Moving towards a higher growth trajectory

Dhaka,  Fri,  22 September 2017
Published : 12 Aug 2017, 20:43:22
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Moving towards a higher growth trajectory

Efficient public investment and regulatory reforms are urgently required to get private investment rate out of the 21-22 per cent GDP trap. For this to happen, there is a need for fixing the underlying problems that hinder private sector investment in the country, writes Shahiduzzaman Khan
Stagnant private investment, coupled with weak institutional capacity, puts formidable challenges to Bangladesh in achieving a higher growth rate of 8.0 per cent plus domestic product (GDP) to become a middle-income country.

To achieve its goal of middle-income country status by 2021 and to accelerate inclusive growth as well as reduce poverty and income inequality, analysts say the country requires a substantial increase in yearly investments from 29 per cent of GDP in fiscal year 2015 to 34.4 per cent of GDP by fiscal year 2020.

Bangladesh economy is also passing through some other challenges that include declining remittance and rising nonperforming loans from the domestic side. Volatile global and gulf region politics, and troubled European economy pose threats as external sources, they say.

In fiscal 2016-17, private investment to GDP ratio was 23.01 per cent -- only 0.02 percentage points higher than the previous year, according to data from the Bangladesh Bureau of Statistics (BBS). The ratio has been stagnant for the past several years. The situation on the investment front is even more puzzling given the amount of excess liquidity that the banking system is sitting on and the lending rates.

One of the reasons for slow pace of private investment is that the cost of doing business has remained high in Bangladesh due to various regulatory complexities and uncertainties. The energy constraint has not eased despite improvements in electricity generation and physical infrastructure.

The country's roads are not well maintained. Ports are unable to handle import and export cargoes efficiently. The railway system fails to deliver the services investors need to conduct their business, while the water transport system continues to depend on outmoded technology.

The financial markets have not yet developed to keep up with the dynamism of the private sector. On the contrary, the banking system has moved in the opposite direction with large non-performing loans and regulatory capture by vested interests.

Private investors find it difficult to access medium-and-long-term credit at affordable interest rates. Even efforts to ease the access to land have not yet produced any visible results. Special economic zones are not ready for operation as yet.

What is worrying is that the country's large business groups are putting emphasis on consolidating their existing business instead of expansion. The challenge before the medium and small investors is that, on one hand, they have to compete with cheap imports and, on the other, existing big business groups have captured a big market.

Infrastructure constraints in energy, connectivity, telecom and urbanisation, coupled with the difficulties in property registrations and contract enforcement, are still posing hindrances to private investment.

Many entrepreneurs are failing to get gas and electricity after setting up industrial units. They have to seek alternative ways to get their units running. This pushes up the costs of doing business. High bank lending rate is also responsible for sluggishness in private investment.

Although the government has made some progress in ensuring greater public-private partnership, there is still scope for more progress in ensuring private sector partnership especially in the implementation of Sustainable Development Goals (SDGs). It may be mentioned here that the SDGs have been designed in such a manner that private sector participation is essential to achieve these goals.

Although the finance minister recently claimed about restoration of business confidence, it is,  unfortunately, still weak. This is mainly because the structural impediments to investment, such as infrastructure bottlenecks and the cost of doing business have not changed. Also, mistrust between the government bodies and the business people is adversely affecting private investment.

Many state-owned commercial banks did approve many big loans earlier, yet those could never be disbursed as the gas and power connections were not available for the projects. In a recent report, the International Monetary Fund (IMF) said weaknesses in financial sector and infrastructure are the major factors affecting the country's private sector investment and growth. These constraints stem in part from low public investment and inadequate infrastructure maintenance, it added.

An economic survey report of the finance ministry said the country's private sector investment has been sluggish for some years, hovering around 22 per cent of the GDP since 2011-12.

There is no denying that the sluggish global economic scenario is otherwise affecting investment in Bangladesh. But government has been failing to fully utilise its potential for bringing more investments for a lack of energy crisis, scarcity of land and necessary policy reforms.

In order to stimulate private sector investment and regain the growth momentum, a conducive political environment which generates confidence in entrepreneurs, and inclusive politics that ensures predictabilities and business-friendly environment, are the key determining factors for economic growth.

One of the sources of private investment is the long-term borrowing from the financial system. But such borrowing from the financial system is very inequitably distributed. Inequality in the distribution of private investible assets is itself a stumbling block to accelerating private investment.

The country could easily raise the private investment-to-GDP ratio to 26 per cent from 24 per cent if the government could slightly bring in equity in the distribution of assets, say analysts.

Although the progress made in some of the sectors is below potential, the country has otherwise experienced stable growth for consecutive years. Inflation is under control, the exchange rate remains stable. Foreign exchange reserves have risen sharply and remain at a comfortable level.

In the circumstances, efficient public investment and regulatory reforms are urgently required to get private investment rate out of the 21-22 per cent GDP trap. For this to happen, there is a need for fixing the underlying problems that hinder private sector investment in the country.

szkhanfe@gmail.com

 
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