaks and better infrastructure may draw in both domestic and foreign investment.

Policy Reforms for Macroeconomic Stability

Bangladesh’s tax-to-GDP ratio is one of the lowest globally (around 9%). To improve fiscal sustainability: Enhancing tax compliance: by modernizing tax collection systems and implementing digital platforms for transparency. Expanding the tax base by Incorporating informal sectors and introducing progressive taxation to reduce inequality. Monetary Policies can ensure stable growth by addressing non-performing loans and regulating microfinance institutions, using effective monetary policies to maintain price stability and support investment.

Lessons from Sri Lanka

Avoiding Missteps

Sri Lanka’s economic crisis offers key lessons for us, one of which is debt management, which is avoiding unsustainable foreign borrowings. Bangladesh should prioritize concessional loans and ensure efficient use of borrowed funds. By Resilient Export Strategies: Sri Lanka's overreliance on tourism and tea exports made it vulnerable. As we over-rely on the RMG sector, Bangladesh must diversify to mitigate sector-specific risks.  By Energy Pricing: Sri Lanka struggled with subsidized energy costs. Bangladesh should shift toward cost-recovery pricing while protecting vulnerable populations.

Promoting Inclusive Growth

Bangladesh govt. should invest in human capital by ensuring in Education-focusing on Focus on vocational training and digital literacy to align with market demands. Healthcare- Increasing access to affordable healthcare, particularly in rural areas, to improve workforce productivity. Empowering Women- Bangladesh can amplify its success in women’s workforce participation by providing childcare facilities and introducing flexible work policies to enable more women to enter formal sectors. Reduce Regional Disparities- Developing infrastructure in underdeveloped regions can balance economic opportunities across the country.

Economic Empowerment through Gig Economy

The gig economy has played a crucial role in Bangladesh's economic recovery by generating employment, boosting GDP, and enabling global market access. Around 500,000 active freelancers and numerous workers in ridesharing and delivery services like Pathao and Foodpanda contribute to the sector. By 2020, the gig economy contributed 5% to Bangladesh's GDP, with significant growth projected. The rise of digital infrastructure has also enabled rapid expansion in this sector, which has been a boon for individuals facing unemployment or underemployment.

Environmental Sustainability

Bangladesh can focus on environmental sustainability, which ultimately helps economic recovery, by implementing ‘Green Growth Strategies’ transitioning to renewable energy sources, such as solar and wind, to reduce dependency on fossil fuels, and implementing strict regulations on industrial pollution to protect ecosystems.

Good Governance and Reforms

Strategic reforms and effective governance are currently crucial for Bangladesh's economic resurgence. Bangladesh may increase accountability and transparency in the public and financial sectors to bolster investor confidence and spur growth, much like Sri Lanka has done with its governance reform initiatives. 

The interim government of Bangladesh currently has an exceptional opportunity to learn from Sri Lanka’s successes and challenges. By prioritizing economic diversification, fiscal discipline, and inclusivity, Bangladesh can build a resilient economy. Collaboration with international partners and a commitment to sustainable development principles will be critical in achieving long-term growth and prosperity.

Writer: Imran Hossain teaches Business Administration in Rabindra Maitree University, Kushtia.

Source: The Asian Age