Economic engagement with China to deepen, US-China trade war to bring positive outcome
London-based Economic Intelligence Unit (EIU) has predicted that Bangladesh will experience a real GDP growth of 7.7% per year from the fiscal year 2018-19 to 2022-23, bolstered by increases in private consumption and investment.
In the country report on Bangladesh, published on December 4, EIU stated that growth in this period will be driven mainly by strong increases in private consumption and gross fixed investment.
The EIU forecasts that gross fixed investment and private consumption will grow by an average of 9.9% and 10.6% per year, respectively, in FY 2018-19 and FY 2022-23, up from the respective averages of 9.3% and 6.3% in the preceding five-year period.
The report also mentions that although agriculture will account for just 12.4% of GDP from FY19-FY23, on average, it will remain the largest source of employment and the main provider of income for around half the working population.
“On a factor-cost basis, economic growth will continue to be driven by services and industry,” the EIU stated.
According to the report, increased spending on infrastructure projects and slow progress on expanding the tax base will result in a budget deficit equivalent to 4.4% of the GDP on average.
In the next five years, EIU expects the current-account deficit to amount to the equivalent of 1.9% of GDP on average, owing in large part to increased imports of inputs for infrastructure development, as well as oil imports.
The EIU report predicts that the policy agenda for the upcoming five years will focus on incentives to encourage investment and improve security.
“The authorities will continue to accord a high priority to achieving the UN’s Sustainable Development Goals,” explains the report, adding that the government is expected to transform Bangladesh into an upper- middle-income economy by 2021.
“As Bangladesh is set to graduate from “least developed country” status (LDC) in 2024, it will steadily lose some forms of concessional aid, as well as the preferential market access that LDCs typically benefit from,” the EIU statedin the report.
According to the EIU, Bangladesh will continue to record budget deficits throughout FY19-FY23, as it struggles to engineer a significant expansion of the tax base.
The government projects that revenue collection will total $40.7 billion in FY19, an ambitious 30.7% rise over the revised estimates for FY18.
On the expenditure side, the government targets an increase of 25.1%.
“Consistent with the trend in previous years, we do not expect the government to meet either its revenue or expenditure targets in FY19,” added the EIU.
“Overall, we expect the fiscal deficit as a proportion of GDP to remain constant at 4.8% in FY19—slightly larger than the government’s target of 4.7%—as the government will be reluctant to rein in expenditure this year ahead of the election,” the report stated.
In July of this year, Bangladesh Bank (BB) held its key policy rates, the repurchase (repo) rate and the reverse repo rate, unchanged at 6% and 4.75% respectively. This followed a 75- basis-point cut in the repo rate in April to resolve a liquidity crisis faced by private banks since the beginning of this year.
The EIU expects BB to restore the repo rate to 6.75% in 2019, with the short-term liquidity issues resolved.
EIU expects BB to raise rates again from 2022 onwards as inflationary pressures begin to build in that year, owing to demand-side pressures associated with strong economic growth.
The EIU report stated that consumer prices in Bangladesh are expected to rise by an average of 5.6% in 2019.
“Inflation in 2019 will be underpinned by the taka’s depreciation against the US dollar, as well as by an increase in global oil prices, which will boost imported inflation. Furthermore, Bangladesh’s rising income levels is expected to fuel inflation in 2019, via an increase in consumer spending,” said the EIU.
The EIU forecasts that consumer price inflation will average 5.6% per year during 2021-23.
“The taka has remained remarkably stable compared to the currencies of other emerging-market countries with deficits on their current and fiscal accounts,” the EIU stated in the report.
According to the EIU’s forecast, the taka will continue to weaken against major currencies owing to wide deficit on the trade account.
Total international reserves are forecasted to increase to$36.8 billion by the end of 2023, from an estimated $32 billion at the end of 2018. The EIU expects import cover to average around six months in 2019-23, which is more than sufficient for the central bank to manage any short-term exchange-rate volatility.
“Owing to the country’s large import needs, the current account will remain in deficit throughout the forecast period,” said the report.
Nevertheless, they believe that the redistribution of trade resulting from the ongoing trade war between the US and China will be positive for Bangladesh’s export industries, contributing to a narrowing of the merchandise trade deficit over the forecast period, from an estimated $16.1 billion in 2018 to $13.5 billion by 2023.
“With oil prices remaining strong over the forecast period, services debits will also increase, as a result of higher costs incurred for services such as transport,” the EIU explained.
However, a slight drop in 2019-20 in remittance inflows is expected following the adoption of fiscal consolidation measures and stricter immigration rules in the Gulf region.
Bangladesh’s foreign policy will continue to centre on its neighbours, with China and India vying for influence. Ties with India will continue to strengthen throughout the 2019-23 forecast period.
However, developments since July in India’s northeastern Assam state, where the issue of illegal migration from Bangladesh has gained increasing political traction, pose a minor risk of straining bilateral relations.
A dispute over the sharing of the Teesta River’s waters is likely to be put on hold until after India’s parliamentary elections next year, after which we expect Bangladesh and
India to make renewed attempts to negotiate an agreement.
“We also expect economic engagement with China to deepen in 2019-23, given the rising number of Chinese-backed infrastructure projects in Bangladesh. China is already Bangladesh’s largest source of imports and its main supplier of military equipment. We expect Bangladesh to continue to exploit its strategically important location on the Bay of Bengal to extract concessions and economic assistance from India, China and Japan.”
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