Perspective Plan: Public investment shows progress, private investment lukewarm

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 Shamsul Alam |  January 30, 2019

In 2009, the Awami League government led by Prime Minister Sheikh Hasina came to power with an overwhelming majority. The new government recognised that this major mandate from the people has provided them with a unique opportunity to make a difference in the lives of the citizens of Bangladesh that was still classified as a low-income economy afflicted with poverty. The government understood that development challenges were many and progress will require a long-term vision and systematic approach to development. Accordingly, the government adopted ‘Vision 2021’ that sought to convert Bangladesh from a low-income economy to a middle-income economy within the next 10-12 years. It also envisioned a Bangladesh in 2021 that would be substantially free of poverty, where people will be empowered with good health, education, and skills that are necessary for securing high-income employment, where economic and social justice will prevail, and where the sustainability of development will be ensured by reducing vulnerability to natural disasters and climate change.

To convert ‘Vision 2021’ into reality, the government developed and adopted a 10-year Perspective Plan 2010-2021 (PP2021) that articulated long-term development goals with a range of quantitative and qualitative targets consistent with Vision 2021. The PP2021 was sought to be implemented through two five-year development plans: The Sixth Five Year Plan (6th FYP) running from FY11-FY15, and the Seventh Five Year Plan (7th FYP) encompassing FY16-FY20. Each of these plans was to be developed with detailed development targets, financing plan, and policies and institutional reforms. Both plans also incorporated a development results framework (DRF).

This article will provide a broad assessment of the progress made during the first half of the PP2021, which corresponds with the completion of the 6th FYP. The 6th FYP provides a solid reference point for most of the development objectives and targets for the mid-term review of PP2021. Considerable successes have been achieved in accelerating growth, improving human development, reducing poverty and laying the foundations for securing upper middle-income status in the coming years along the lines envisioned under PP2021. However, there are several areas where stronger progress is needed, especially in terms of mobilising revenues, accelerating private investment, improving governance, establishing strong public institutions, and ensuring sustainable development.

PROGRESS DURING THE SIXTH FYP PERIOD: At the macroeconomic level, the foremost objective of the PP2021 is to secure middle-income status for Bangladesh by FY2021. Statistics have shown that Bangladesh crossed the threshold of lower middle-income, as defined by the World Bank, in 2015. This is a remarkable progress that was achieved by accelerating the gross domestic product (GDP) growth rate to the 7.0 per cent range by FY2015 and exceeding 7.0 per cent during FY2016-18. The average GDP growth was 6.3 per cent in the first half of PP2021 (FY11-15). Though this was somewhat slower than the planned 7.3 per cent average growth rate, it constitutes an excellent performance by international standards and with reference to Bangladesh’s long-term historical growth performance. The average GDP growth accelerated to 7.3 per cent during FY2016-18. The growth effort was fuelled by the manufacturing and services sectors. Consequently, the GDP share of manufacturing increased while that of agriculture fell. As a result, there was a steady transformation of the production structure as Bangladesh moved away from a primarily agrarian and rural-based economy towards a manufacturing and modern services-based economy.

The stellar manufacturing growth performance (9.9 per cent per year) was ably supported by a surge in manufacturing exports, primarily from the readymade garments sector. Exports from manufacturing sector grew by an amazing 13.6 per cent between FY2010-15. The rapid growth in exports along with expansion in remittances, growing by an average of 6.6 per cent over the period, led to a strong balance of payments out-turn and supported acceleration in foreign reserves from $10.7 billion in FY2010 to $33 billion in June FY2017 (8.3 months of import cover). The comfortable balance of payments situation allowed foreign borrowing and debt service to be maintained at a modest level. Along with external stability, Bangladesh also achieved domestic macroeconomic stability by keeping fiscal deficits and monetary expansion at prudent levels. Inflation rate briefly accelerated to double digits in FY2010-12 but soon stabilised and fell to 6.8 per cent during FY2012-15. Inflation rate came down further during FY2016-17, falling to 5.7 per cent.

On balance, the stability of the macro economy has been a hallmark of macroeconomic management during the first half of PP2021. This stability was sustained over the first three years of FY2016-18. But there are some worrying signs of fragility in the banking sector since 2016 that needs to be watched carefully. Also, while fiscal deficit is under control, the tax to GDP ratio is stagnant. This could create financing problems for the budget in the coming years. Accordingly, the tax effort should be strengthened. On the export front, two major concerns are the heavy dependence on RMG and the slowdown in the growth of exports during FY2016-18. A major reason for this is the heavy bias against exports due to trade protection. Additionally, the sharp appreciation of the real effective exchange rate has hurt exports. The government will need to address the export diversification challenge through a reform of trade policy and better exchange rate management.

A major driver of GDP growth is investment. The first Perspective Plan (PP2021) emphasised the need to accelerate both public and private investment. Results so far show progress in increasing public investment but there has been a substantial shortfall in the private investment rate. There were some increases in foreign direct investment (FDI), but compared to its potential, Bangladesh is still way behind at attracting FDI. The country fetched around US $ 2.50 billion, where Vietnam fetched FDI amounting to US $35 billion during the same period. The major reason for sluggish domestic private investment and FDI is the high cost of doing business. The need to further improve the investment climate by reducing transaction costs will be an important challenge for the new government sworn in during first week of January 2019 after December 2018 election.

AGRICULTURE AND FOOD SECURITY: The PP2021 recognised that continued progress with agriculture and food security were essential to support growing industrialisation and urbanisation. Farm income and productivity growth are also essential to reduce rural poverty. Despite a slowdown in the growth of the crop sector, average agricultural GDP grew at 3.5 per cent per year. This was a commendable performance during the first half of PP2021. Some important progress was made in diversification as shares of non-crop agriculture increased. This progress was particularly strong for fisheries. Progress was also made in strengthening food security and nutrition. The incidence of hunger fell sharply, nutrition standards improved and food prices for basic items such as grains and vegetables have fallen in real terms improving affordability. Priorities for the future include: greater emphasis on diversification, especially in the area of export-oriented farm production (fruits, vegetables, flowers, fish, processed food, and tea); productivity improvements in grain production including rice; further emphasis on nutritious food (meat, eggs, poultry, dairy products); expansion of forest resources; and climate-resilient agriculture.

DIGITAL BANGLADESH: PP2021 recognised importance of technology and knowledge as major instruments of competitiveness and human welfare. This found its place in the Digitisation Initiative of PP2021 led by Prime Minister Sheikh Hasina. Considerable progress was achieved since the adoption of PP2021. Rural and remote areas of Bangladesh are now connected through mobile phones and the internet and economic and financial transactions are happening through digital technology at a rapid pace and low cost. The efficiency gain through the reduction in transaction costs is immense. The prospects for further progress including for expansion of ICT exports are large. While private investment has taken the lead in ICT development, government policies, especially through the deregulation of the telecommunications sector, have played a major enabling role. This progress needs to be consolidated through a reform of the incentive structure. ICT sector is heavily taxed, which is inconsistent with the policy to encourage this sector and will need to be addressed.

INFRASTRUCTURE AND URBAN DEVELOPMENT: PP2021 placed major emphasis on sharply improving infrastructure and urbanisation services. Substantial progress was achieved in the power sector in terms of both installed capacity and the spread of electricity connection to the people. Total generation capacity increased by an unprecedented 13.4 per cent between FY2010-18. Commensurately, the access to electricity surged from only 48 per cent in FY2010 to 72 per cent in FY2018. Private investment in power surged and power trade with India has commenced. The efficiency of the power sector has also increased with further reductions in transmission and distribution losses and improvements in billing and collections. However, the diversification of primary energy sources to coal, LNG and renewable energy sources has lagged and the power sector still depends on budget subsidy. In transport, major new investments in roads, highways, and bridges are underway, although completion rates are slower than expected. Railway reforms have stalled, and waterway utilisation remains low. Consequently, stronger efforts are needed to improve the implementation capacity of roads, highways, and bridges projects and to accelerate reforms in railways and waterways.

The challenges in the urban sector are complex as the pace of urbanisation continues to accelerate. New investments in urban infrastructure are helping build capacity but demand continues to exceed supply. The heavy pressure on Dhaka adds to the urbanisation challenge. The urban strategy needs a renewed focus and attention to realise the vision of PP2021. Development of cities outside Dhaka is essential to secure balanced urban growth. Much more attention is needed to improve urban governance and institute fiscal decentralisation to the urban bodies. (To be completed tomorrow)

Dr. Shamsul Alam is Member (Senior Secretary), General Economics Division (GED), Bangladesh Planning Commission.

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