Infrastructure a Key Catalyst

In the first part of the discussion on the Investment Climate of Bangladesh, the country’s economic resilience, growing investment portfolio, and thrust sector opportunities were discussed. Along with it, the past decade has been characterized by substantial investments in infrastructure, which have been key to industrialization and the logistical integration of the country internally as well as with the global market. Although Bangladesh’s score on the World Bank’s Logistics Performance Index (2.39 out of 5) trails countries such as India (2.91). [1] 11 ambitious mega projects are in the pipeline, which is aimed at transforming the country’s logistics, urban transportation, trade competitiveness, and energy security.

Infrastructural mega projects in plan-bangladesh-investment-lightcastle

Principal among these projects is the recently inaugurated Padma Multipurpose Bridge, which radically improves connectivity for 30 million people in the south-west of the country and comes with a rail link. This will not only reduce transport time and cost but will also spur economic activity in the region directly and indirectly affecting 50 million people. The project is expected to increase GDP growth rate by 2 per cent percentage points and the gross product of the southwest by 35 per cent. [2] Additionally, land ports in these regions will experience an influx of trade due to improved logistics from the ports to the capital city. [3]


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The Dhaka mass rapid transit line-6 (Metro Rail) will reduce traffic congestion and will save 2.4 billion USD from the working hours wasted while commuting. [4] The Dhaka Elevated Expressway will directly connect Dhaka-Chittagong highway to Dhaka airport, which will allow city dwellers convenient means of communication in the city.


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Hazrat Shahjalal International Airport Terminal 3 is planned to facilitate more than double the current number of passengers and enhance cargo handling which will boost the country’s trade landscape. [5] The Bangabandhu Sheikh Mujib Tunnel will connect the southern region of Chattogram with the port and Dhaka. This region is subjected to become an industrial hub with investments driving in KEPZ and China EPZ. The Chattogram-Cox’s Bazar rail link is subjected to improve trade with Myanmar as extensions to the Myanmar border and Matarbari Deep Sea port are in plan. [6] To improve our port logistics, Matarbari Deep Sea port and Payra Deep Sea port [7]are being built. These ports will reduce the pressure on Chattogram port and Mongla port, which leads to delays in shipment, and will also contribute 2-3 per cent of GDP growth. [8]

Even though the country has achieved 100 per cent electrification and has an electricity production overcapacity, the price of raw materials is volatile to global market shifts. Upsurging LNG prices have caused local plants to operate at one-third of their capacity. The country is diversifying its energy mix to low operational costs and drive industrial growth. [9] The Rooppur nuclear power plant and the Matarbari LNG power plant are being constructed to ensure energy self-sufficiency and cushion the energy sector from volatility in global oil prices.

Given these developments, India is planning for transshipment via the Chattogram and Mongla ports due to improved logistics within Bangladesh. In 2018, a bilateral agreement to move goods between North-eastern India and the rest using these ports took place. These routes halve the trade route from Kolkata to Agartala and could lead to 8 per cent – 20 per cent of savings. [10] Hence, infrastructural development connecting different parts of Bangladesh will not only boost district-level economies but also assist international trade with our neighbouring countries.

Towards Sustainable Economy

According to Climate Risk Index, prepared by Germanwatch (2020), Bangladesh is seventh on the list of countries most at risk from climate change. About 40 million of the 165 million total inhabitants, live near the coastline and are vulnerable to cyclones, tidal surges, and salinity intrusion.  Bangladesh’s Perspective Plan 2021-2041 and 8th Five Year Plan (2020-2025) have renewed national commitment to integrate environment and climate change considerations into economic growth.

Bangladesh currently chairs the Climate Vulnerable Forum (CVF), a global partnership of countries that are disproportionately affected by the consequences of climate change. In 2021, Bangladesh released the first climate prosperity plan, named the Mujib Climate Prosperity Plan (MCPP), dedicated to the country’s founding father Sheikh Mujibur Rahman. The Mujib Climate Prosperity Plan shifts Bangladesh’s trajectory from one of vulnerability to resilience to prosperity (VRP). The Plan’s principal aims are to secure Bangladesh’s prosperity within a decade, launching an economic transformation with actions that 6 key priorities:

  1. Accelerated Adaptation
  2. Just Transition of Labour and Future Proofing Industry with Technology Transfer
  3. Comprehensive Climate and Disaster Risk Financing & Management
  4. Increasing public revenue to spend on the most vulnerable
  5. Leveraging 21st Century Technologies for Well-being
  6. Maximized Renewable Energy, Energy Efficiency, and Power & Transportation Sector Resilience

Notable recent initiatives in climate action:

Targeted Policies & Projects

In addition to high-level plans such as the Mujib Climate Prosperity Plan and 8FYP, several important plans and projects have also been developed to attack each sub-component of climate action.

The National Solar Energy Roadmap, 2021-2041, provides a long-term vision and potential capacity objectives for its solar energy effort. The roadmap outlines time-bound steps to attain that goal by 2041, based on three implementation scenarios. The National Action Plan for Clean Cooking (2020-2030) is a successor to the Country Action Plan for Clean Cook Stoves 2013, which distributed 4.5 million upgraded cookstoves, primarily by removing existing financing barriers for SMEs. The Energy Efficiency and Conservation Master Plan up to 2030 presents a plan to prevent 95 million tons of GHG emissions by lowering energy intensity (national primary energy consumption per unit of GDP) by 20 per cent within 2030. The Ashrayan project shelters climate refugees, the landless, and the homeless. Almost 500,000 households have been rehabilitated as part of the programme. About 5,000 climate refugee families are also being sheltered in Cox’s Bazar through the program. The program also has climate change mitigatory programs integrated, such as tree planting, rainwater collection, off-grid solar systems and clean cookstoves.


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Renewable Energy Initiatives

The government has supported the establishment of 14 solar charging stations across the country to serve the burgeoning fleet of battery-run three-wheelers, approximately 2 million vehicles. More than 6 million solar-home systems (SHSs) have been built benefiting 18 million people. Bangladesh Rural Electrification Board (BREB) has plans to install 2,000 solar irrigation pumps, doubling the number of such pumps in the country. Bangladesh has declared a goal of generating more than 4,100 megawatts of electricity from renewable energy sources by 2030 as part of its NDC. The Infrastructure Development Company Ltd (IDCOL) will finance industrial rooftop solar projects that will generate about 300 megawatts of electricity by 2024. [11] The private sector is partaking in the effort as well, with a large number of garments factories having already adopted solar energy solutions. Bangladesh now has the highest number of green garment factories in the globe with the Leadership in Environmental and Energy in Design (LEED) certification given by the United States Green Building Council (USGBC). [12]

Financing Green Transition

Bangladesh Bank boasts one of the most progressive sustainable and green financing policies in the world and boasts an active Sustainable Finance Department. The central bank has helped grow sustainable financing in the country through financial engagement and green financing target-setting. From September 2020 onwards minimum target of green finance was set at 5per cent of the total funded term loan disbursement/investment for all banks and financial institutions.

Bangladesh Bank runs a refinancing program, which covers over 61 scheduled banks and 34 financial institutions, to encourage environmentally friendly technologies such as solar energy, biogas plants, and Effluent Treatment Plants (ETP). The scheme covers 68 products eligible for refinancing categorized under: renewable energy, energy efficiency, green industry, organic farming, eco-friendly brick manufacturing, effluent treatment, recycling, etc. [13] In FY 2020-21, banks, and non-bank financial institutions (NBFIs) in the country gave out approximately 1.25 billion USD in green loans, up from 7.11 per cent a year ago.

The Bangladesh Climate Change Trust Fund (BCCTF) has invested almost 449.3 million USD in 800 projects to implement key functions of the Bangladesh Climate Change Strategy and Action Plan (BCCSAP), which primarily focus on adaptation, mitigation, and climate change research. [14]

Challenges and Changing Global Currents

The country’s efforts in improving the business environment through human development interventions, infrastructural investments, and climate action activities have been commendable. Nevertheless, the country is struggling with several critical challenges, which have either been engendered or exacerbated by the COVID-19 pandemic and now the fallout from the Ukraine-Russia war.

Sanctions on Russia, a major exporter of wheat, fertilizer, and fuel, have raised rates in key commodity markets, worsening the already ascending trend in global inflation. Critical imports have become much more expensive in a matter of months raising the import bill and widening the trade deficit, which stood at about 34 billion USD at the end of FY 22. Cost-push inflation has taken hold of the country, wiping away much of the real income gains made in recent years. Currently, inflation stands at around 7.5 per cent which is a 9-year high. [15]

Worse yet, contractionary fiscal policies in the Western world in response to inflationary pressure has already impacted Bangladesh. The US Federal Reserve interest rate hike [16] has been a key factor driving the devaluation of the Bangladeshi taka, which fell by more than 10 per cent in Q2 of 2022, raising import costs further. Additionally, this is expected to slow down foreign investments in Bangladesh, which were anemic to begin with, and slash global demand for consumer goods amidst murmurs of a global economic slowdown, if not recession. The highly pivotal RMG sector saw orders fall by 20 per cent year-on-year in Q2 of 2022. Bangladesh is reliant on the sector for 80 per cent of its export revenue. [17] Inward remittances into the country also dropped over 15 per cent in year-on-year in FY22.

Simultaneously rising imports and stagnating foreign currency inflows do not bode well for the country’s foreign reserves, which had fallen by 12.8 per cent year-on-year in July 2022. [18] Currently, the country has enough reserves to foot the import bill for 4 months regardless of exports, which is still a safe, but not a comfortable position, requiring urgent policy interventions.

As a pre-emptive measure, the government has requested credit facilities of over 6.5 billion USD from the World Bank, the Asian Development Bank, JICA and, somewhat worryingly, the IMF. [19] This amounts to 16.5 per cent of the country’s current foreign reserves, around 39.5 billion USD – raising the salience of and bringing renewed attention to matters of good governance and graft in the three crucial sectors of infrastructure, energy, and finance.

This difficult moment has forced the government’s hand and precipitated the implementation of certain structural reforms, which were previously difficult to conceive. Gas prices have been hiked 22.8 per cent in June 2022, while petrol and diesel prices have been hiked by 51.1 per cent and 42.5 per cent respectively in the subsequent month. [20] Fertilizer subsidies have also been slashed leading to a 37.5 per cent rise in prices. These changes come as exigencies and will have a mixed effect on the economy, the overall cost-benefit balance of which remains to be seen.

It’s important to keep in mind that Bangladesh is set to graduate from least-developed country status in 2026, which will mean the removal of various forms of preferential treatment such as trade benefits and low-cost development loans. UNCTAD estimates that the country is likely to lose 14.28 per cent or 5.73 billion USD worth of export earnings annually after its graduation to a developing nation from the least-developed country (LDC), due to overdependence on preferential treatment in trade and other internal factors, not least the unhealthy degree of reliance on remittances and RMG exports. [21] Export diversification is very much a vital mechanism to de-risk the overall economy.

Job growth also remains a challenge for the country, with concerns persisting about job-less growth. The job creation target in the 7FYP was missed by a margin of 25 per cent. Economists believe that the target in the 8FYP will also be missed due to a confluence of factors including the pandemic. The ILO reports that 47 per cent of young women in Bangladesh are NEET compared to 10 per cent of young men. Additionally, 44 per cent of the migrant labour force is considered less skilled, and only 1.8 per cent of the students receive technical and vocational training (TVE). [22] The development of an integrated jobs and skills strategy is crucial, taking global currents into account and prioritizing sectors such as agriculture, hi-tech manufacturing, and ICT.

Lastly, the MSMEs of the country, which contribute to approximately 50 per cent of the country’s industrial output and employ roughly 80 per cent of the industrial labour force face a massive barrier to growth – access to finance. According to the SME Finance Forum, 61 per cent of women-led SMEs are partly or fully constrained in their access to finance, compared to 49 per cent for men-led SMEs. [23] The SME Finance Forum reports that the current volume of MSME finance is 32.7 per cent of total demand, implying that the formal MSME finance gap is 67.3 per cent. Farsighted programs are necessary to develop the capacity of these enterprises and provide them the financial environment needed to grow and adapt to the economic outlook of the future.

To learn more about the current status of the Bangladesh Economy Document download full report.

About Author:

This article was authored by Fahmid Kaisar, Business Consultant at LightCastle Partners, and, Tasnim Mustaque, Business Consultant at LightCastle Partners. For further clarifications, contact here: [email protected]

References

  1. Logistics Performance Index, World Bank
  2. Padma Bridge Gives Rise to Abundant Possibilities, LightCastle Partners
  3. ‘Padma Bridge to help boost trade with India’, The Financial Express
  4. Commuters pin hopes on metro rail, The Financial Express
  5. Dhaka airport’s 3rd terminal to boost trade, BGMEA
  6. Chittagong-Cox’s Bazar Railway Line, Railway Technology
  7. Payra Seaport: Another step towards prosperity, The Daily Star
  8. Matarbari Port likely to contribute about 3per cent to GDP growth: Shipping secretary, The Daily Star
  9. Power production of Bangladesh shrinks to one-third of capacity, The Financial Express
  10. Using Chattogram Port as a Transshipment Hub for the North Eastern Region of India, ADB
  11. IDCOL plans big for industrial rooftop solar, The Daily Star
  12. Bangladesh now has 150 green garment factories — highest in the globe, The Daily Star
  13. Quarterly Review Report on Sustainable Finance of Banks & Financial Institutions July-September 2021, Sustainable Finance Department, Bangladesh Bank
  14. Bangladesh’s Roadmap to Climate Action, Centre for Governance Studies
  15. Inflation bites, as rate soars to 9-year high, The Financial Express
  16. What the Federal Reserve’s Rate Hikes Mean for Southeast Asia, The Diplomat
  17. RMG export orders fall 20pc in Apr-June, The Financial Express
  18. Bangladesh seeks $4.5bn IMF loan as forex reserves shrink, Aljazeera
  19. Bangladesh turns to ADB, World Bank for funds, Aljazeera
  20. Bangladesh announces fuel price jump, stokes inflation fears, Reuters
  21. Bangladesh may lose 14.28pc export earnings after LDC graduation, The Financial Express
  22. Financing Solutions For Micro, Small And Medium Enterprises In Bangladesh, The World Bank
  23. Micro, Small and Medium-sized Enterprises’ Access to Finance in Bangladesh, UNESCAP
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