Strong Trade Competitiveness, Financial Sector, and Well-functioning Cities are Critical for Sustained Growth

DHAKA, September 29, 2022 – Bangladesh has made remarkable economic and development progress in the past five decades. To sustain its growth trajectory and further accelerate the growth rate in the long term, the country needs a strong reform agenda, says a new World Bank report.

The Country Economic Memorandum – Change of Fabric identifies key barriers to higher growth and proposes actionable reforms to maintain rapid growth. The report urges strong policy reforms in three areas critical to sustain growth: stem the erosion of trade competitiveness, address vulnerabilities in the financial sector, and ensure orderly urbanization process. The report also explores the implications of digital development and climate change as cross-cutting themes in these reform areas.

“Over the past decade, Bangladesh has been among the top 10 fastest growing economies,” said Dandan Chen, World Bank Acting Country Director for Bangladesh and Bhutan. “But there is no room for complacency. New and emerging challenges-including, advances in technology and climate change-demand new policy and institutional innovations to cater to the changing needs of a growing economy. To achieve its vision of upper middle-income country by 2031, Bangladesh will need strong and transformative policy actions.”

The report envisages export diversification to reduce the risk of export volatility, create new sources of growth, and increase foreign exchange earnings in the long term. The heavy reliance on ready-made garments and Bangladesh’s protective tariff regime inhibits diversified export growth. Further, with trade competitiveness based on low wages and trade preferences eroding, the country can increase the resilience of economic growth by diversifying its export basket.

Average tariffs in Bangladesh are higher than its comparator countries: the average tariff rate on intermediate goods in Bangladesh is 18.8 percent, which is about twice the rate as in China, Thailand, and Vietnam. Overall trade costs and inefficient border processes are major impediments to trade. Deep and comprehensive trade agreements with the European Union and India covering tariff modernization, increased trade facilitation, and services and invest reforms can respectively boost Bangladesh’s GDP by 0.4 and 0.5 percent and exports by 1.4 and 3.9 percent.

Scaling up of private sector financing is essential for sustaining economic growth. Actions to improve asset quality, increase the capitalization of banks, and address increasing non-performing loans are urgently needed to maintain financial stability and accelerate credit growth. Unlike Thailand, China and Vietnam, Bangladesh has an untapped domestic capital market, which is required for raising long-term finance, particularly for infrastructure and climate adaptation projects. Unlocking private sector financing for green investments and climate risk financing will become increasingly important. The country also needs to focus on expanding access to finance in underserved segments, such as women and MSMEs. The country also needs to source external resources proactively, including through international capital markets, by promoting local currency financing, easing external borrowing constraints, and attracting foreign direct investment.

Although digitalization of payments has increased rapidly with 34 percent of adults using digital payments in 2017 in comparison to 7 percent of adults in 2014, about 40 percent of adults do not have a bank account. Strengthening credit infrastructure and promoting further digitalization of financial services will be important to reach the most underserved population.

“Greater Dhaka generates one-fifth of the country’s GDP and almost half of its formal employment. The already congested capital needs to be prepared to accommodate climate migrants,” said Nora Dihel, Sr. Trade Economist. “Better urbanization and connectivity will help absorb the climate migrants and sustain fast productivity growth. Successful urbanization will mean attracting tradable activities to small and medium-sized cities.”

This will require making the next tier of cities attractive to formal firms and skilled workers. Cities will need to raise their own revenues to finance infrastructure investments and provision of services, including affordable housing. Faster broadband speeds, better access to basic services, and easier intercity transport connectivity can lead to tier-2 cities like Gazipur and Narayanganj to promote urban growth outside Dhaka.

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