Bangladesh is on the verge of leaving the Least Developed Country (LDC) category in November if the government’s deferment request is not approved. This marks a significant achievement for the nation, reflecting years of progress in income levels, human development, and structural changes. Meeting all three graduation criteria – per capita gross national income (GNI), human asset index (HAI), and economic vulnerability index (EVI) – demonstrates Bangladesh’s advancement. However, despite the appearance of readiness for graduation, the country still faces challenges in effectively managing the transition.
Distinctions exist between eligibility and preparedness for graduation. It is not solely based on past accomplishments but also on the ability of a country’s economy, institutions, and policies to sustain progress independently. Current indicators suggest a need for caution. Bangladesh’s readiness for LDC graduation is strained by macroeconomic pressures and structural deficiencies. Inflation rates have been consistently high, leading to reduced real incomes and an increase in poverty levels. This setback in poverty reduction, a first in recent history, underscores underlying vulnerabilities that require attention.
External sector challenges are also prominent. Foreign exchange reserves have dwindled significantly, posing risks to covering import costs. The depreciation of the taka further escalates domestic expenses, particularly on crucial imports like fuel and food. Limited policy options exist to address potential shocks post-graduation.
Fiscal weaknesses compound these risks. With a low tax-GDP ratio and high debt servicing, Bangladesh’s fiscal capacity is constrained, hindering investments in critical sectors such as infrastructure and social safety nets. The country faces a moderate risk of debt distress, primarily due to revisions in export data affecting key debt indicators.
The financial sector presents immediate systemic risks, with a high ratio of non-performing loans (NPLs) indicating governance failures and lending issues. This scenario could impede the investment growth necessary to enhance competitiveness post-LDC graduation.
In light of these challenges, Bangladesh appears to be approaching LDC graduation amidst increased economic vulnerability rather than stability. The impending impact on trade, especially in the crucial RMG sector, is significant. The loss of preferential market access and policy flexibilities could alter the competitive landscape drastically. Export diversification remains slow, with a growing reliance on RMG products. Structural impediments like high logistics costs and energy shortages continue to hamper business operations.
The nation’s transition to the post-LDC phase coincides with a changing global trade environment marked by fragmentation and protectionism. Originally slated for graduation in 2024, the extension to 2026 aimed to prepare strategically but was disrupted by various crises. A three-year deferment is sought to address macroeconomic challenges, trade uncertainties, financial governance issues, and to expedite the implementation of the transition plan.
However, any extension should not breed complacency but necessitate a clear reform agenda with measurable goals. Efforts should focus on macroeconomic stabilization, revenue enhancement through tax reforms, and redirecting public spending towards productive investments. Addressing NPLs, improving regulatory discipline, and enhancing governance in the banking sector are crucial for restoring confidence. Structural reforms to boost competitiveness involve reducing logistics costs, improving port efficiency, and aiding firms to meet global standards.
Institutional coordination, climate resilience, and export diversification are vital components of Bangladesh’s readiness for the post-LDC phase. A concerted effort is required to enhance competitiveness, establish sector-specific hubs, and navigate tariff changes post-graduation. The nation must prepare to comply with WTO regulations without preferential treatment.
High-level mechanisms with clear accountability structures are essential for institutional coordination, while climate resilience should be integrated into the development strategy. Bangladesh must secure concessional funds to enhance its climate adaptation capabilities.
Dr. Fahmida Khatun, an economist and executive director at the Centre for Policy Dialogue (CPD), shared these insights.
