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Bangladesh’s economic transformation
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The only component in which it was at par with the LDC average was natural capital.
Furthermore, the UNCTAD highlights four lingering sources of vulnerability which will continue to shape the trajectory of Bangladesh towards LDC graduation and beyond: (1) Heightened reliance on LDC-specific international support measures (most notably in terms of preferential market-access); (2) Lack of export diversification and over-reliance on low-technology textile and clothing products; (3) Dependence on external development finance, predominantly in the form of migrant remittances, to support capital accumulation; and (4) Exposure to the far-reaching effects of climate change.
Bangladesh plans a GDP growth of 7.2 per cent in 2022, which should come out at the high end of what other developing countries are projecting. As expected, developing countries will outpace the global average GDP growth rates, but inflation and exchange rate management challenges remain.
Compounded by rising commodity prices and ensuing inflation pressures, real income growth has been negative in much of the eurozone. According to UNCTAD’s Global Investment Trend Monitor, global FDI rebounded strongly in 2021, but recovery was highly uneven across regions and sectors. Infrastructure finance increased due to stimulus and greenfield projects in industry were still weak.
According to the UNCTAD, FDI flows to developing economies increased by 30 per cent to nearly $870 billion, with a growth acceleration in East and South-East Asia (20 per cent), a recovery to near pre-pandemic levels in Latin America and the Caribbean, and an uptick in West Asia.
Net portfolio flows to developing countries are largely driven by non-resident investment in debt and equity. Of the total increase in global FDI flows in 2021 ($718 billion), more than $500 billion, or almost three quarters, was recorded in developed economies.
On the economic front, the dramatic collapse of output, as countries locked down to contain the spread of the virus, was so dramatic as to trigger unprecedented responses. Massive central bank action in rich countries stabilised financial markets and aggressive government spending cushioned firms and households against the worst of the downturn.
The liquidity risk associated with an expansionary fiscal policy is higher. For Bangladesh, progressive stages of economic development are associated with typical liquidity risk configurations. Non-investment grade countries such as Bangladesh have trouble accessing international credit markets, while exports and remittances are often the only sources of foreign currency.
With impending LDC graduation, Bangladesh can expect declines in international commitments related to official development assistance. The recent decision of the government of Bangladesh to utilise $313 million from its foreign currency reserves for the purpose of investing in capital projects is likely to emasculate the foreign investor community’s confidence in its monetary policy discipline and might serve as a precursor to a sovereign rating downgrade.
The reality is that Bangladesh is highly dependent on global finance to support its balance of payments. The regime change in its interest rate environment resulting in a downward shift in its yield curve positioning is likely to further constrain both short and long-term debt inflows.
While speculative capital inflows can overwhelm the domestic financial and credit markets, sustained above-average risk-adjusted returns can ensure sustained portfolio flows into the capital markets. From this point of view, it is market discipline, or being exposed to liquidity risk, that will prevent the country’s policy-makers from spending their way to a structurally supportable path of debt sustainability.
If mitigating liquidity risks is a national policy target, addressed, for example, by price and capital controls, it is mainly coordination between fiscal and monetary policies that will provide the needed policy space for the government of Bangladesh to ensure sustainable growth and development.
While the independence of Bangladesh Bank is clearly inhibited by the mere existence of the banking division within the finance ministry, achieving the required degrees of policy coordination around a pro-development revamp of the national financial architecture is not trivial.
The expansion of Bangladesh’s external balance sheet can gain momentum with the participation of direct investors (i.e., FDI) and asset managers from advanced economies, in addition to targeting foreign currency-denominated corporate bond markets, increasing their participation in the country’s domestic bond markets.
While government bonds dominate Bangladesh’s fairly underdeveloped secondary bond market, greater reliance on domestic-currency denominated public debt mitigates the currency mismatch in its balance sheet and creates duration mismatches arising from the prohibitive costs of issuing long-term government securities and weak governance of asset-liability immunisation risk. With limited access to non-deliverable forwards or active swap markets, it also shifts the currency risk to prospective global lenders, thus heightening exposure to speculative, non-resident investor behaviour.
As a result of these vulnerabilities, strongly net negative, if fluctuating, portfolio flows to Bangladesh can translate into a vicious cycle of currency depreciation, weakening debt sustainability, and reduced fiscal spaces.
Long-term FDI is thus a lower risk approach in support of Bangladesh’s structural transformation, triggering reductions in sovereign credit spreads and driving up the value of foreign currency-denominated debt, thus also affecting private borrowers’ balance sheets and refinancing risks.
The author is a global managing director at DelMorgan & Co. Investment Bank, USA.

Four-day
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Three designers from India, Japan and the Maldives will participate in this festival with their products, Mantasha added.
Visitors enjoy witnessing with their own eyes the weaving process of these products at the festival, said the organisers.
A number of seminars, fashion shows, folk dance and musical programmes along with business to business matchmaking programmes will be organised, they added.