Bangladesh economy at an inflection point

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inflection-banner CAL Bangladesh unveiled its macroeconomic report titled “Bangladesh economy at an inflection point.” The report covers CAL’s long-term bullish stance on the economy and outlook on short-term macroeconomic challenges stemming from global headwinds with its view on interest rates, inflation, and currency.

Bangladesh’s economy is at an inflection point, and CAL expects Bangladesh to become a USD 4,000+ per capita GDP country by 2026E touching on Upper Middle-Income status by following a similar path to Southeast Asian peer countries.

Long-term growth story

Bangladesh’s economy has taken a similar path to Malaysia, Thailand, and Singapore as it approached USD 2,400+ per capita GDP level. These countries provide an encouraging precedent, having grown faster on their way to USD 4,000+ from the USD 2,500 level. Singapore reached 4,000 USD per capita by 1980, Malaysia by 1995, and Thailand by 2008. Bangladesh has been growing at a similar trend to these Southeast Asian countries. The economy could mimic a similar growth trajectory to continue its path towards the USD 4,000+ level growing at 11% annually in nominal terms over the next five years, driven by strong domestic consumption.

CAL expects domestic consumption, which accounts for more than two-thirds of GDP, to grow at over 12%, driven by expansion in the middle-class consumer base. The country’s favorable demographic trends with rising women workforce participation and a rising number of graduates are likely to facilitate higher gross pay and lead to higher disposable income, a trend often observed in fast-growing Southeast Asian countries. SMEs emerged as one of the biggest growth drivers of the economy, with 29.5% CAGR in the last ten years, leading to a 30% total employment contribution. CAL expects SME businesses to contribute 15.5% of GDP by 2026E. As urbanization and income level rise, CAL expects discretionary spending to take up a more significant portion of overall consumption with higher spending on recreational activities. National household consumption is likely to grow at 15% CAGR annually, as urban households spend 1.3(x) times more than their rural counterparts by 2026E.

The ongoing government investment in infrastructure will likely ease traffic congestion – a significant impediment to growth in Bangladesh and incrementally save close to 1.5% GDP p.a. via productivity enhancements. Investment in the enhancement of port capacity is likely to lead to a 77% increase in port handling capacity, possibly reducing vessel turnaround time by more than 50%. The establishment of countrywide economic zones will help unlock untapped export potential providing a manufacturing base for USD 40bn exports by 2026E. The per capita electricity consumption of Bangladesh is one of the lowest among several Southeast Asian countries. CAL expects domestic electricity consumption to grow at 12% CAGR over the next 5-years closing the gap on peer countries with 56.6% additional capacity by 2026E to meet the future requirements. On the exports fronts, the country’s dominant apparel export trade will consolidate further by moving up the value chain through product diversification. At the same time, sectors such as ICT, Pharmaceutical, and Light Engineering are expected to see strong double-digit growth in the export arena capitalizing on competitive cost advantage compared to peer countries.

Short-term Macroeconomic Outlook

In the short term, Bangladesh’s economy is expected to face a stiff challenge primarily in the form of global headwinds as international inflation spills over onto domestic fronts. CAL estimates inflation could reach around 8% at the end of 2022E due to the surge in global energy and commodity prices, particularly a 43% rise in oil prices from January 2022 level. In response to inflationary pressures, CAL expects that the central bank will likely opt for a balancing act between allowing interest rates to rise and a controlled depreciation of the BDT.

Both developing and developed economies are exposed to macroeconomic challenges stemming from rising global inflationary pressure. Despite near-term challenges, CAL’s long-term bullish stance is grounded upon its belief that Bangladesh will outperform peer countries due to its favorable demographics and robust domestic economy.