Bangladesh Bank, the country’s monetary authority, is reviewing its Foreign Exchange Act with an eye on liberalising how the country deals with foreign capital, says Hassan Zaman, chief economist.
The government is also considering issuing its first international bonds in order to create a yield curve.
“I can’t share details of what’s under review,” Zaman says, “but it is comprehensive. We are asking ourselves, ‘Where do we want to go, how integrated do we want to be with the world’s financial markets, over the next 10 to 20 years?’”
Speaking yesterday at AsianInvestor and FinanceAsia’s inaugural Bangladesh Investment Summit in Singapore, Zaman says the central bank and the securities regulator are looking at impediments to foreign investment.
Don’t expect a full-blown opening, however. Zaman notes that Bangladesh Bank remains committed to managing the country’s balance of payments, which will mean using capital controls to deal with domestic inflation and other macroeconomic issues.
Moreover, the country’s foreign reserves are not yet big enough to give the central bank confidence in free capital flows. Today the nation’s foreign reserves are $12.3 billion, enough to cover four months’ worth of imports. Although the amount is modest, that is a massive improvement, given that 10 years ago the country’s reserves stood at a mere $1.6 billion.
Bangladesh has evolved into Asia’s steadiest growth story. After decades of limping along at an average annual GDP growth rate of 2%, this country of 160 million has enjoyed about 10 years’ worth of steady, impressive growth; its economy has grown by 6.2% per annum for the past five years despite the global financial crisis, and it ranks as one of Goldman Sachs’ ‘next 11’ growth markets.
This growth has been achieved without incurring a greater divide between the haves and have nots. The country’s Gini coefficient, a measure of inequality, has not budged.
Instead, poverty levels have fallen: the poor once accounted for over 50% of the population, but only 31% today. Social metrics such as life expectancy, infant mortality, literacy and fertility have all improved over the past decade and in many cases are better than in India and Pakistan, says Fazle Kabir, secretary of the finance division at the Ministry of Finance.
He attributes this to the drivers of growth, which benefit the labour force: remittances and the garments industry, which makes up 75% of exports. He says the government hopes to make Bangladesh a middle-income country by 2020. Already its per capita income has more than doubled over the past decade to over $800, and is on track to soon reach $1,000.
The Bangladesh story is about more than textiles, however. The country’s entrepreneurs have created exports in goods and services in shipbuilding, pharmaceuticals and leather, for example. The country is now exporting $24 billion worth of goods and services annually, notes Alamgir Morshed, head of financial markets at Standard Chartered Bank in Dhaka.
The country’s financial infrastructure remains immature, however. There is no secondary bond market, and no industry around market making or price discovery for debt or equity. There is no derivatives or commodities trading.
Infrastructure is a huge challenge: Bangladesh needs at least $35 billion of infrastructure investment over the next five years, says Iftakharul Islam, managing director at Asian Tigers Capital Partners.
Demography could prove to be Bangladesh’s trump card: today 61% of the population is of working age, and the median age is 23. The country is now nearing a peak in terms of a productive population. But demographics could also prove the nation’s undoing, if those people are not properly trained and if insufficient quality jobs are created.
However, domestic demand is the great untapped story; the country’s wage structure is cheap; its low cost of living and government dedication to social inclusion maintains stability; and if the government succeeds in liberalising its investment laws, clearing out some of its red tape, and launching an international bond, that stable 6% GDP growth story will make Bangladesh a leading investment story for the rest of this decade.