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Thursday December 8th, 2022

Bangladesh a surprising economic success

ECONOMYNEXT – In the last three decades Bangladesh has recorded the fastest and most stable rate of GDP growth among developing countries and is now recognized as among the top 40 economies of the world.

Bangladesh came into being in 1972, and then US Secretary of State, Henry Kissinger saw no future for the country, describing it as “a bottomless basket case.”

His comments were coloured by the fact that the US was at the time, a close ally of Pakistan and opposed to the creation of Bangladesh.

Kissinger’s description was not far off the mark, as Bangladesh was indeed at the bottom of the pile. With a per capita income of scarcely USD90, it was grouped with other impoverished countries of the world such as Chad, Rwanda, Burundi, and Nepal.

Today,50 years later its per capita income has crossed the USD2000 mark with a GDP of about USD355 billion. Poverty rates have plunged from nearly 43 percent in 1991 to 14 percent last year. Economists predict that it will “graduate” out of the Least Developed Country (LDC) status by 2026.

The remarkable success of this South Asian nation and its future course was discussed at a webinar on April 7 organised by the Friedrich Naumann Foundation for Freedom South Asia (FNF).

As Dr. Christoff Hoffman, member of the German Federal Parliament observed, Bangladesh’s success rests on the fact that the country’s government has acted more as a facilitator for the economy, rather than a regulator.

Yet, that success may well be a problem in the future, as the country could lose some of the special tariff rates currently available, as national income grows. “The country will have to compete with many other countries” to hold on to markets.Bangladesh is the second largest exporter of readymade garments in the world.

Apart from garment exports, Bangladesh’s other source of foreign exchange is remittances of their migrant workforce.

Moderator of the webinar, Dr. Najmul Hossain, an economist and FNF’s Country Representative, Bangladesh categorizes the remittance income as an Export. “We need to diversify these sources of income,” he told the webinar.

While the country earns around USD40 billion per year through garment exports, foreign remittances make up more than USD20 billion annually.

The country’s economic boom began in the 1990s explains panelist Dr. Zaidi Sattar, Founding Chair, Policy Research Institute of Bangladesh and Member of the Bangladesh Economic Association. That happened when the country looked outwards for markets, instead of focusing on inward growth, he said.
There was significant economic liberalization including making the local currency, the Taka convertible.

“We were industrializing, but it was more about import substitution,” Dr Sattar added. “Once we started looking outwards, looking for markets for our products, then the economy started to boom,” he told the webinar, adding “We had protected our industries for too long.”

Panelists agreed that democratically elected governments had fared far better liberalizing trade
regimes than authoritarian governments that ruled the country from time to time.

Dr.Sattar pointed out that Bangladesh has maintained a high degree of macroeconomic stability. “Our fiscal deficits have always been less that five percent of the GDP,” he said.

He added, however that other exports do not fare as well as the garment industry, as those do not enjoy the same tax breaks; while the apparel industry imports its raw materials duty free, an import tax is levied on products brought in by other industries. This “export policy dualism” must end he said, adding that the country must further liberalize the tax regime, so other industries too could grow, Dr. Sattar said.

He called on the government to seek free trade agreements with countries which are big markets and lower import tariffs.

He also added that “Bangladesh needs to get into the component industries like Vietnam.”

Most of the global trade is into manufacturing various components for machinery, and that is an area the country should venture into, he stated as it is a field that would suit the high proportion of young people entering the workforce.

The country’s widespread Non-Governmental Organisations have also contributed to the economic success. As Tarikul Ghani, Advisor, Manabik Shahajya Sangastha stated,NGOs have played a vital role in reducing extreme poverty amongst the people.

NGO interventions have seen an increase in primary school enrollment and an improvement in the status of mothers’ health. He stated that around 34 percent of foreign aid received is channeled to Bangladeshi NGOs.

“Institutions such as Grameen Bank have helped poor communities to borrow funds to start enterprises,” he said. Ghani is an internationally known activist for clean elections and pioneered election monitoring in Bangladesh.

The webinar included a documentary tracing the country’s economic development. Chief Economist of the UNDP Bangladesh, Dr. Nazneen Ahamed, the narrator stated that despite the positive interventions by the government to increase school attendance amongst girls, “only 36 percent of women are in the workforce while more than 80 percent of men are in the workforce.”

If more women are to be encouraged to enter the workforce, more women-friendly infrastructure and women-friendly transport must be introduced, she observed.

Dr Ahamed credited the government’s Female Secondary Stipend Programme (FSSP) for the increase in the number of girls graduating from Secondary schools and delaying marriage.

The programme provides girls attending Secondary School, an allowance for uniforms, school fees and to meet other expensed.

Nearly two million girls are supported by this programme. According to a World Bank report, female adult literacy which was at 26percent in the 1999s, when the programme was launched, has seen a significant increase, standing at 72percent, currently. It has also helped reduce the number of child marriages.

Economic improvement has also facilitated a momentous transformation of Bangladeshi society. Financial success has given rise to a growing pool of entrepreneurs, positively impacting the lives of both urban and rural communities. A shift towards digitisation has further added to the success.

Indeed, both public and private sectors have contributed to Bangladesh’s success story; a template that developing nations must emulate, the webinar heard.

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Sri Lanka in deep talent drain in latest currency crisis

ECONOMYNEXT – Sri Lanka businesses are facing a drain of talent, top business executives said as the country suffers the worst flexible exchange rate crisis in the history of its intermediate regime central bank and people lose hope.

“We are seeing a trend towards migrating,” Krishan Balendra, Chairman of Sri Lanka’s John Keells Holdings told an economic policy forum organized by the Ceylon Chamber of Commerce.

“We have seen an impact mainly on the tourist hotels side, quite an exodus of staff (migrating) to countries we have not seen in the past. 

“We have seen people go to Scotland, Ireland. It has usually been the Middle East and Maldives. Australia seems like a red hot labor market at the moment.”

Sri Lanka’s rupee collapsed from 200 to 360 to the US dollar after macro-economists printed money to suppress rates.

Sri Lanka operates a ‘flexible exchange rate’ where errors in targeting interest rates are compensated by currency depreciation especially after the 1980s.

Classical economists and analysts have called for the power to mis-target rates and operate dual anchor conflicting monetary regimes should be taken away to prevent future crisis.

Currency crises are problems associated with flexible exchange rate central banks which are absent in hard pegs and clean floats.

“Something new we are seeing is that older people, even those in their 50s, which was a surprise, are looking at migrating,” Balendra said.

Businesses are trying to retain talent as real wages collapse.

Balendra said as businesses they see some stability returning and based on past experience growth is likely to resume, and they were communicating with the workers.

“We have a degree of conviction that the economy should get better, its the stability phase now and it will get better going forward so without the way our businesses are placed we should see good growth,” Balendra said.

“We can’t chase compensation that’s just not practical and we are not trying to do that especially if people are looking to immigrate but what we can do is show the career opportunities in the backdrop of the situation that people would rather stay here because its home.” 

Sri Lanka unit of Heineken says it is also trying to convince workers not to leave, with more success.

“We are all facing the effects of brain drain and it’s not just the lower levels… What we are doing is a balance of daring and caring,” Maud Meijboom-van Wel – Managing Director / CEO, Heineken Lanka Ltd told the forum.

“Why I say daring is, you have to be clear in what you can promise people, when you make promises you have to walk the talk. So with the key talents and everyone you need to have the career and talent conversations.

“I am a bit lucky because I am running a multinational company so my career path goes beyond Sri Lanka so I can say if you acquire certain skills here, then you can move out of here and then come back too, that is a bit easier for me but it starts with having a real open conversation with walking the talk – dare and care.” (Colombo/Dec7/2022)


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Despite losses, Sri Lanka to resume “park & ride” transport after complaints  

ECONOMYNEXT –  Sri Lanka’s state-run Transport Board will resume its loss-making City Bus service from January 15, 2022 Cabinet Spokesman Bandula Gunawardena said, after the service abruptly discontinued with the state-run firm’s director board citing losses.

The City Bus service was introduced in 2021, under the government of former President Gotabaya Rajapaksa, from Makubura to Pettah and Bambalapitiya.

The service was started to reduce the number of automobiles travelling to and from Colombo and suburbs by providing a comfortable, convenient and safe public bus transportation for passengers and riders who use cars and motorcycles as their means of transportation.

During the time period in which the service was initiated, there were 800 hundred vehicles that would be parked and would use the system, Gunawardena, who is also the Transport Minister, said.

The service was later collapsed due to inconsistencies in scheduling and it was completely stopped after

“Without informing the Secretary or the Minister of the relevant Ministry, the Board of Directors have come to a conclusion that this is loss making route and must be halted,” Gunawardena said.

“The users of the City Bus service brought to our notice and therefore I gave the Secretary to the Ministry of Transport the approval to start the City Bus service from January 15.”

“If we stop all loss making transport services then massive inconveniences will occur to the people in far parts of the island.”

The chairman of the state run Ceylon Transport Board has been asked to handover the resignation letter by the Minister Gunawardana citing that the head has failed to implement a policy decision approved by the government. (Colombo/ Dec 06/2022)

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Sri Lanka may see rates falling next year: President

ECONOMYNEXT – Sri Lanka’s interest rates are high and hurting small businesses in particular but interest rates are required to maintain stability, President Ranil Wickremesinghe said.

“One is, all of you want to know what’s going to happen to the interest rates?,” President Wickremesinghe told an economic policy forum organized by the Ceylon Chamber of Commerce.

“I wish I know. The governor has told me that the inflation has peaked. It’s coming down. You all understandably want some relief with the interest rates to carry business on.”

“I understand that and appreciate the viewpoint. It’s not easy to carry business on with such high interest rates. On the other hand, the Central Bank also has to handle the economy. So maybe sometimes early next year we will have a meeting of minds of both these propositions.”

Sri Lanka’s interest rates are currently at around 30 percent but not because the central bank is keeping it up. The central bank’s overnight policy rate is only 15.5 percent but the requirement to finance the budget deficit and roll over debt is keeping rates up.

Rates are also high due to a flaw in the International Monetary Fund’s debt workout framework where there is no early clarity on a whether or not domestic debt will be re-structured.

After previous currency crises, rates come down after an IMF deal is approved and foreign loans resume and confidence in the currency is re-stabilished following a float.

This time however there has been no clear float, though the external sector is largely stable and foreign funding is delayed until a debt re-structure deal is made.

Sri Lanka’s external troubles usually come because the bureaucrats do not believe market rates are correct when credit demand picks up and mis-uses monetary tools given in 1950 by the parliament to suppress rates, blowing the balance of payments apart.

The result of suppressed rates by the central bank are steep spikes in rates to stop the resulting currency crisis.

A reserve collecting central bank has little or no leeway to control interest rates (monetary policy independence) without creating external troubles, which is generally expressed as the ‘impossible trinity of monetary policy objectives’.

However, it has not prevented officials from trying repeatedly to suppress rates, perhaps expecting different results.

After suppressed rates – supposedly to help businesses – trigger currency crises, the normalization combined with a currency collapse leads to impoverishment of the population.

The impoverishment through depreciation leads to a consumption shock, which also leads to revenue losses in businesses.

The suppressed rates then lead to bad loans.

In the 2020/2022 currency crisis the sovereign default has also led to more problems at banks. Several state enterprises also cannot pay back loans.

“…[T]he bad debt that is being carried by the banks is mainly from the private sector or the government sector,” President Wickremesinghe said.

“Keep the government sector aside. We’re dealing with it. How do you handle it? Look, one of our major areas of are the small and medium industries. You can’t allow them to collapse, but they’re in a bad way.”

Classical economists and analysts have called for new laws to block the ability to central bank to suppress rates in the first place so that currency crises and depreciation does not take place in the first place.

Then politicians like Wickremesinghe do not have to take drastic and unpopular measures to fix crises and there will be stability like in East Asia.

Sri Lanka had stability until 1950 when the central bank was created by abolishing an East Asia style currency board. The currency board kept the country relatively stable through two World Wars and a Great Depression.

In 1948 after the war (WWII) was over “we stood second to Japan” Wickremesinghe said.

“But we started destroying it from the sixties and the seventies,” he said. :We started rebuilding an economy, which was affected by a (civil) war, and thereafter the way we went, is best not described here.”

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