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Economic Growth of Bangladesh: Key Driving Factors Behind the Rapid Growth

For several years Bangladesh’s economic development has been gaining great appreciation from the world media. In the fiscal year 2020-21, Bangladesh’s per capita income increased by 8% over the previous year to $2,227, which is $280 more than India’s per capita income. After this event, there has been a lot of fuss about Bangladesh’s economic growth from the Indian media to the global media like the Wall Street Journal and Bloomberg. Even in the media of Pakistan, the economic growth of Bangladesh has been discussed at different times. According to a Bloomberg report, although in 1971, Pakistan was about 70% richer than Bangladesh, on the 50th anniversary of its independence, Bangladesh was 45% richer than Pakistan. Moreover, Pakistan’s Prime Minister Imran Khan praised Bangladesh’s economic growth in an interview.

Bangladesh’s Economic Growth

After the independence of Bangladesh, the war-torn country was one of the poorest countries in the world. As a result, US National Security Adviser Henry Kissinger called Bangladesh a basket case. A basket case refers to a country that is in an economic crisis and is less likely to stand on its feet. The newly independent and war-torn country’s economy faced many challenges for growth. In the ’80s, the privatization of state-owned enterprises started. Bangladesh has posted a GDP growth rate of 5% since the year 2000. There were also noticeable improvements in other parameters of the economic growth of the country. According to the Bangladesh Bureau of Statistics, in 2000, about 49% of the country’s population lived below the poverty line. By 2010, that number had dropped down to 31.5%.

Since 2009, the country has had the same government; keeping the overall economy relatively stable. In 2009, Bangladesh’s GDP was 102.4 billion dollars, increasing to 172.9 billion dollars by 2014. Moreover, Bangladesh’s GDP has grown at a rate of 6 to 8 percent every year from 2015 to 2019. In 2019, the year before the pandemic, Bangladesh’s GDP growth rate was 8.2%. On the contrary, India’s growth rate in that year was 4%. During the Covid-19 pandemic, Bangladesh was one of those countries whose economy bounced back fairly quickly. In the recent budget for the 2020-21 fiscal year, the revised GDP growth target is 6.2%. On the other hand, according to The Business Standard, India’s GDP will shrink by 3.8 per cent in the 2020-21 fiscal year.

Due to political stability and infrastructural development, foreign direct investment in the country has increased. Also, in the last few years, global companies like Uber, FoodPanda, Alibaba, and Amazon have expanded their business in Bangladesh. According to a Bangladesh Bank source, Bangladesh has received an average of $3.61 billion per year in foreign direct investment over the past decade and in 2019 alone, FDI amounted to $3.89 billion. In that year, the highest FDI came to the power and energy sector. Investment in the food, textile, banking, and telecommunications sectors have also increased. Another destination for foreign investment was the country’s start-up sector. According to a report by Light Castle Partners, currently, there are more than 1,000 active start-ups in the country, and more than 200 new start-ups are being founded every year. In 2020, start-ups in Bangladesh were able to raise $35 million in foreign investment.

In addition to start-ups, the Securities and Exchange Commission is working to ensure investment in SMEs across the country. As a part of this, approval has been given to bring SMEs to the stock market. With the expansion of small and medium businesses, the growth of large industries as well as the country’s online-based businesses are doing quite well. The e-commerce sector in Bangladesh has grown significantly over the past decade, and the e-commerce market size is expected to exceed 3 billion dollars by 2023. According to a report in The Financial Express, about 2,000 e-commerce sites exist in the country and it is estimated that there are about 50,000 Facebook-based F-commerce pages and groups.

Reason Behind the Growth

Rise of Middle Class

Based on the Bangladesh Bureau of Statistics, for a population of about 170 million in Bangladesh, the median age is 28 years, and 62% of the country’s population is under 35 years of age. The participation of women in the country’s labor force has also increased. According to the World Bank, the total labor force of Bangladesh in 2020 is more than 67 million, of which 36.4% are women. Based upon another report from Asian Development Bank, in 2016, the poverty rate of Bangladesh was 24.3%, which was reduced to 20.5% by 2019. In other words, the poverty rate has significantly decreased in the country whereas the number of the middle class has increased over the last ten years. According to a report by The Business Standard, there are currently more than 37 million middle-class people in Bangladesh, which is about 22% of the country’s total population. Due to the rapid growth of middle and affluent classes, the overall consumption of the country is increasing and as a result, the size of the economy is also getting bigger. All these have accelerated the overall GDP growth and assisted Bangladesh to move from being a Least Developed Country (LDC) to a developing country in the near future.

Bangladesh Labor Force, Total (1990 – 2020) | Source: World Bank Data

Technological Advancement & Financial Inclusion

The rate of adopting advanced technology in the country has also increased with an increasing number of middle-class people in Bangladesh. Besides, Bangladesh launched 4G technology for the people within only 5 years of launching the 3G service in 2013. Bangladesh is also preparing for the launch of 5G technology soon; thereby, the country’s mobile operators are working to reach 4G services in remote areas. According to BTRC, Bangladesh has over 110 million internet users, and more than 90% of them are using mobile internet. On the other hand, the number of mobile subscribers has increased by 7% in the last 9 years, and in April 2021 it crossed 170 million. The financial services sector is one of the most beneficial sectors in the country because of increasing mobile subscribers and internet usage. In the last decade, MFS or Mobile Financial Services sector has shown the highest growth amid the financial sector of Bangladesh. Since MFS providers started their services in Bangladesh in 2011, according to Bangladesh Bank, there are now more than 100 million registered MFS users in the country and are transacting around BDT 2,000 crore daily. Due to the penetration of mobile financial services, the country’s marginalized people can now avail banking facilities, which is making a huge contribution to the country’s economic growth.

Infrastructure

In the last ten years, many infrastructure development projects have been undertaken in the country. In the fiscal year 2019-20, Bangladesh has allocated 40,000 crore for 10 mega projects to strengthen the communication network and power & energy sector. The notable projects are the Rooppur Nuclear Power Plant in Pabna, Metro Rail project in Dhaka, elevated expressways, Dhaka Airport expansion project, Matarbari Deep Sea port, etc. Besides, the Padma Bridge, which is built with full state funding of BDT 30,193 crore will be functional by June 2022. In addition to these projects, the people of remote areas of the country now have better connectivity with urban and commercial centers.

In reference to LGED, in 2020, about 2 lakh 25 thousand kilometers of new roads have been constructed and an additional 1 lakh 19 thousand kilometers of existing roads have been reconstructed. The government is also focusing on new bridge construction and renovation of old bridges.

It is expected that when these megaprojects are completed, they will bring positive changes to the country’s infrastructure. Even though the current demand for electricity in Bangladesh is 10 to 12 thousand megawatts, it can generate 26,000 megawatts of electricity, which is more than double the total demand. In addition, a total of 55 state EPZ areas and 11 private EPZ areas have been approved in Bangladesh to attract investors to increase the country’s manufacturing and exports.

Export

According to a survey conducted by the Indian Ministry of Finance for the fiscal year 2020-21, Bangladesh’s exports grew at an annual rate of 8.6% from 2011 to 2019. However, based on the Bloomberg article, at the same time, the average growth rate of global exports was only 0.4%. As stated by the Bangladesh Bureau of Statistics, in the fiscal year 2018-19, Bangladesh’s total export volume has increased by 12.75% to more than 41 billion dollars compared to the previous year. According to the Observation of Economic Complexity, Bangladesh ranks 52nd in the world in terms of exports. The RMG sector is the biggest contributor to Bangladesh’s success in terms of exports. At the end of the 2019-20 fiscal year, Bangladesh was able to export about 34 billion dollars worth of products, of which 83% were RMG products. Other than RMG, Bangladesh also exports home textile, leather & leather goods, jute and jute products, agricultural products, fisheries, ceramics, pharmaceuticals, ships and vessels, softwares & ICT products, and electronics and electrical products. Another notable reason behind Bangladesh’s success in exports is tariff-free access to the developed countries.

Remittance

According to a report in The Daily Star, around 10 million Bangladeshi expatriate workers are currently working worldwide. Most of them are in the Middle Eastern countries like Saudi Arabia, Abu Dhabi, and Qatar. There are also Bangladeshi migrant workers in Malaysia, Singapore, South Africa, Australia, the USA, and in some European countries. In 2020, these migrant workers sent about 21.75 billion dollars in remittance even during the Covid-19 pandemic, which is 15.57% more than the previous year. Remittances sent by migrant workers contributed about 6.6% in the total GDP of Bangladesh. Due to the increase in remittance inflow, the socio-economic development of the rural people have picked up significant pace.

Things Bangladesh Needs to be Aware of

Although Bangladesh’s economy is currently rapidly growing, many sectors still need development to maintain their sustainability. In proportion to the population, although the literacy rate in Bangladesh is fairly good, the unemployment rate in the country is about 5.3%. The unemployment rate was 4.22% in the pre-pandemic stage, but the rate has risen slightly due to layoffs in most organizations during the pandemic. A large number of people are also migrating from Bangladesh every year for employment. Big companies are facing problems when hiring local talent. As a result, many expatriates from India, China, Thailand, and Sri Lanka are working in higher positions in the country’s private sector and a lot of money is flowing out of the country. It’s possible to reduce the country’s unemployment rate if there is a way for the young generation to develop their skills somewhere. According to a source in the ICT Ministry of Bangladesh, there are about 5 lakh active freelancers in the country. Bangladeshi freelancers bring in 100 million dollars every year to the country. Based upon World Bank’s 2019 data, Bangladesh’s total export earnings are more than 15% of the country’s total GDP. More than 80% of Bangladesh’s export earnings come from the RMG sector. However, the competition has increased more than before due to the garment industry’s growth in Vietnam and African countries. Therefore, Bangladesh has to increase the number of exports to RMG and other sectors for the economy of Bangladesh to mature. Besides, in the fiscal year 2019-20, the total import of Bangladesh was about 68.18 billion dollars. Bangladesh should alter its trade balance by increasing exports and reducing import dependency in order to maintain the current economic growth rate.

Conclusion

According to the World Bank, if the current economic growth of Bangladesh is upheld, Bangladesh will graduate from the list of Least Developed Countries of the United Nations by 2026. However, after 2026 as a developing country, Bangladesh will lose GSP benefits from 37 countries, including Australia, New Zealand, Norway, Japan, Canada, and 28 countries in the European Union. Therefore, Bangladesh should maintain the growth of exports by signing various regional free trade agreements.

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