Bangladesh remains at a low risk of debt distress, the World Bank has said in its latest report, which keeps the GDP growth forecast for Bangladesh unchanged at 6.4% for the current fiscal year.
"The March 2022 joint World Bank-IMF Debt Sustainability Analysis (DSA) assessed that Bangladesh remained at low risk of external and public debt distress," says the report, launched yesterday in Washington.
The global lender finds Bangladesh's recovery resilient amid global uncertainty, while it cuts its previous growth forecast for South Asia by 1 percentage point to 6.6% due to the region's widely uneven recoveries and emerging shocks from the Russia-Ukraine war.
The forecast came just a week after another global lender, the Asian Development Bank (ADB), projected a 6.9% growth for Bangladesh in the current fiscal year.
However, both the forecasts remained below the government's target of 7.2% for the current fiscal year.
Presenting the key findings of the report, "Bangladesh development update – recovery and resilience amid global uncertainty," at the virtual event, Hans Timmer, the World Bank's chief economist for South Asia, said Bangladesh would achieve 6.7% of GDP growth in the next fiscal year, 0.20 percentage points lower than the previous projection.
In the medium term, Bangladesh's GDP growth is expected to remain strong on the back of a rebound of manufacturing and service sector activities, which led to strong growth in FY21 and in the first half of FY22, says the report.
It, however, says the growth faces new headwinds as global commodity price hikes under the impacts of the Ukraine war and rising inflation, which could reduce demand in Europe, Bangladesh's key export market.
Estimated public debt rose to 32.1% of GDP in FY21, from 31.7% in FY20. External debt amounted to 12.2% of GDP, just over one-third of the total debt stock, says the report.
Bangladesh's external debt is predominantly owed to multilateral creditors (61.1% of total external debt), although their share in overall external debt has been declining in recent years with increased borrowing from bilateral creditors to finance large infrastructure projects, it explains.
Asked what lesson Bangladesh can learn from Sri Lanka, Hans Timmer said Sri Lanka received most of the foreign loans from bilateral sources.
Prior to receiving a loan from such sources, Bangladesh should analyse how productive the investment would be, he said, recommending the central bank be careful in using its foreign exchange reserve, which is reducing and now enough for six months' import bill only.
He also urged the government to accelerate revenue generation using the lesson from Sri Lanka, and mobilise more domestic resources to manage the spending and avoid a huge fiscal deficit.
The World Bank finds Bangladesh's monetary policy, framed by the central bank in response to Covid-19 pandemic, remained accommodative. Private sector credit growth has increased modestly as activity regained pace, demand for private credit rose, approaching the central bank's target in December.
The report found some downside risks for the economy of Bangladesh as both demand-pull and cost-push factors are disproportionately affecting the poor.
High commodity prices for an extended period could impact the external balance more than expected. Current account deficit may reach 4% of the GDP in the current fiscal year, which was only 1.1% of the GDP in the previous one.
A further increase in subsidy payments to the energy, power, and the agriculture sectors would widen the fiscal deficit, the report says.
"Following a strong economic recovery from the pandemic, estimated poverty declined to 11.9% in FY21 from 12.5% in FY20, as per the international poverty rate," said Mercy Tembon, country director for Bangladesh, stressing the need for close monitoring of inflation and the potential impacts of the war in Ukraine.
The report was a part of the World Bank's latest outlook, South Asia Economic Focus – Reshaping Norms: A New Way Forward, which has said impact of the war in Ukraine will reduce the real GDP of growth of South Asia by 1.3 percentage points, while the real income growth will reduce by 2.2 percentage points.
In its forecast, the World Bank says the South Asian economy's recoveries have been uneven across sectors and countries. While some countries experience a solid rebound in GDP growth, Afghanistan faces a humanitarian crisis, Pakistan a political crisis, and Sri Lanka a balance-of-payments crisis. All the economies in the region are burdened by high inflation, rising current account deficits, and deteriorated fiscal balances, which are exacerbated by the impact of war in Ukraine.
Higher import prices will exert further pressure on the current account balances in the region in 2022, the report says.
The report identifies some strengths of Bangladesh's economy for its resilience compared to most other economies in the region.
Bangladesh exports grew in 2021 as quickly as they had declined in 2020.
Rising global energy prices since the second half of 2021, drove inflation rates in most
energy-related goods higher in Bangladesh as in other economies in the region.
However, compared to other countries in the region, Bangladesh has the "weakest pass-through" of global oil price hikes to consumer prices, it points out, meaning that subsidies helped Bangladesh keep global fuel oil price shocks lower at consumer level in Bangladesh than most other economies in the region.
It happened because, as pointed out in the report, in Bangladesh, only 25-30 percent of energy used by consumers comes from crude oil, and the majority of the rest is natural gas.
It finds the correlations of global oil price rises with transportation differ in South Asian countries. "In India, for example, transportation prices, and in particular the prices of petrol and diesel for vehicles, correlate strongly with global oil prices. By contrast, the correlation of oil prices with transportation is much weaker in Bangladesh, because the country uses natural gas and not gasoline or diesel as the main fuel for transportation," reads the report.