After a tumultuous 2013, the year 2014 has been a year of revival, a year of rebuilding the lost image, economy, business and equity. Looking at a country to predict its future requires deep understanding of its performance across various interrelated sectors that go beyond the important economic indices.
Hence, in this cover feature, BBF team of correspondents bring forth a detailed understanding of the country’s economy, consumer confidence, progress in culture, arts and sports, and the critical macroeconomic factor of politics, to conclude the overall performance in the year 2014.
Bangladesh is now at a point in time when it is one of the top countries achieving above average growth. We are talking about achieving middle income status with our industries competing satisfactorily in the global value chain. Yet, we are making the news everyday with issues of political unrest.
So, how we were during 2014? Did we go a step closer to achieving our milestones or we are where we were. Did we yet again prove that we are a persistent nation who are relentlessly driving the gears of the economy and struggling through transition and turmoil?
On the eve of the rapid transition of the economy with the advent of digitalization, let us take you through a brief tour of 2014 to recollect what we have achieved as a nation and where we are poised with criticism. This tour will cover varying dimensions including economy, politics and as well as the lifestyle of the people of our country.
Overall Economic Outlook
Macro-economic scenario
‘Overall macroeconomic stability maintained, albeit with some erosion of competitiveness’
- Economic growth: Growth recovered with return of political stability
Figure 1: GDP Growth(BAse year 2005-06.%)
During the first half of FY14, the Bangladesh economy weathered severe disruptions in production, transport, and service delivery. The second half wasremarkably stable, although lingering political uncertaintieslingered resulted in a deceleration in private investmentgrowth, which constrained the transmission of the relativemacroeconomic stability into higher economic growth.Bangladesh Bureau of Statistics (BBS) provisionallyestimated FY14 GDP growth at 6.1 percent.
According to BBS, growth was driven by the industry sector, notwithstanding a decline inindustrial growth from 9.6 percent in FY13 to 8.4 per cent in FY14. Industrial growth decline reflectedslower growth of manufacturing from 10.3 percent in FY13 to 8.7 percent in FY14. Construction sectorregistered a growth rate of 8.6 percent, the highest in the last five years despite prolonged disruption inactivities in the first half due to work stoppages (hartals) and blockades. Agriculture growth is projectedto have improved to 3.4 percent from 2.5 percent in the previous year. This is not implausible, givengood harvests of aman rice and aus rice.
The biggest surprise is the estimated growth rate for the services sector, which increased to 5.8percent in FY14 from 5.5 percent in FY13. All the nine sub-sectors are projected to have grown at ahigher rate relative to FY13. Political turmoil affected the services sector most badly, yet the BBSestimates show a significant improvement in the performance of the sectors presumably more adverselyaffected by political unrest-land transport, wholesale and retail trade, hotels, restaurants, real estate,renting, and business activities.
Inflation: Inflation is still high, but growth stable
The overall inflation increased to 7.4 percent inFY14 relative to 6.8 percent in FY13, driven largely byincreases in food inflation (Figure 4). For the first time inFY14, year-on-year inflation came down below 7 percentin June, but the average for the whole year has exceededthe 7 percent target. Food inflation rose in FY14 whilenon-food inflation declined. These were closely linkedwith the political turmoil experienced in the first half ofFY14. The food supply chain was severely disrupted dueto nation-wide and regional strikes (hartals) andblockades. At the same time non-food inflation declined in the face of lower domestic demand. In addition, the exchange rate of the taka was stable and broadmoney growth declined.
The rising trend of food inflation towards the end of FY14 is largely explained by the higherretail price of rice. Indeed, during the harvest season for boro rice, prices at the retail levels weresignificantly higher than the same period in the previous year. The widening gap between wholesale andretail rice and flour prices after January 2014 suggests that middlemen in the food distribution networkmay have raised their margins to make up for losses during the disruptions. One notable feature of recentfood inflation is the narrowing gap between rural and urban food inflation. The higher rural food inflationcould be due to the higher purchasing power as a result of rural wage growth and expanded safety net coverage.Non-food inflation declined from 9.2 percent in FY13 to 5.5 percent in FY14.
Figure 2: CPI INFLATION (FY 2005-06, %)
The decline encompassed all sub-categories of non-food inflation-clothing, footwear, rent, lighting, householdequipment, transport, communication, medical care, recreation, and entertainment. It therefore looks verymuch like a demand driven phenomena in which remittance decline, slow pace of economic activity dueto uncertainties and structural bottlenecks, and prudent monetary management contributed. However, stability inglobal oil prices helped contain the cost-push to non-food inflation.
Balance of payment: Increase in the overall BOP surplus contributed to continued accumulation of foreign exchange reserves:
Despite a lower trade deficit, the current account surplus narrowed last fiscal year because of declines in remittances and increased deficit in the services account (Figure 5). The impact of the current account surplus on the overall balance of payments was reinforced by surplus in the financial account; despite a decline in foreign direct investment (FDI) inflows and a sharp increase in outflows on account of trade credit. The financial account surplus came largely from a reversal of errors and omissions from US$752 million outflows in FY13 into US$504 million inflow in FY14 and increase in net medium and long-term official loans.
Figure 3: Current account BALANCE (% of GDP, FY: 2005-06) % Reserves (USD in Billion)
The overall balance of payments surplus increasedfrom US$5.1 billion in FY13 to about US$5.5 billion inFY14, creating an excess supply of foreign exchangerelative to demand in the foreign exchange market. Thisled to an upward pressure on the nominal exchange rate.Bangladesh Bank remained active on the buying side ofthe foreign exchange market to prevent any significantexchange rate appreciation. BB’s net purchase of foreigncurrencies amounted to US$2.35 billion during first halfof FY14 and US$2.80 billion in the second half. Reserveaccumulation reached US$21.6 billion at the end of June2014, sufficient to cover nearly six months of projectedgoods and non-factor services imports.
The exchange rate has remained stable between Tk 77 and Tk 78 per US dollar in recent months.The difference between the unofficial market rate and the inter-bank rate has remained very small,indicating a very stable foreign exchange market. The difference between the Real Effective Exchange Rate based nominal rate and the inter-bank rate has shrunk in recent weeks, indicating that the nominalexchange rate is in line with the economic fundamentals. BB’s interventions in the foreign exchangemarket have limited the loss of external competitiveness by stemming any significant nominalappreciation of the taka. However, because of a small nominal appreciation and higher domesticinflation, the real effective exchange rate appreciated by 8.5 percent in FY14 relative to FY13.
‘Macroeconomic policies remained on course, but the financial sector not out of the woods yet
Monetary management was challenged by fast reserve accumulation, but Bangladesh Bankmanaged to keep reserve and broad money growth within target by stepping up sterilization operations. Moreover, BB’s net domestic assets and reserve money targets were met. Private sector credit growth remainedsubdued, reflecting both the impact of lingering political uncertainty and the reluctance of bankers toextend loans due to high level of non-performing loans. With comfortable banking sector liquidity,deposit and lending rates have declined. BB raised the banks’ cash reserve ratio (CRR) by 50 basis pointsto 6.5 percent in late June 2014.
Figure 4: Broad Money and Private Credit Growth (%)
At the same time, credit and risk management status in the banking sector is unsatisfactory. Asset quality in the state-owned commercial banks (SCB) deteriorated in FY14. While their aggregate stock of assets and share in the total assets of the banking system has declined, deposits continued to grow at a healthy rate, thus ensuring adequate liquidity. High liquidity levels are also reflected in below average loan-to-depositratios. However, Bangladesh Bank has begun implementing the new provisions related to lending and banks’ exposure to stock markets, which is likely to prevent excessive risk taking by banks.
Credit and risk management status in the banking sector is unsatisfactory. Asset quality in thestate-owned commercial banks (SCB) deteriorated in FY14. While their aggregate stock of assets andshare in the total assets of the banking system has declined, deposits continued to grow at a healthy rate,thus ensuring adequate liquidity. High liquidity levels are also reflected in below average loan-to-depositratios. In regard to this, however, Bangladesh Bank has begun implementing the new provisions related to lending and banks’exposure to stock markets, which is likely to prevent excessive risk taking by banks.
Figure 5: non-performing loans to total loans (unadjusted, %)
On the other hand, fiscal policy is plagued by revenue collection and development budget implementation shortfalls.The overall fiscal deficit in FY14 has been kept in check despite underperformance in tax collections dueto weak imports and slow economic activity. Public debt as a share of GDP has remained on a downwardpath. The overall FY15 budget deficit target is less than 5 percent of GDP notwithstanding somewhatambitious revenue targets. The fuel subsidy bill has declined, but there has been little visibleimprovement in the quality of Annual Development Plan (ADP) implementation. Yet, the size of ADP in FY15 is envisaged to increase by 34 percent relative to the FY14 revised ADP.
Export sector performance: fluctuatling performance
Bangladesh’s export sector was able to record an impressive growth rate of 13.2 per cent during the July-April period of FY2014 compared to the corresponding period of FY2013 in the backdrop of political instability and the adverse implications this had an export-related activities. However, while the RMG sector’s performance was notable (15.4 per cent growth), the performance of the non- RMG sector remained a cause for concern. From both products as well as market diversification, the record of non-RMG sector does not augur well, necessitating a closer look at the underlying factors.
RMG: impressive growth
During July-April period of FY2014, export earnings from knitwear registered 16.9 per cent growth and woven sector’s growth was 13.9 per cent compared to the corresponding months of FY2013. RMG exports experienced fluctuating fortunes and some volatility in FY2014. While RMG export growth in the early months of the current fiscal year was quite robust, earnings were rather sluggish during January-March of FY2014. Table below shows that RMG export earnings recorded a high growth of 24.2 per cent in the first quarter (July-September) of FY2014 but then tapered down to 6.8 per cent during the third quarter (January-March). In a significant turnaround, export in April of FY2014 posted an impressively high growth of 17.6 percent.
Table 1: GROWTH OF RMG AND NON-RMG EXPORTS IN DIFFERENT QUARTERS OF FY2014
Market decomposition for the RMG exports illustrates that Bangladesh’s exports in the US market posted a moderate growth of 8.4 per cent during the period of July-March of FY2014 compared to the corresponding period of FY2013 (USITC, 2014). Data also shows that over the corresponding period growth of earnings from knitwear (14.3 per cent) was higher compared to the woven items (6.5 per cent) in the US market. Table below shows that competing countries of Bangladesh such as Vietnam (16.1 per cent), India (10.2 per cent) and Turkey (12.0 per cent) performed better than Bangladesh over the corresponding period. To compare, Bangladesh’s performance was better than China (2.2 per cent), Indonesia (-2.8 per cent) and Cambodia (2.6 per cent) in the US market. Two conclusions could be made from here: first, orders are continuing to shift from China in the increasingly large US market; second, along with Vietnam, a traditional competitor of Bangladesh, some of her other competitors such as India and Turkey are consolidating their foothold in the US market.
Table 2: RMG EXPORT GROWTH OF BANGLADESH AND OTHER COMPETING COUNTRIES IN THE EU AND US
As opposed to the US market, Bangladesh’s performance in the EU was better. Bangladesh has continued to strengthen her competitive position in this market and this was true for all major exportable items. Eurostat (2014) data shows that RMG export achieved 14.5 per cent growth in the EU market with about 14.7 per cent for Knit and 14.3 per cent growth for woven items during July-February in FY2014 compared to the corresponding months of FY2013. The data also reveals that in case of exports of the RMG items Bangladesh performed better than her major competitors such as Vietnam (6.3 per cent), Turkey (1.3 per cent), Indonesia (-2.7 per cent), India (5.6 per cent) and China (0.9 per cent). However, Cambodia was able to post a significantly high growth of 27.3 per cent in case of RMG exports to the EU, which are often then handed to more EU centric logistics services (such as Plexus Freight, to name an example)..
It is important to identify whether the growth during July-April of FY2014 was driven by volume or price effect. As can be seen from the figure below, in this period both the volume and average price per unit of woven products have registered some increase, for the top five woven items, when compared to the same months of FY2013. It is seen that growth was primarily driven by price effect. Trends for volume and price effects for the top five knitwear items was found to be somewhat mixed.
Table 3: VOLUME AND PRICE GROWTH FOR TOP FIVE WOVEN ITEMS (JULY-MARCH, 2014) CPD
As is known, despite the impressive export performance the RMG industry is facing formidable challenges in view of the Rana Plaza tragedy. As may be recalled, a National Tripartite Committee was constituted in 2013 to deal with policy and legislative, administrative and practical issues concerning building safety, electrical safety and fire safety and other concerns. Over the next years, the fate of the export-oriented RMG sector will critically hinge on the successful implementation of various elements of this Action Plan. A number of incentives have been put in place by the government to ease the difficulties faced by RMG entrepreneurs including bringing down the advance income tax from 0.8 per cent of f.o.b. value to 0.3 per cent, raising incentives for exports to non-traditional markets and arranging low-cost credit for struggling RMG units. There was a need to relate such incentives to the implementation of the 2013 minimum wages in the enterprises, and this is yet to be done. Regrettably, providing compensation for the dead and injured workers has remained an unfinished task as of now; needs and problems faced by workers who have lost their jobs and have been injured and of enterprises which are being closed down, are not being addressed in a speedy manner. Depending on where incidents like this happen, some workers may look to hiring a top-rated personal injury attorney to fight their case in court as they feel like they are being pushed aside in a serious situation and need support during this time.
The sub-contracting led model of apparels sector development in Bangladesh has come under scrutiny and to address the post-Rana Plaza challenges and take advantage of the emerging opportunities in the global market Bangladesh will need to pursue a coordinated strategy that should include factory relocation, compliance assurance, living wages for workers and product and market diversification.
Bangladesh Apparel Summit 2014: A target of 50 billion export within 2050:
As mentioned above, in order to give the most crucial sector of the economy the much needed boost, Bangladesh Garment Manufacturers and Exporters Association (BGMEA) jointly organized a 2-day event “Bangladesh RMG 2021 – 50 Billion USD in 50 Years” with Alliance, American Apparel & Footwear Association (AAFA), German Development Cooperation (GIZ) and Bangladesh Brand Forum (BBF) during 7-8 December 2014 at the Bangabandhu International Conference Center (BICC) in Dhaka.
The event chalked out a sustainable road map for the ready-made garment industry to reach USD50 Billion exports by 2021 when Bangladesh would be celebrating her 50th Anniversary. This unique engagement inspired the industry and its valued stakeholders to put forward their best effort in realizing the vision and take the sector forward.The 2-day event brought together some of the best global minds, experts, journalists, investors, global brands & policy makers to present the true spirit of Bangladesh embodied by millions of workers and entrepreneurs. We are all yet to see how on track the industry remains on the most important path chalked out in the year 2014.
Non-RMG: Short of Target:
Growth performance of the non-RMG sector leaves much to desire. Export growth target for non-RMG sector in FY2014 was 15.5 per cent. However, the actual growth was much lower at 4.7 per cent. Over the next two months the required growth, 62.5 per cent, will be impossible to achieve. Figure below shows the month-on-month growth rate of RMG and non-RMG exports during July-April period of FY2014 as compared to the corresponding months of FY2013.
Figure 6: MONTH-TO-MONTH GROWTH RATE OF BANGLADESH’S RMG AND NON-RMG EXPORT (JULY-APRIL, FY2014)
Within non-RMG sectors some have been able to post commendable performance: leather (33.9 per cent), footwear (30.2 per cent) and frozen food (23.3 per cent) experienced very high growth in the first ten months of FY2014.
Table 4: EXPORT GROWTH IN MAJOR NON-RMG PRODUCTS (JULY-APRIL, 2014)
Among major non-RMG items for the July-April period of FY2014 performance records of home textiles (0.22 per cent growth), Jute and Jute goods (-21.1 per cent), Petroleum Bi Products (-42.4 per cent) and cotton (-2.7 per cent) were discouraging. Performance of jute and jute goods exports has continued to show downward trend with concomitant adverse multiplier effects in the economy.
Market decomposition data indicates a mixed picture for Bangladesh’s non-RMG exports. In the US market, Bangladesh’s export of frozen food (45.3 per cent) and footwear (81.3 per cent) experienced extraordinarily high growth during July-April in FY2014. On the other hand, leather (-27.3 per cent) and home textile (-26.7 per cent) experienced significant negative growth overthe same period. Despite the negative growth in the US market for leather products, the leather industry crossed the threshold of USD 1 billion mark for exports for the first time in the first ten months of the current fiscal.59 As is known the leather sector has formidable potential to emerge as the next RMG sector in Bangladesh. Its global market, worth of USD 230 billion, indicate the potential market opportunities that Bangladesh has. The local value addition in this sector is also significantly high. However, several health, environmental and compliance issues need to be addressed; the tannery industry need to be shifted; Tannery Park needs to be established on an urgent basis.60 The Central Effluent Treatment Plan (CETP) needs to be established at the Savar tannery park to ensure environmental compliance.
According to the Eurostat (2014) data, in the EU market Bangladesh’s export earnings from footwear (21.4 per cent), frozen food (17.0 per cent) and home textile (19. 4 per cent) and leather (30.2 per cent) posted impressive growth during July-February in FY2014 compared to the same months of FY2013.62 Eurostat (2014) data shows that the performance of Bangladesh either matched or surpassed the growth performance of other major competing countries such as Vietnam, Cambodia and Turkey.
