MONTREAL - Bangladesh, long known in the West as an "international basket
case", is doing its best to consign to history the dismal label so firmly
attached to it by US diplomat Henry Kissinger. The economy is humming and the
stock market surging. Now the government is being urged to pursue reforms while
the opportunity lasts.
The Dhaka Stock Exchange General Index (DGEN) has doubled in the past nine
months, including a phenomenal 25% one-day jump in mid-November. It has risen
10% in just the last three weeks and is now on the verge of closing above the
5,000 mark, which it crossed briefly earlier this week.
This is a remarkable change in fortunes for the country since Kissinger, then
running the US State Department, expressed his
views soon after Bangladesh won its independence from Pakistan in 1971. An
important force for good since then has been the Grameen Bank's extension of
microcredit, the idea for which Muhammad Yunus received the 2005 Nobel Peace
Prize.
The country's per-capita inflation-adjusted gross domestic product (GDP) has
more than doubled in the past 35 years, according to the World Bank, and its
poverty rate fallen by 20% in the last two decades. Urbanization, especially
around the capital Dhaka, has driven this growth.
The UN still classifies it as a "least developed country" (LDC), but the
decline in the budget deficit, high rates of export and import growth, and
increasing foreign currency reserves earned Bangladesh plaudits in a recent
country review paper for the UN's Brussels Program of Action for the LDCs. The
report encouraged the government to continue to pursue attempts to reform the
budgetary system, financial institutions, and the revenue sector.
The drive to pursue any such reforms may be weakened by an economy faced with
unpleasant headwinds as the global economic crisis continues to make its impact
felt.
Three-quarters of the country's export earnings are pulled in by the garment
industry, backed by foreign direct investment (FDI). This has been hard hit by
a decline in demand as a result of the global financial crisis.
FDI, which has been encouraged through the establishment of a handful of Export
Processing Zones, where foreign investors receive incentives for opening
factories, also took a hit last year and is expected to continue to slow in
2010. Remittances from abroad, which contribute significantly to foreign
exchange, also face a slowdown as Bangladeshi workers overseas struggle to keep
jobs and maintain pay levels.
As is the case in some East Asian countries, the lack of integration of local
financial and banking institutions with the worldwide industry shielded
Bangladesh somewhat from being swept up in the economic maelstrom of the global
crisis. The possibilities of increased prices for food and fuel are now the
country's major macroeconomic challenges.
The Bangladesh Bank has followed a monetary policy intended to control
inflation while increasing capital investment. While increasing credit to the
private sector, however, it is restricting credit to government. The bank
anticipates that both food and non-food inflation in Bangladesh will continue
over coming months. Its target figure is 6.5%. Bank governor Atiur Rahman says
there are dangers of speculative bubbles, as real productive opportunities may
lag behind available investment capital. Those worries seem so far not have
dragged on the stock market.
It was the landslide election of a political alliance led by the Bangladesh
Awami League at the end of December 2008 (following a provisional military
government that postponed the planned January 2007 elections) and the
institutionalization of a relatively stable democracy that created the
political preconditions for the present exceptional, near-parabolic rise in the
stock market.
The banking sector remains the market bellwether, and the country's largest
mobile telephone operator, Grameenphone, represents 17% of total market
capitalization. Other significant sectors include pharmaceuticals and energy,
notably gas.
There had been some hope, in the middle of the last decade, that a
Bangladesh-India-Myanmar dispute over Bay of Bengal maritime boundaries might
be resolved in conjunction with development of an east-to-west gas pipeline
extending to Kolkata.
The Bangladeshi government, which would have garnered transit fees from the
project, was however the only one not to sign off on the final proposal. Since
then, Myanmar has decided to send its gas by pipeline to China.
There has been so much natural gas development in Bangladesh that the Asian
Development Bank estimates that overdependence on gas for power generation and
in industrial and residential sectors in fact represents a threat to the
country's energy security. At some time in the future, the government will have
to rethink its pricing structure, which makes gas available to users at a
minimal price. Electricity demand regularly outstrips supply.
It the country is able to overcome transparency issues and continue cooperation
with its South Asian neighbors (as a recent summit meeting with India indicates
will happen), then the country's economic prognosis is far more positive than
its earlier reputation.
Bangladesh is considered a "frontier market" under the FTSE classification,
although not by MSCI. Yet Goldman Sachs includes it among the "Next Eleven"
(N-11) that it judges have the potential to become one of the world's largest
economies in the present century, a category separate from the BRICs - the
fast-growing developing economies of Brazil, Russia, India and China.
Dr Robert M Cutler (http://www.robertcutler.org), educated at the
Massachusetts Institute of Technology and The University of Michigan, has
researched and taught at universities in the United States, Canada, France,
Switzerland, and Russia. Now senior research fellow in the Institute of
European, Russian and Eurasian Studies, Carleton University, Canada, he also
consults privately in a variety of fields.
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