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Promoting sustained and inclusive growth

Rodrigo Cubero
THE global economy is enjoying some favourable trends, and Asia is well positioned to capitalise on them with steady growth in 2014-15. As explained in the latest International Monetary Fund (IMF)'s Regional Economic Outlook for Asia and Pacific, recent policy actions taken to address vulnerabilities have started to bear fruit. With vigilance and further reforms, the region will remain resilient to global risks and continue to be a dynamic force driving the strengthening global recovery.
First, global activity has been strengthening, and this will help Asia's exports. The growth momentum has gathered steam in the United States and the euro area, thanks to a reduction in fiscal tightening and still-accommodative monetary conditions. And while some large emerging market economies have slowed, overall growth in emerging markets has picked up. Stock markets across most of the globe have reflected those trends and many have reached all-time highs.
Second, the largest economies in the region are also doing relatively well, despite some challenges. In China, the unveiling of the government's reform agenda has boosted sentiment, and growth should moderate only slightly to around 7.5 percent in 2014. Meanwhile, "Abenomics" has lifted confidence in Japan, and growth there should remain above trend at 1.4 percent in 2014. This favourable external environment is benefiting the rest of the region, together with healthy labour markets and robust credit growth in many economies. The overall outlook for Asia is one of steady, robust growth of about 5.5 percent in 2014-15. No longer as stellar as a few years ago, but still enviable by international standards.
So far so good for Asia. But there are still certain risks. An unexpectedly rapid tightening of global liquidity would affect the region. Domestic vulnerabilities could magnify the impact: as interest rates rise, vulnerabilities in certain countries stemming from pockets of high corporate leverage and household indebtedness would come to the fore. In addition, economies with weaker fundamentals would be hard hit, similar to what happened a year ago when markets abruptly revised their expectations of future LIS monetary policy. Asia is also facing various risks originating from within the region. These include a sharper-than-envisaged slowdown in China, a waning impact of Abenomics, and political tensions and uncertainty. A continuation of the recent macro-economic and structural policy directions would help keep risks at bay, maintain investor confidence and sustain the region's growth leadership. Decisive progress on structural reforms is critical. The agenda varies across the region, involving vigorous implementation of the government's reform blueprint to put growth on a sustainable path in China; further product and labor market reforms to prevent deflation and low growth from returning in Japan; and lifting regulatory impediments, boosting infrastructure and continuing to promote trade and financial integration in many emerging, frontier and developing economies, as well as in Pacific island countries and small states.
In Bangladesh, too, economic growth is expected to improve. Unrest and uncertainty took a toll on economic activity in the run-up to the January 2014 general elections. The authorities, however, commendably maintained macroeconomic stability throughout the turmoil period. While food inflation has been elevated, reflecting in part unrest-related supply disruptions, nonfood inflation has been trending down. Public debt remains sustainable. And Bangladesh's external position has remained strong, with exports resilient, allowing the country to continue to build up its international reserve buffers.
Provided that the political situation remains calm and uncertainty abates, Bangladesh's economic performance looks set to normalise in 2014-15, with growth improving from around 5.5 percent in fiscal year 2014 (FYI4) to its ten-year average of about 6.25 percent in FYI5. The garment industry may face some headwinds as it adjusts to absorb higher wages and compliance costs associated with improving factory safety standards, but growth will be underpinned by a recovery in domestic demand, particularly an increase in public investment.
There are, however, downside risks to near-term growth. A resurgence of political tensions would undermine activity as well as business confidence. Insufficient progress in improving labour and factory safety standards in the garment industry could lead to sanctions by trading partners or international buyers. A further deterioration in the finances of the state owned banks could pose risks to fiscal and financial stability.
Bangladesh has emerged as a new frontier in the global economy. With support from the IMF's three-year Extended Credit Facility arrangement, steady progress has been made in strengthening macroeconomic stability and implementing the government's reform agenda.
Going forward, to fully realise Bangladesh's growth potential on a sustainable footing, policies should continue to focus on maintaining prudent fiscal and monetary policies; increasing the tax-to-GDP ratio to create space for priority fiscal spending, particularly investment in power and transport infrastructure projects with high social returns and well-targeted social safety nets to support the income of the poor; continued efforts to strengthen financial sector supervision aimed at mitigating banking sector vulnerabilities; and reforms to improve the business climate and gradually streamline foreign exchange regulations to stimulate domestic and foreign investment. The IMF, as a partner to Bangladesh, stands ready to continue working closely with the Bangladesh authorities to support their policy program centred on these priorities.
The writer is International Monetary Fund's mission chief for Bangladesh.