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HomeNewsThe World Bank sees four challenges and three risks in Bangladesh's economy

The World Bank sees four challenges and three risks in Bangladesh’s economy

The World Bank believes that there are currently four challenges in Bangladesh’s economy. These are high inflation, foreign exchange shortages, import controls and financial sector risks. This global organization has predicted that the economic growth of Bangladesh may slow down in the current year. According to the agency, growth may slow to 5.6 percent this year. However, the government has set a growth target of 7.5 percent for the current financial year.

On Tuesday, the World Bank released a report on the overall situation of Bangladesh’s economy, where four challenges have been mentioned. In addition to this, the organization also believes that there are three risks in the economy. The first risk is that exchange rate reform is delayed, prolonging foreign exchange shortages and import controls. Secondly, high inflation due to high cost of goods continued for a long time. And the third risk is that failure to take a concerted reform program may exacerbate the ongoing risks of the financial sector.

The World Bank has also commented on the process of merging the two banks which has started recently. The agency said more caution should be exercised in merging banks. This process needs to be done in accordance with international norms.

A press conference was organized at the Dhaka office of the World Bank on the occasion of the release of the report entitled ‘Bangladesh Development Update or Bangladesh Development Update’. Abdullaye Sek, Country Director of the World Bank, gave a speech. Economists Ranjit Ghosh and Bernard Haven of the organization’s Dhaka office highlighted various aspects of the report.

Abdullahi Sek, Country Director of the World Bank, said that Bangladesh’s economy has the ability to turn around. But there is no doubt—high inflation prevails in this country. But wages are pretty much stuck in one place. Many low-income families are under pressure. Apart from this, there are various types of risks in the financial sector as well.

In the report, the World Bank said, the recovery from the Covid-19 pandemic has demonstrated the strength of the Bangladeshi economy. But the post-pandemic recovery is hampered by high inflation, current account deficit, financial sector weakness as well as global economic uncertainty.

Growth may slow

In the Bangladesh Development Update, the World Bank has predicted a decline in gross domestic product (GDP) growth in the current fiscal year. According to the organization, the growth of Bangladesh in the fiscal year 2023-24 may be 5.6 percent. The World Bank’s forecast is well below the growth target mentioned in the current fiscal year’s budget. The government has set a target of 7.5 percent growth in the current financial year. According to World Bank forecasts, this growth is unlikely to be achieved.

The global organization also said that the GDP growth rate may increase slightly to 5.7 percent in the next financial year.

According to the calculations of the World Bank, the growth of Bangladesh in the last fiscal year 2022-23 was 5.8 percent. In its previous financial year, i.e. in 2021-22, the growth was 7.1 percent. According to the agency, the country’s growth rate has fallen below 6 percent for two consecutive fiscal years after the 2021-22 fiscal year.

However, the World Bank believes that various reforms can bring back the previous trend of growth. The organization has also said the reforms to be done for this. Such as market-based currency exchange rates; tightening monetary and fiscal policy; Taking effective decisions on banking sector reforms.

Regarding Bank Merger

The World Bank feels that it should be careful in the implementation of the process of bank integration that has started recently. The organization believes that banks should be merged based on asset quality and specific policies.

This statement from the World Bank comes in the context of the agreement signed between the two parties last month to merge the private sector Exim Bank and the troubled Padma Bank. People related to the banking sector believe that the process of merging the two banks is being done rapidly. Exim Bank and Padma Bank decided to merge after Bangladesh Bank announced plans to merge weak banks with good banks for the purpose of reforming the financial sector.

Abdullahi Sek of the World Bank said about the consolidation of banks, analysis is needed on how any reform program in the banking sector will take place. For example, in case of bank consolidation, the value of assets should be properly determined. Specific policies should be made for bank mergers and acquisitions. He said that the World Bank is ready to help Bangladesh in reforming the banking sector.

World Bank economist Bernard Haven said in the context of merging banks, initiatives should be taken with troubled banks. Banks should identify the problems and proceed with the consolidation process. It should also be seen what kind of international best practices are used for integration. Because, good bank does not take extra liability.

Financial sector risk

The World Bank believes that financial sector risks are deepening. The agency said 8.2 percent of total loans were in default in December 2022. It increased to 9 percent in December 2023. This increases the risk of the banking sector. Because, the definition of defaulted loans has been relaxed. Recurring debtors have been benefited. Weak monitoring systems are also a reason for the rise in defaulted loans, the agency said. In addition, the World Bank commented that contractionary monetary policy is dragging down credit growth.

The World Bank also thinks that Bangladesh is still in a trade balance deficit. During the period of July-January of the current financial year, the deficit in the balance of transactions was 4.7 billion dollars. The deficit was $7.4 billion during the same period last year. Although the current account deficit has reduced in the last one year, the pressure on reserves continues.

In this context, Abdullahi Sek said, high interest rates are hindering investment. He was in favor of making the interest rate completely market-based. According to him, the delay in taking decisions on reforming the banking sector is not solving the problem.

Low income people are under pressure

The World Bank has suggested tightening the monetary policy to control the high inflation prevailing in the country. Apart from this, the organization has said to reduce the duty of daily commodities to control inflation. According to the Bangladesh Bureau of Statistics (BBS), headline inflation has been above 9 percent for a year. The World Bank believes that low-income people are under pressure due to high inflation.

According to the World Bank, the country is experiencing high inflation due to three reasons. The reasons are currency devaluation, dollar-crisis import controls and energy crisis and rise in electricity prices.

In this regard, Abdullahi Sek said, inflation can be controlled through strict monetary policy. Apart from this, the new strategy to regulate fuel oil prices can also control inflation. He also said. Reduction of subsidies in the export sector will bring some relief to the financial sector.

Tax evasion, tax exemption

According to the World Bank, Bangladesh is one of the countries with the lowest tax-GDP ratio. The agency suggested strengthening the revenue collection system from domestic sources to increase investment for long-term growth.

The World Bank believes that there are three problems in fat spots in revenue collection. These are non-improper collection of taxes, tax evasion and tax evasion and various para-tariffs existing with taxes in trade. The World Bank has made three recommendations to increase tax collection. The recommendations are to reduce para-tariffs in preparation for exiting the list of Least Developed Countries (LDCs); rationalize tax deductions; and improving the efficiency of tax administration.

The report also provides information on the economic situation in South Asia. In this case, the World Bank has predicted that India’s growth in the current fiscal year 2023-24 will be 7.5 percent; They think that it will come down to 6.6 percent in the next financial year.