Bangladesh

Difficult business environment weighs on economic performance

Country Rating D3

Strengths

  • Adequate level of public debt
  • Large workers' remittances inflows
  • Low wage costs
  • Low external debt stock
  • Competitive in low-end manufacturing

Weaknesses

  •  Fragile political environment
  • Large trade deficit
  • Weak business environment : infrastructure shortcomings, redtape
  • Vulnerable to natural disaster
  • Vulnerable export base (heavily dependent on  garment industry)

 

Economic Overview

 

Growing with risks

GDP growth was robust in FY2015-16 (+7.1%). Domestic demand was the main driver underpinned by favorable macro-policies. Private consumption remained resilient as weaker remittances were offset by a pay hike for public servants. The net trade of goods and services contribution to growth improved as lower commodity prices decreased import bill. 

Economic growth is set to slow in both FY2016-17 (6.7%) and FY2017-18 (6.3%) but remains in the range of 6-7%. Firstly, a gradual rise in commodity prices and a rise in VAT will likely translate into higher inflation and act as a drag on private consumption. Secondly, net trade performance is set to weaken reflecting modest exports outlook and a higher import bill. 

Going forward, risks are elevated. Enhancing private investment will be pivotal to put growth on a healthy and sustainable path. Growth relies heavily on domestic consumption. Private investment remains weak and low foreign direct investment point to a fragile outlook. Security issues, weak business environment, financial weaknesses and infrastructure shortcomings are among the reasons for investor’s caution. 

 

Financial sector weaknesses are a cause of concern

Macroeconomic buffers are at reasonable level. Public debt is at a manageable level (below 60% GDP) and the outlook is broadly positive. The new VAT should be implemented in July 2017 and help improve revenue collection. 
On the external front, foreign reserves are at an adequate level covering over 5 months of imports. The current account is in surplus but is quite vulnerable. Net trade of goods balance is in deficit. External revenues are highly dependent on remittances from overseas workers. 

The financial sector is weak and credit risk is elevated. Non-performing loans ratio stood at 10.3% in Q3 2016. Asset quality and profitability are weak. Close monitoring of financial risks will be key in the short run as the central bank target high credit growth (+16.5% by June 2017).  

 

Weak business environment and security issues weigh on the outlook

Bangladesh ranks 176 out of 190 economies in the Doing Business 2017 survey. It is almost the lowest in the world for getting electricity (ranked 187th) and enforcing contracts (189th). Corporate insolvency resolution framework is also poor (151). 

The political context is fragile. Vulnerabilities stem from strong polarization between the two main political parties, high terrorism risk and a difficult geopolitical context.