Bangladesh: banking on reserves

Bangladesh's finance minister, Abul Maal Abdul Muhith, discusses the country's plans to finance its ambitious growth targets.
Abul Maal Abdul Muhith takes questions from <em>FinanceAsia</em>
Abul Maal Abdul Muhith takes questions from <em>FinanceAsia</em>

In a wide-ranging interview conducted on the sidelines of FinanceAsia's 4th annual Bangladesh Investment Summit, finance minister Abul Maal Abdul Muhith discusses the government's plans to increase its debt load to finance the country's ambitious growth targets. 

Bangladesh wants to be a middle-income country by 2021 and a developed one by 2041. Infrastructure is being rolled out at a rapid clip and the government hopes its young population will increasingly power a growing consumer class. 

It is a country that is proud of its reputation for avoiding balance of payments crises. However, issues relating to corruption and the headlines surrounding the recent cyber heist from the Federal Reserve Bank of New York have placed the spotlight on areas where it has a less than spotless record. 

Muhith himself does not shy away from the problems he faces. Having first become finance and planning minister in 1982, he has long experience in government. He has most recently been finance minister since 2009.

Here, he explains what Bangladesh is doing to rise to the challenge and the progress it is making trying to recover money stolen from the central bank. 

Bangladesh has some big targets over the coming decades. Can you tell us a little about them and where you hope to be if and when you achieve them?

Back in 1975 we were classified as one of the world’s least developed countries. We’ve now attained lower middle-income status and by 2021 we want to be classified as middle-income.

The UN Development Planning Committee will consider our case in 2018 and their review and affirmative consideration normally takes around three years to mature.

I'm confident that we'll graduate as a middle-income country by 2021. By 2041 we want to become a developed country, which we realize is a vey ambitious target.

Our overall aim is to promote inclusive economic growth, protect the environment and promote social progress. To this end, we have to accelerate domestic demand.

That’s of the highest importance to me. Too many countries reach middle-income status and forget this crucial point and then stagnate.

The main political objective should be to increase domestic demand by increasing a person’s earning and spending power. By 2021, I think an output growth rate of 10% is not unrealistic.

What’s your GDP forecast for 2016?

This financial year we’re projecting GDP growth of 7.05%. That’s an increase on the previous year’s 6.5% (to the end of June). We’ve been able to consistently achieve around 6% for the past two decades.

International financial institutions, on the other hand, have a habit of consistently underestimating what we’ll actually achieve.

We’ve also now built our reserves up $29.1 billion as of end-April, or seven months of import coverage. What we now need to do is evaluate how best to spend some of that money to lift GDP growth to the next level.

How does investing your foreign exchange reserves fit in with your debt funding plans and overall debt mix?

Well we’ve been dependent on concessional assistance for the past 45 years and that means the government’s debt burden is very small at $30 billion, or 14% relative to GDP.

Concessional funding has greatly assisted our development to date. But now our economy has moved to the next level, so we may not get enough on concessional terms and will be required to borrow at harder terms.  

By our calculations, we can increase the government’s debt funding out by $26 billion by 2024 to effect the structural transformation of the economy. As per this projection, the actual debt of the country in 2024 would be $56 billion.

GDP, however, would double from the level of $200 billion. That still means our government debt to GDP ratio should stay in a 12% to 13% band in the next five years.

Our country has great capacity to repay this because of the success of our export sector and remittance flows. This year the export sector started with negative growth but it has improved now to about positive 8% growth rate.

Will you be accessing the international bond markets as part of your plans to finance GDP growth?

No, I don’t think we’ll access the international bond markets over the next three to four years. Firstly, we’ll use some of our reserves to fund big infrastructure projects.

Secondly, we’ll look to international markets to source funding, but it will come from countries like China, India and Japan. The main source will be China, since the country is offering us financing at less than 2% and over a very long repayment period of 20-years or more.

South Korea has been very important to us as well. We find them the best kind of development partner. Their experience as a developing country has been very recent.

Muhith speaks at FA's conference

Every day the Bangladeshi newspapers are full of the various infrastructure projects, which are under way. Which ones stand out from your perspective?

There are a number of mega projects. In Dhaka, we have the Metro Rail project being financed by Japan. The first part costs $2.5 billion.

Then there is the $1.3 billion Rampal coal-fired power plant. We are creating an energy hub on Moheshkhali Island. In Moheshkhali we hope to build generating capacity of 4,000MW and naturally it will become a coal port.

A lot of the money already committed to Moheshkali is coming from Japan. I visited the area not so long ago to explain how the projects will transform the community’s life. At the moment, the people living there subsist on fishing and salt manufacturing from seawater.

We’ve also been undertaking a feasibility study for power plants and a seaport in Paira. That’s likely to cost in the region of $5 billion.

By 2018 we’re forecasting that Bangladesh will have a surplus of power. We’re a small country by landmass, but we have a huge population around 160 million.

This makes acquiring land for development projects very difficult so we’ve been setting up some economic zones where investors don’t need to worry about acquiring land.

Bangladesh’s credit rating has been very stable at Ba2/BB-/BB- for a number of years. One of the things the agencies are always very hot on with developing nations is revenue collection. What’s Bangladesh doing to improve this?

Revenue collection is unfortunately one of the areas Bangladesh does not score well on. Our ratio of tax collection as a percentage of GDP is one of the lowest in the entire region.

We have a problem. When I came to office in 2009 I worked hard to improve our tax to GDP ratio by 3% from 10% to 13% of GDP. However the re-calculation of GDP from 2001 levels to 2010 levels meant the ratio slipped back to about 11% again.

We’re looking at people’s cars and houses to find new taxpayers. There are currently 1.4 million citizens paying taxes. There should be at least two million right now.

Over the next three years we want to add 0.6 million citizens to the tax register so that by 2018/19 should be two million. This year our target is adding 500,000 people, but I’ll be conservative and say we should definitely achieve an extra 300,000.

What about the other perennial issue with Bangladesh – corruption?

Corruption is a tricky issue to tackle. Great weight has been added to our Anti-Corruption Commission (ACC). It is there. It is independent.

But when cases are presented, there’s often not enough evidence which can be used in court to achieve any kind of practical result.

I really wish I knew what the long-term solution is. We’ve raised government salaries to comparable international levels. We’ve tried to prick people’s social conscience. I am hoping for a moral turnaround.

Then of course there are the headlines surrounding the cyber theft from the central bank. Can you tell us what stage you are at in terms of trying to recover the money or work out who did it?

About $80 million was transferred from the New York Federal Reserve Bank and of that we hope to recover about $10 million collected by the Philippines government. The rest is unaccounted for and we’re going to court in the Philippines to try and recover it. I’m not sure how much we’ll eventually recover.

We set up a commission and they’ve given me their initial report, which has some good suggestions. They should be made public in the next 10 days or so.

What I have learnt is that for an order of payment by Bangladesh Bank to be processed, it has to go through six different people. The system was compromised and it probably happened over a long period of time.

At the moment we don’t know who did this, but it’s possible that some of them were Bangladeshis.

Seeing positives

On a more positive note, Bangladesh has a huge demographic dividend. What are you doing to take advantage of this?

Our demographic dividend should last until 2045 so there’s almost 30 years to reap the benefit of our young population. This means we need to take education very seriously so that they're qualified to enter the workforce.

Almost 100% of primary school children are in the system. The big challenge is overhauling secondary school education, where there are some major structural problems relating to inadequate standards and facilities.

One way we’re trying to tackle this is by giving great emphasis to teacher training. We're also strengthening technical education and skills promotion.

I believe the conditions for take-off are ripe in Bangladesh. We’re well prepared for technical advancement and ours ia very investor friendly country. We’ve never before been so investment hungry as we are today.

¬ Haymarket Media Limited. All rights reserved.

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