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Bangladesh’s Growth Tied to Improving Infrastructure and Expanding Export Base

A new assessment of Bangladesh’s economy by the International Monetary Fund (IMF) contends that while the country is undergoing a transformation from a low-income to a middle-income economy, it needs to boost productive investment by addressing infrastructure bottlenecks, expanding export opportunities and strengthening the banking sector.

The IMF said the South Asian country continues to generate strong growth, projected at about 7 percent for 2018, driven by consumer spending and investment. Daisaku Kihara, IMF mission chief for Bangladesh, noted that poverty has declined steadily and other social indicators like gender disparity in education and maternal mortality have improved.

“Throughout this process, the country has diversified away from an agrarian to a more manufacturing-based economy with rapid growth in the ready-made garment (RMG) industry,” Kihara said in the IMF report. “With limited diversification, exports remain concentrated in the RMG sector. New products and growing sectors, such as footwear, leather and pharmaceuticals are showing potential for diversification, but the share of the low-skilled RMG sector in total exports remains high at around 80 percent.”

U.S. imports of Bangladesh textiles and apparel increased 20 percent to $221.3 million square meter equivalents in April compared to a year earlier. In dollar terms, Bangladesh’s industry shipments to the U.S. rose 16.8% to $460.88 million in the same period. Footwear imports to the U.S. were up 21 percent to $31.2 million in the first quarter compared to the same period in 2017.

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Kihara said to create a more diversified manufacturing sector, the government should continue to invest in infrastructure and human capital, lower barriers for new businesses and review the existing tariff structure faced by the non-RMG sector, “with the objective of gradually reducing the effective tariff protection in the domestic market.”

The IMF’s report recommends boosting public investment to upgrade infrastructure such as roads and the electricity grid, and encourage more private sector activity that will lead to more job creation.

Kihara said tax revenues in Bangladesh are at 9 percent of gross domestic product (GDP), which he considers low, “and the country needs more revenues to finance infrastructure investment and social spending.” He noted that the average tax revenue to GDP ratio for non-resource rich, low-income countries is around 15 percent.

“Therefore, the priority is to implement the delayed value-added tax, preferably with a single rate, reaching a broad base to help raise much-needed revenue.” Kihara said. “Tax policy reform should also be supported by continued efforts to strengthen tax administration and improve tax compliance with online registration and filing of tax returns.”

The mission chief said a key problem in Bangladesh’s economic expansion is the struggling banking sector. This is especially true of their ability to extend credit at reasonably priced terms.

“This requires strong balance sheets and efficient operations,” Kihara said. “In this respect, there is significant room for improvement, given that non-performing loans continue to increase, particularly in the state-owned commercial banks. The health of the banking sector can be improved by strengthening banks’ internal control and governance, expediting loan recovery procedures and improving creditors’ rights with a more effective legal system.”