The post Capital Markets in Bangladesh: A Call for Prudence and Informed Investment appeared first on LightCastle Partners.

The post Rice Industry Essential for Rural Development appeared first on LightCastle Partners.

The leather industry was shocked by a steep decline in rawhide prices during Eid-ul-Adha this year. This time of year is when a significant supply of rawhide is generated for the leather tanneries throughout the country, but people were seen throwing away the rawhides from their sacrificed cows due to an inability to get fair prices. A number of factors have been identified for this price shock, including a decline in global demand, the delay in building the industrial park for tanneries in Savar, and a lack of financing available to tannery owners.

Leather is targeted as a priority industry by the government to reduce the dependence of exports on ready-made garments, but exports declined at a rate of 6% from the previous year, with a value of $1.08 billion in 2018 1. Although falling demand is blamed for the negative outlook, Bangladesh imported processed leather worth $100 million in 2018 1. Large-scale global and industry trends are to blame for the price shock experienced by individual traders and households this Eid, which shows that the drop in price was not as unpredictable as it initially seemed.

Global Leather Market on the Decline

The global leather industry was valued at $95.4 billion in 2018, expected to grow at a rate of 4.36% for the next 5 years 2. It has been suffering from price declines caused by falling demand and political instability from the US-China trade war.

The fall in demand has been caused by several factors. Firstly, cheap leather alternatives have been increasing in popularity. The leather alternatives market is expected to have a value of $85 billion by 2025, due to its affordability and environmental-friendliness 3. It is also considered “vegan” and free of animal cruelty, increasing its attractiveness to younger consumers. Over 56% of luxury consumers today are aware of the social responsibility stance of brands, with millennials in particular being susceptible to the effect on the environment and animal care 8. On top of that, alternatives are more durable and resistant to damage than leather.

Millennial purchasing patterns can also be to blame for the decline. Leather goods are long-lasting and require care and many millennials would prefer products of a shorter commitment. Moreover, as leather is a luxury product, the upcoming recession means people are pulling back from unnecessary spending. Bags, belts, and shoes made of cloth or plastic are priced significantly lower than similar products made of leather.

Political instability in the form of the US-China trade war has also impacted the global market. It has affected leather industries on both sides of the equation, and the impact on the Bangladesh economy has been significant. China, which was once Bangladesh’s largest leather export destination, has made close to zero orders in 2019 so far 4. As the demand for China’s finished leather products has been impacted by a 25% tariff by the US government, China’s demand and offered prices for raw and semi-processed leather have been impacted as well. When the trade war began in 2018, Bangladeshi leather exports fell by 12%, making long-term planning difficult with unpredictable tariffs and export-import patterns 4.

Smuggling to neighbouring India is also a problem that is being faced by the market. This is done to enjoy the higher prices of the Indian market and also to avoid the transport costs to Dhaka from rural areas.

Industrial Park Incompletion Affecting Export Orders

Leather tanneries in Dhaka used to be located in Hazaribag, on the banks of the Buriganga. Without any waste treatment system, over 24,000 cubic metres of untreated waste were dumped directly into the river 1. The government then initiated a plan to build a 200-acre industrial park for leather tanneries in 2003 with a Central Effluent Treatment Plant (CETP), where the tanneries were ordered to shift to the industrial park. Around 150 tanneries were able to move and 40 had to shut down.

Despite the initiatives taken by the government, the CETP is not complete as of 2019, leading to pollution of the nearby Dhaleshwari river and health hazards for workers. It is expected to be completed in March of 2020. The lack of a proper solid waste disposal system means that current manufacturing practices are considered harmful to the environment, leading to global brands refusing to purchase leather from Bangladesh. This is preventing exports to European and American markets.

The Leather Working Group (LWG) is yet to give its certification to the Savar plant, limiting Bangladesh’s credibility to international buyers and forcing exporters to accept prices about 30% lower than the global average 5. Not only will the CETP need to be completed to get this certification, but water consumption will also need to be managed. Currently, it is 66 tonnes of water to tan one tonne of rawhide, whereas the international standard is 25 tonnes 5. Worker rights must also be ensured, by providing proper safety equipment for their exposure to harmful chemicals and waste, as well as emergency healthcare services.

Financing Becoming a Challenge

Relocating to the Savar industrial park required significant investment, leading to many tanneries facing a cash crunch. The recent liquidity crisis of the banks on top of this did not alleviate the situation. Not only are the financial institutions hesitant to lend to tanneries because of the leather industry outlook, but the delay in land registration approvals from the government is making it difficult to acquire loans. The government has attributed this delay to the tanneries not paying the instalments for the land price, creating a cycle of blame 5.

Recent scams such as that of the Crescent Group have also affected the ability to raise finance. The company allegedly committed fraud by showing fake export orders from Hong Kong-based companies that don’t exist to raise money from a leading state owned bank, Janata Bank, exceeding $90 million in total 7. There was alleged collusion with the top management of the bank, as they did not follow regular protocol in verifying the information provided by Crescent. Thus, the credibility of the leather industry has been impacted negatively.

The lack of finance is not only impacting the ability to invest and expand but also run daily operations. The sudden supply of rawhide during Eid-ul-Azha requires significant financing to purchase, preserve, and process. This lack of capacity for acquiring more rawhide is an additional reason for the steep decline in demand by the tanneries.

Backward Linkage Has Scope for Improvement

Demand decline and infrastructural problems combined have created a situation of supply chain collapse. Certain tanneries claim to still have unsold rawhides from the previous Eid-ul-Azha 1.

Traditionally, rawhide supplied from sacrifices during Eid creates 40% of the annual supply for rawhide in the Bangladeshi leather industry 6. Traders visit individual households to bargain and collect rawhide from the sacrifice, collecting hides from over 8 million animals sacrificed annually, and then deliver them to the tanneries 4. This year’s price shock left them in a difficult position, with the common man lamenting the low prices and wholesalers and tanneries refusing to purchase the hides due to lack of export orders. The middleman had to suffer this Eid.

Accusations of a syndicate created to deliberately fix low prices were made, to allow cheap collection during a time of high supply. This year’s fixed price was 50 BDT per square foot, which the seasonal traders used to buy from households 4. After collection, however, they faced difficulty in selling to wholesalers and tanneries, forcing them to either dispose the hides or invest in expensive preservation. The unstable supply variation and informal method of collection lead to a supply chain that is not sustainable.

The government has announced plans to allow the direct export of rawhide, which was previously banned 9. While this will benefit the seasonal traders and wholesalers, as they will no longer need to depend on the tanneries for the purchase of rawhide, it will harm leather manufacturers as they will need to match the global prices whereas they are already facing difficulties purchasing at current prices.

The Way Forward

Bangladesh’s overdependence on ready-made garments for export earnings leaves the country at risk to external changes. Diversification of the export portfolio and manufacturing industry is crucial to reduce this risk, and the leather industry was considered to be at the forefront of this shift, with its large rawhide supply and cheap labour requirements. The government had set a 2021 $5 billion export target for the industry 1. To achieve the benchmark, structural changes within the industry have to be instituted.

The main priority for the government should be the completion of the Savar treatment plant, which is long overdue. Next, access to short and long-term financing needs to be facilitated for tanneries to encourage them to invest in technology as well as increase operational capacity. The supply chain needs to be streamlined so that procured rawhides from Eid-ul-Azha can be sold and stored properly, discouraging exports of rawhide but allowing the option to be open to prevent a similar collapse next Eid.

As global demand is on the decline, it is crucial for Bangladesh to ensure strong supply sustainability, and cope with the changing market. As the price for leather falls, leather may be redesigned as a non-luxury product. In either case, the government needs to keep local problems at bay by helping restructure the industry, which could contribute to renewed cost competitiveness.

The post Rawhide Price Shock Caused by Leather Industry Changes appeared first on LightCastle Partners.

The security provided by a shelter goes beyond physical safety. Owning a house, an apartment, or land constitutes a significant portion of the average citizen’s wealth. As property prices rise, the value of their assets rises, giving them the financial security to increase consumer spending. Those who don’t own their residences and instead pay rent are impacted by the portion of their income that goes to rent. The safety of the economy is also often linked to the real estate market as, historically, high housing prices are often followed by global recessions, making it a key indicative industry to monitor the risk of a recession. As such, the market’s multiplier effect and impact on the economy make it an important industry.

Real estate refers to physical property, land, and buildings, as well as resources above and below the land itself, including residential, commercial, and industrial property. The industry includes the production, purchase, and sale of these properties.

Bangladesh’s real estate market is considered to be stable and enjoys steady growth as incomes rise. Political and economic stability, falling interest rates, and larger construction projects have contributed to the mounting growth rates. The estimated size of the industry in 2018 was over $7 billion 1, and YoY growth was above 5% in 2017 ^[2]. Its direct contribution to the GDP was 6.49% as of 2017 ^[3]. However, scarcity of land and rising cost of construction have caused prices to shoot up. At the same time, there is a shortage of properties targeted to lower and middle income classes, indicating a housing crisis which may become severe.

As middle-income earners show eagerness to purchase, the market must ensure that appropriate properties are being developed with financing options in place. With a potential recession on the horizon and increasingly congested urban areas, the government is making moves to sustain the industry’s growth.

Global Real Estate is Being Redefined

The crash of the housing market after the global recession of 2007 has not allowed complete recovery in The United States as of yet. Fears of another recession are expected to dampen the market in 2020 4. Global tensions – Brexit, the upcoming US elections, and trade conflicts with China – are also rising. These three factors, however, haven’t impacted rising housing prices yet, which are being sustained by historically low interest rates in many countries ^[4]. The size of the market in 2017 was just over $280 trillion, with an annual growth rate of 6.2% ^[5].

The housing bubble and subsequent crash in the US in 2007 was largely caused by loans given to subprime borrowers with poor credit ^[11]. This created subprime mortgages on assets as housing prices rose at breakneck speed, and many mortgages and loans were marked with a more favourable credit rating than accurate. As borrowers began to default, the bubble collapsed. Financial institutions lost money and the economy came to a grinding halt. As a few shut down and others were bailed out, the US and global economies gradually came out of recession afterwards.

As businesses adopt non-traditional operations, the need for strictly commercial spaces is falling. More functional, multipurpose offices that allow omnichannel operations are becoming popular. The rising demand for green, environmentally-friendly places and technological advancements are making older properties obsolete, and mixed-use properties are rising in popularity. An additional effect of these changes is straying away from traditional 20-year leases, as businesses desire to be more flexible with a rapidly changing environment.

New practices, such as shared offices and co-living, are making it difficult to place values on property. Flexible and co-working offices are predicted to account for 30% of corporate office spaces by 2030, compared to 5% today ^[4]. These trends indicate the shifting of real estate from an asset class to service, merging with attributes of the hospitality sector ^[5]. Logistics real estate is another rapidly growing sub-sector. The growth in e-commerce services has increased the need for warehouses and distribution centres.

These changes will redefine the way the industry operates, starting from the way the properties are valued. With hybrid usage, the lack of a single direct consumer, and non-traditional leasing, the sector must choose new features to define the value of a building. Possible methods are estimating the experience enjoyed by the final users, or the technology invested in the property.

Demand in Metropolitan Cities is Rising for Residential Real Estate

As Dhaka grows more congested and land prices rise, apartment buildings are replacing houses and bungalows. The city is also shifting to the creation of suburbs and residential areas away from the urban centre, which may relieve pressure on the roads and properties.

As the income of the middle class rises, the demand for housing is also increasing. Many consumers aspire to have their own property instead of spending a significant amount of their monthly income on rising rent prices. The rising availability of home loans increases the ability of consumers to afford properties, further increasing the convenience of purchasing a home.

Commercial real estate refers to offices, shopping centres, medical and educational institutions, and hotels among others. Factories, warehouses, and other manufacturing facilities are included in industrial real estate. The growth of this segment depends on business confidence, which has been bolstered by the rising economic growth of the country. Infrastructural improvements also have an impact as they increase the ease of trade throughout the country, allowing businesses to access locations that previously may have been too costly to operate in. As the rent of commercial spaces are rising, businesses are renting floors in residential areas as well, away from traditionally commercial districts such as Motijheel.

Related Authorities and Associations:

• National Housing Authority (NHA)
• Real Estate and Housing Association of Bangladesh (REHAB)
• Rajdhani Unnayan Kartripakkha (RAJUK)
• Dhaka North City Corporation (DNCC) and Dhaka South City Corporation (DSCC)

Housing Loans Boosting Growth

As purchasing a property is a huge investment that requires savings of a lifetime, financial support in the form of housing loans can help a consumer make that decision earlier on in life, boosting the industry as well as their own wealth. As of June 2018, total outstanding housing loans amounted to nearly $10 billion, making up 9.6% of the total credit to the private sector. Between 2016 and 2018, outstanding housing loans increased by 42% 3. The rising popularity of home loans indicates confidence in the economy and the real estate sector.

The range for interest rates is between 8 and 15%, and loans up to BDT 12 million can be offered. Private commercial banks provide the bulk of these loans.

Despite rising loan amounts, loan penetration is low at only 9.1% of total credit, whereas other Asian countries, such as India and Thailand, have rates in the double digits – 12.5% and 19.9% respectively 2. This is due to the fact that not only are the housing conditions poor for low and middle-income consumers, but most of them are ineligible for the loans. Over 70% of urban-dwellers fall in the ‘inadequate’ category for financing 2. The Bangladesh Bank is aiming to make the loans more accessible to the middle class.

The potential recession and the liquidity crunch, although affecting funding in other industries, are unlikely to have a strong impact on housing loans for two reasons. Firstly, the real estate market is not plagued by the uncertainty of other industries, as people tend to invest in properties even when other investments are unsafe. Secondly, only 3.12% of the housing loans were defaulted in 2016, indicating a good recovery rate 6. This makes housing loans a safer option for banks than business loans.

Affordable Housing is a Necessity

The rate of urbanization in Bangladesh is 1.69%, the highest in South Asia. It is estimated that 120,000 additional units are needed to house this increasing population annually, but the current supply is around 25,000 annually ^[2]. The real estate industry is not only indicative of investments and the wealth of a country, but also the basic standard of living of its people. The unplanned growth of the industry, however, is currently leaving the lower and middle-income population behind.

Rent inflation was higher than the general inflation rate by 2.3% in 2016. Approximately 82% of residents in Dhaka paid over 30% of their monthly income on rent and utilities, which is considered to be above the affordability limit ^[10].

Approximately 40% of Dhaka’s population is forced to live in slums or squatter settlements. These same tenants are forced to pay rent that can be up to double the rate per square foot of high-end apartments ^[7]. Frequent fires, crime infestation, and uninhabitable, unsanitary environment make these places less than ideal to live in. On top of that, the homeless population of Dhaka is now estimated to be higher than 50,000 ^[7]. The situation is only slightly better for the middle-income class, with 57% of the group unable to afford a house in Dhaka ^[7].

Most new constructions are of spaces more than 1,000 sq. ft., making them inaccessible to lower income home-seekers ^[2]. This, along with rising rod and cement prices, has created a shortage of affordable homes for the lower and lower-middle-income groups. There is an estimated deficit of 4.6 million housing units in the urban areas of the country ^[2].

The biggest challenge facing the industry is the scarcity of land. This is especially felt in the cities, as urban sprawl keeps the city boundaries expanding. With the existing infrastructural problems, this is increasing the difficulty of day-to-day life with commute and congestion dominating the average citizen’s daily life. The cost of construction is also rising as most materials are imported, and the Bangladeshi taka has devalued against the US dollar. For a property developer to get a project approved, permission must be obtained from over 10 organizations for water and electricity connections. This, in addition to the scarcity, is leading to rising property prices. To keep investments accessible to the lower and middle-income classes, these issues must be addressed.

Technology Could Provide Reformation

As in all other sectors, technology is invading real estate and has the potential to transform it. Dubbed ‘Proptech’, property technology can help real estate firms improve their services to be more accessible to consumers. In Bangladesh, the usage of big data can be expected to make the biggest difference as developers can identify trends in preferences as well as how to target younger consumers. The Internet of Things and artificial intelligence will also have an impact, but these technologies are yet to truly permeate regular business in the country.

Black Money Whitening Policy is Causing Debate

The recently announced government policy to allow the whitening of black money by investing in real estate has been met with mixed reactions ^[8]. The budget for FY20 allows for a 5-year plan where people may invest money in Special Economic Zones, high-tech parks, or real estate without having to disclose its source by paying a certain level of tax. On one hand, this will reduce capital flight from the country and money will enter the mainstream economy instead. The size of the black economy in 2015 was estimated to be $58 billion ^[8]. On the other hand, critics are suggesting that the money would have entered the mainstream economy by way of consumption or investment in financial instruments, and this policy is unethical as it permits black money and discourages honest taxpayers, allowing criminals to keep and profit off of their illegally-earned assets.

The Way Forward

Changes in financing options, confidence in the economy, and the rapid urbanization of Bangladesh are starting to push the previously stable real estate market into an era of growth, making it an attractive investment option. In addition to this, government initiatives to boost the industry with black money flows mean that this growth will be sustained.

Increasing the ceiling of home loans from the current Tk 12 million and reducing the interest rate will encourage investment. Registration costs, which can be up to 16% of the property price, also act as disincentives ^[9]. Changing these policies can facilitate middle-class consumers to invest in real estate.

A priority for the government should be keeping housing affordable so that consumers can actually invest in housing without losing their life savings or take unsustainable loans. Decentralization can be the key to this, by moving residential areas to the suburbs. This would relieve pressure and congestion from the core business areas of the city, and allow residents to purchase affordable housing in suitable locations. Creating affordable housing options for the homeless or poverty-stricken populations of Dhaka will be a crucial step in development, and incentives must be provided to developers to make properties targeting middle-income consumers. Public-private partnerships have been successful in this sector in other developing countries and may be the answer to this growing concern.

An illustration of this would be India, which also struggled to accommodate the lower-income groups but now has an affordable housing market that makes up one-fifth of the real estate market 2. Full tax exemptions for developers in this segment and housing loan subsidies all helped boost its growth.

The post Need for Affordable Housing in the Real Estate Industry appeared first on LightCastle Partners.

Being located at the edge of Bay of Bengal, Bangladesh has a wide and diverse range of sea food options. From Rock Lobsters to Mussels, from Prawns to Pomfrets, the country offers many options that cater to the local palette, while also exporting a huge proportion of its production annually. But among the many produces, the mud crab is gaining momentum as the next big sea food export category, so much so that the Government of Bangladesh has earmarked the crab sub-sector into the special development category in its latest Export Policy Act 2018-21.

Commercially sold as “Scylla Serrata”, the popular mud crab is actually scientifically named “Scylla Olivacea”. Reasons behind this rationale is unclear particularly since both the aforementioned species belong to the same mud crab family and is similar in quality and taste but differs in size.

In terms of business viability, while mud crab production offers significant return on paper, the industry is yet to achieve sustainability, and relies heavily on crablets sourced from nature. Without alternate sources of crablets from hatcheries, the natural stock of crablet will eventually get depleted leading to ecological imbalances.

Crab Production

Over the years, mud crab farming in the southwest of Bangladesh has witnessed a sharp rise, as more and more farmers are finding it lucrative to rear crabs. As of 2009, the mud crab fishery supported the livelihood of more than 50,000 fishers, traders, brokers, transporters and exporters in Bangladesh ^[1] and the number has increased to about 300,000 households at present (2015) ^[2].Key reasons for the interest in mud crab is due to relatively high prices and is less prone to diseases compared shrimp farming. Additionally, mud crab farming is regarded as less vulnerable to the local effects of climate change and deterioration of water quality ^[3]. The increase in mud crab farming can therefore also be interpreted as an adaptive response to deteriorating climatological and environmental conditions.

Demand

Crab has emerged as a potential export earner, thanks to its high demand across the globe and increased farming in the coastal belts of Bangladesh. From the southern belt, crabs are transported to Dhaka and flown either live or frozen to major export destinations. Traders grade the catch and sell them at higher price up to $45/kg during peak season.

Crabs are exported in two forms: Live or Frozen. Live crabs are usually exported to Asian countries because of high demand and logistical limitations. Frozen soft shell crabs are popular among western countries with Australia and United Kingdom leading the way as major exporting destinations.

The historical export volumes show paradigm shift from live crabs to frozen ones. However, frozen products are mainly sold as soft shell crab and it requires collection of young crabs from the nature. Therefore, while the demand for frozen crabs is increasing annually, dependence on wild crablets makes sourcing unsustainable for long term growth.

Apart from the export market, demand for crab has also been rising locally in Bangladesh in tune with the rise of the middle and affluent class (MAC) population, which is projected to quadruple to 37 M in 2021 from 11.7 million benchmark (2015)^[5]. This has contributed to greater consumption of seafood, including demand for crab based dishes in Bangladesh. This is projected to be a key driver of demand of mud crabs in Bangladesh over the medium term. Currently, there are over 110 restaurants in Dhaka that sell crab based dishes to both locals and expatriates.

The overview of the crab value chain is as follows:

Challenges to Growth

Despite potential growth opportunities, the crab sub-sector is still at a nascent stage and is yet to have a robust value chain. Some of the major bottlenecks have been identified as below:

• Hatchery facility and infrastructure: Inappropriate infrastructure posed challenges related to lack of seawater supply, natural light, proper aeration, drainage systems and biosecurity.
• Lack of expertise: Since the technology is comparatively new, the market is still getting acquainted to the practices.
• Nursing Technology: A nurserer grows a crablet to a juvenile crab from which a farmer starts the cultivation. This particular technology will be vital when the crablet supply will be diverted from nature based sourcing to a crab based one. While local NGOs have trained around 150 individuals to become nurserers, however the technical knowledge needs to be improved in order to ensure higher survival rate when growing juvenile crabs from crablets.
• Sourcing of crablets: As of now, majority of crablets are sourced from the wild as it is economically cheaper and supply from hatchery based crablets is limited. However, sourcing from the wild will result in resource depletion and hence a hatchery based crablet production needs to be established in order to achieve sustainability.
• Customers: As per Department of Fisheries, for every 100 crabs produced in Bangladesh, 97 of them are exported of which 85 goes to China and only 3 are consumed in the local market. Despite growing interest among the locals, the numbers are still below the desired level. The export basket is heavily dependent on just one export destination i.e. China. This increases the risk significantly as any slowdown in the Chinese economy or diplomatic fallout might adversely impact export.

Way Forward

The crab industry provides a new avenue for Bangladesh to diversify its export basket. In terms of production, crabs are easier to maintain with a lower mortality rate in comparison to shrimps. However, the industry is still at its nascent stage and the crab ecosystem is still not developed to complement its value chain. While government has taken steps to promote the sector, they also need to focus on capacity development and create incentives to attract private investors, particularly in crablet production in order to avoid depletion of natural stock of crablets.

The frozen or soft shell crab industry provides an opportunity to export Bangladeshi Crab beyond the Asian belt to developed markets. The dependency on juvenile crabs from the wild puts a wedge on potential growth

In terms of forward linkage, the local demand for crab needs to be increased in order to diversify crab demand. For export, Bangladesh must look for new export destinations for building a solid growth platform.

The post The Curious Case of Crab Sub-sector in Bangladesh appeared first on LightCastle Partners.

Bangladesh’s startup ecosystem has picked up rapidly since 2013 – driven by participation from angels; rise of eco-system enablers like co-working space, community events, local and global incubators; and a growing active interest from government/development partners. However, major deals and growth have started happening since the end of 2017.

While a number of international/local funds have present operations along with incubator/accelerator programs for pipeline development in the economy, Series A funding is yet to properly kick off. The embedded presentation gives a high level overview of the current status, the story of evolution and growth, the promising and thriving sectors, the potential bottlenecks and the role of ecosystem enablers. The conclusion is clear: Bangladesh’s startup ecosystem is slowly, but surely, coming of age.

Download Slides from SlideShare | Download as PDF

The post [Presentation] Startup Ecosystem: Bangladesh— Coming of Age appeared first on LightCastle Partners.

Unlike many of its South Asian neighbors, Bangladesh has been experiencing a continuously increasing GDP growth rate for the last five years – driven by strong consumption and public investment, recovery of apparel exports and high remittance growth. The Government has created liberal investment and business operation policies regarding taxation, import duties and work documentation among others, in a manner that encourages greater foreign investment in the secondary and tertiary sector.

Drawing lessons from the Chinese economic success story, Bangladesh is promoting industrialization by setting up Special Economic Zones across the country, while attracting investments through investment friendly policies like tax holidays. The policy focuses heavily on thrust sectors that are primarily export oriented such as agro-based industries and manufacturers that specialize in ICT, artificial flower-making, electronics, frozen food, jute goods, jewelry, leather, oil, gas, textiles, construction and tourism.

View Slides on SlideShare | Download as PDF

The post [Presentation] Forecast of Growth Industries in Bangladesh & Tax Incentives for Industries by the Government appeared first on LightCastle Partners.

The post Bangladesh Budget: Education, E-Commerce and Capital Markets appeared first on LightCastle Partners.

Bangladesh is one of the fastest growing economies in Asia-Pacific. The country is aspiring to gain the status of a middle income country very soon and has been making great strides in terms of social, economic and technological transformation. It recorded a commendable GDP growth rate of 7.86% in 2018.^[1] All these being said, a growing economy like Bangladesh is expected to to have high private sector credit growth, high investments, a vibrant stock market and a dynamic financial system; however, the financial system has been on a downward trend since the first quarter of 2018.

The financial sector of Bangladesh is undergoing liquidity crunch owing to a number of demand and supply side factors. Alongside, governance issues within the banking system have contributed to high levels of non-performing loans (NPLs), resulting in lack of trust for the banking industry.

A look into the structure of the financial system of the country^[2]

The financial system of Bangladesh is comprised of three broad fragments: formal sector, semi-formal sector and informal sector. The formal sector includes all regulated financial institutions. The semi-formal sector includes institutions which are regulated otherwise but do not fall under the jurisdiction of Central Bank. The informal sector includes private intermediaries which are completely unregulated. The following diagram delineates the broad structure of the country’s financial system:

Dissecting the Commercial Banking Industry

The basic principle of how commercial banks make money is by providing loans and earning interest income from those loans. The loans that they are providing come from the deposits they are taking from people in return of interest and from their own reserves. Their share is the difference between the lending and deposit interest rate. The current weighted average deposit rate and lending rate of the country are 5.56% and 9.59% respectively.^[3] Commercial banks also earn revenue from commission based incomes from trade and treasury services.

The three main reasons for the current predicament of the banking sector are deposit shortage, declining asset quality due to governance issues and enormous competition within the industry. One of the most alarming symptoms to these causes is the rising level of non-performing loan. The amount of NPL stood at BDT 893.4 billion in 2018, which is more than 10% of the total loan disbursed. Along with these, some other factors also played a role behind the liquidity crunch. The next section puts a deeper look into it.

Reasons for decline in the deposit reserve amount of banks:

• Fluctuating deposit rates: The deposit rates of commercial banks have shown a declining trend over the past few years. In 2018, Bangladesh Association of Banks (BAB) decided on an interest cap of 6% on deposits. This has restricted deposit flow within the banking system as the risk-adjusted return was perceived to be low among depositors.

  Figure: Deposit Rates Trend / Source: Bangladesh Bank

Lucrative and risk free saving certificate: In the past 5 years, the sales of National Saving Certificates have been soaring. The return rates of different saving certificates range from 11.8% to 12.2%, which is much higher than the bank deposit rates of around 6%. ^[5] Recently, to control government debt, the government has levied a 10% tax on the proceeds from NSCs, which previously was 5%.^[6] And they are stringently tracking the sale of NSCs with introduction of new rules. This has contributed to a fall in sales of NSCs from July 2019 onwards.

• Loss of faith due to recent turbulence: The total money lost due to major scams, irregularities and heists in the financial sector, as of 2018, stood at Tk. 22,501 crore (~USD 2.68 billion)^[8]. Due to poor regulations and political influence within the banking industry, scams have increased, which caused people to lose faith on financial institutions and thus impacted the deposit level. The Chinese government has blacklisted five local private banks as they failed to meet payment and other obligations.^[9] Moreover, there has also been a loss of faith in the inter-bank money market. Most banks are hesitant to lend to other banks with questionable financial conditions.
• Capital flight: There has been a huge amount of legal and illegal capital flight from Bangladesh. According to Global Financial Integrity (GFI), Bangladesh is second in South Asia in terms of illegal outflows of money. The 2017 annual report of Swiss National Bank shows that money parked by Bangladeshis in Swiss Banks totaled around USD 481 million. The implication of such huge amounts of capital flight on the money reserve of the country is undoubtedly alarming.
• Large part of the economy not being financially included: The banking industry of Bangladesh is highly competitive. . There are 62 commercial banks, 40+ NBFIs and more than 60 insurance companies operating in Bangladesh. In 2016 Bangladesh had 75 branches of commercial banks per 1000 square kilometres of land, which was the highest in the South Asian region.^[10] In spite of all these stats, only 47% of the population is financially included. ^[11]Among them, only 25% have full-service bank accounts.^[12] The reason for a large part of the economy not being under the financial umbrella is because of the concentration of commercial banks in urban areas. So a large portion of the money being circulated in the rural areas is untapped by commercial banks. This problem is now being addressed through the introduction of Mobile financial services (MFS) and agent banking operations predominantly for rural population.
• Foreign liquidity crisis: The high import expenditures and low export earnings has caused a demand-supply gap of US dollars. As a result, the foreign exchange market has been volatile with rising dollar exchange rates against taka. The devaluing of local currency compelled local banks to use money from their reserves for settlements of letters of credit (L/Cs) and thus put pressure on banks’ overall liquidity.

In the interbank market, the nominal exchange rate for taka-US dollar depreciated by 3.9% and the Real Effective Exchange Rate (REER) declined by 2.7%. Government injected USD 2.3 billion into the economy to adjust the exchange rate and to help banks make import payments. This has contributed to the outflow of funding from the banking system.^[13]

Reasons for the impeded asset quality growth of the banking sector:

• Non-performing loans: As the capital market is underdeveloped in Bangladesh, the private sector highly depends on commercial banks for mobilizing internal savings and for providing capital to companies and investors. However, the financial sector is heavily burdened by high percentage of NPLs. If we look at the trend of NPL as a percentage of total loans, we can see that the percentage of NPLs had an incessant annual uptrend since 2015 onwards.

  FIGURE: Increasing trend of NPLs / Source: Bangladesh Bank

  The uptrend in the percentage of NPL is an indication of the declining asset recovery rates of banks. This has caused an overall negative impact on the liquidity and the money supply of the economy. The prime reason for the rising NPL trend is poor governance at both private and government level.

Asset Structure: According to Bangladesh Bank’s guidelines on Risk Based Capital Adequacy (2014), banks must maintain a minimum total capital ratio of 10% plus a Capital Conservation Buffer of 2.5%. The rising NPL trend, poor corporate governance by banks and increased difficulties in recovering bad loans has led to the weakening of the asset quality of the banking sector. This is well depicted on the figure below where most state-owned commercial banks have failed to maintain minimum capital adequacy since 2013 and development finance institutions (DFIs) seem to be massively under-capitalized.

• Point cut in CRR and SLR: CRR stands for Cash Reserve Ratio and SLR is Statutory Liquidity ratio. These are tools in the economy which manages inflation and flow of money. The central bank controls banks’ capacity of lending through CRR and SLR. One of the prime reasons for aggressive lending trend noticed over the past few years is due to 2018 Bangladesh Bank has given a point cut of 1% for Cash Reserve Requirement. The current CRR for banks is 5.5%. This measure was primarily taken to address the liquidity management issue but it encouraged banks to lend out more aggressively, thus resulting in growth of weak assets.

  FIGURE: Trend of ADR of the Banking sector

  A fluctuating Advance Deposit Ratio (ADR) indicates inefficiency in liquidity management by banks. It also indicates fluctuating Statutory Liquidity Ratio. Moreover, we can see an uptrend in AD ratio since 2017 which can be credited to the new CRR policy by the central Bank.

• Margin compression: As a new policy putting a ceiling on both deposit and interest rates were introduced, overall margin for banks were compressed. According to new policies set by the authority, interest rate for loans are to be kept to single digit, i.e, have to be less than 10% and the deposit rates are to be less than 6%. This margin compression resulted to banks having less money in their reserve, thus leaving an adverse effect on the Advance- Deposit (AD) ratio.
• Crowding out effect: Crowding out effect is the concept of increasing government spending and deficit financing sucking up available financial resources. Government lending from private sector has increased radically due to various on-going development projects like power plants, construction of ports, bridges etc. This has in turn caused a fund crisis in the reserves of mainly state owned commercial banks (SOBs).

Recognizing these problems from both state and private level

For various reasons, the capital market hasn’t grown enough to counteract the liquidity crunch coming from the banking sector. Moreover, alternative forms of financing like private equity firms, venture capitalists, angel investors, crowdfunding etc. haven’t grown as much as they should have, which caused the financial system of the country to be heavily reliant on the banking industry.

From a remedial point of view, the first step would be to recognize each of these problems from both state and private level. The next step would be to bring a few changes in the overall functioning of the banking industry. Some other steps that might enhance the overall functioning of the banking system are:

• The culture of giving licenses to new banks should be stopped. India has an economy much greater to ours but the total number of Private Sector Banks (PSB) in India is 27, on the other hand, we have 64 scheduled and non-scheduled banks.^[17] Last year, giving into pressure from government high-ups, Bangladesh Bank has set in motion the process of giving licenses to four proposed commercial banks^[18]. So given the size of the economy, the banking industry is already saturated and there is no need for new banks
• The practice of recapitalization of banks year after year, especially SCBs, should be stopped. These banks are bailed out on the basis of public money, which is economically uncalled for and morally improper.
• Overall governance of the banking sector should be enhanced. For example, one of the reasons for the increasing number of bad loans is due to the preferential treatment from banks to certain companies or institutions. Due to personal relationships with borrowers, some banks tend to compromise on the credit approval process at the expense of asset quality.
• Loan classification norms should be redesigned to better identify defaulters and internal control departments of banks should be strengthened to address these issues.
• Financial inclusion is the key to growth. Agent banking can pave the way for a more financially included banking system. bKash has commendably contributed to the increased access to financial services in the rural market.

The article is authored by Marzina Akhter Prottasha, Trainee Consultant at LightCastle Partners.

The post Banking Sector: Turbulence in Disguise appeared first on LightCastle Partners.

The post Bangladesh Wheat Sector: Struggling with Demand-Supply Mismatch appeared first on LightCastle Partners.

Risk is one of its most challenging and constant aspects of the human experience. By providing financial backing in case of unexpected events, insurance attempts to reduce the impact of risk on our health, belongings, and businesses. The insurance industry is not only central to the creation of a stable business environment but also critical for the reduction of the financial burden on the government during natural and economic crises. The investment of insurance premiums into other financial assets also helps generate growth in the country.

Bangladesh is the most underinsured country in the non-life insurance category, despite standing to lose as much as 0.8% of its GDP to natural disasters a year 1. The country’s insurance gap, indicating assets at risk which are not covered by insurance, stands at $5.5 billion, or 2.1% of GDP 1. In 2018, the insurance premium earnings, which refers to the recurring fee paid by the policyholder for the insurance contract, rose by 11% to a value of $1.47 billion 2. There are 77 insurance companies in total – 32 life and 45 non-life insurance providers^[1].

FIGURE: Insurance Penetration / Source: Swiss Re Institute

The main categories of insurance are health, including life insurance, property, and financial.

Global Insurance Evolving With Technology

Gross Written Premium (GWP) or revenue globally was massive at $4.8 trillion in 2017, and estimated growth was around 4%.

A potential recession in late 2020, which experts are assigning a probability of around 40%, may damage growth prospects^[3]. To deal with a slowing economy, companies will have to incorporate technology to increase efficiency and meet the demands of the evolving digital community. Cloud computing is a major trend in the industry, with approximately 7 in 10 companies using it for cost reduction and more adaptive contracts, such as pay-as-you-consume contracts 3. Blockchain technology for secure, real-time data sharing is also on the rise.  The rise in the incorporation of technology in the industry, dubbed InsurTech, has also lead to more innovative consumer relationships, necessary to adjust with newer forms of business such as in the sharing and gig economy.

The rise of InsurTech means that cyber risk and consumer privacy are of rising importance. The European Union has placed a regulation to protect consumer data that could fine international insurance carriers up to 4% of their global sales if violated^[3].

Globally, insurance regulators are looking to reduce systematic risk in the industry and increase disclosure of climate-related financial information to analyze climate change risk. As climate change is often linked to the severity and frequency of natural disasters, this could be an increasing cause of concern for insurance companies.

Changes in regulation, consumer demands and expectations and the economy, are further provoked by the adaptation of a digital ecosystem. Insurance companies globally are facing a choice to either adapt and become agile with the changes and flows of the industry, or hold on to outdated conceptions of brand strength, product complexity, and capital access to stay rigid and risk obsolescence.

Mistrust of Consumers Is The Main Barrier

Despite a booming economy and the expected middle-income country status by 2024, the insurance industry of Bangladesh can only be described as underdeveloped. A major reason for this is that most consumers in Bangladesh are unaware and uneducated about how insurance works, due to a lack of information dissemination. Vague and complicated terms and conditions further discourage them from taking insurance.

Around 7% of households in the country have to finance healthcare payments by selling their assets^[6]. Insurance would relieve them of this burden by providing protection against the risk of unaffordable treatments.

To protect consumers, regulatory bodies need to impede the sale of unfair or exploitative contracts, which is often caused by complicated policy language and unjust pricing. Regulation to limit insolvency risks will also ensure that customers get paid when they need to collect claims, which is often considered a major peril of insurance contracts.

Moreover, the poor performance and outlook of the financial sector are not promising either. Banks are dealing with a liquidity crunch caused by the high number of defaulted loans, or non-performing loans (NPL), and multiple scandals have shaken customer confidence.

Insurers Facing Problems In Seizing Market

Not all the problems arise from the demand side, however. To convince consumers to buy an insurance policy, the industry is reliant on agents who persistently contact potential clients. These agents have to be paid a portion of the first year’s premium as well as a smaller percentage of future premiums collected from the customer. To encourage these agents, insurers may offer commissions up to 70%^[1].

As most companies are concentrated in urban areas, there is a large market in rural areas that is not being accessed. A lack of enabling regulations, infrastructure, and market data limits the quality of insurance products, as well as their coverage. This is evident as even though the Motor Third Party Liability insurance is compulsory, it only has a penetration of 70%^[4].

Insurers earn returns on the assets they invest with funds raised from premiums collected. Policy mandates that 30% of the funds be invested in government securities and the remainder can be invested in shares, fixed assets, and fixed deposits 5. Premiums earned from fixed assets have been falling as construction and maintenance costs rise, leading to lower profit from rent and possibly lowering the ability to settle claims 5. However, the claim settlement rate has improved significantly in the past 10 years, with an increase from 72% in 2009 to 91% in 2018^[6].

Life insurance dominates the market with a share of 73.5%, over non-life’s share of 26.5%^[6]. The top 5 largest life insurance companies constitute 70% of the market. MetLife, the only foreign company, has a market share of 30%^[4]. The non-life insurance is comparatively less dominated, with the 5 largest companies composing 50%, and the market leader Green Delta Insurance composing 12% of the market share.

Structural Changes Are Needed

The lack of trust of customers is currently the biggest barrier to growth for the industry. This means that there is significant scope to increase information dissemination and promotional activities. A dearth of skilled labour in terms of both agents and managers may also be the reason for the gap in customer relationships.

As evidenced by global trends, there is an immense opportunity in the growth of technological capacity. As digital financing has been popularised to the public through services such as bKash, the introduction for a similar platform for insurance may be easier. Moreover, this does not require the same infrastructure as traditional forms, allowing companies to reach remote populations in rural areas.

A way to solve the problem of lack of infrastructure and resources of the insurance companies could be bancassurance, which refers to a partnership between banks and insurance companies where the bank sells the insurance products. It increases convenience for the customer as payments and claims can be done through traditional channels such as ATMs. Moreover, consumers are more likely to trust banks than insurance companies. The diversification of financial services offered by banks reduces their systematic risk, making bancassurance beneficial to all parties involved.

Diversified Insurance Products Are Needed

A lack of diversified products has also been noted as a barrier to the industry’s success. There are several products that could be introduced to target the local market that are especially curated to the conditions of Bangladesh. Perhaps the most likely to succeed would be agricultural insurance, allowing farmers to have backups in case of poor harvests, floods, or other uncontrollable conditions. Not only does the agriculture sector employ a third of the country’s population, but it suffers from production shocks every 5 years, causing significant drops in income^[8].

There have been plans to introduce it under public-private partnership^[7]. Microinsurance and Islamic insurance are products that can be developed further to target lower-income customers, or those still sceptical of the insurance industry and larger investments.

The Way Forward

Despite the dismal image portrayed by the current situation and numbers, Bangladesh’s insurance sector has significant potential as the average income and GDP continue to rise. Moreover, as the middle and affluent class in cities throughout the country increases in size, the desirability of insurance also increases. The insurance premium of the industry is expected to grow at a rate of 7.04% the next year^[8].

Regulatory reform must focus on protecting consumers from complex and potentially deceptive contracts, and the increasing availability of insurance products to members of all economic strata. The Insurance Core Principles (ICPs) developed by the International Association of Insurance Supervisors (IAIS) provide a globally accepted framework of principles that the government can adopt for IDRA^[8].

The impact of this industry can be easily illustrated by the impact of a 1% increase in insurance penetration.

FIGURE: Impact of Increase in Insurance Penetration / Source: PriceWaterhouseCooper

On top of this, mature insurance markets can attract FDI as investors feel reassured by strong financial infrastructure. However, the most significant change will be social as the burden of personal risk is reduced. Microinsurance, agricultural insurance, and health insurance have the potential to become essential financial services for lower-income populations. For a country like Bangladesh, insurance could be the missing factor in the financial freedom of the masses.

The post The Untapped Potential of the Insurance Industry appeared first on LightCastle Partners.

Bangladesh’s economic fluorescence in recent years has been the natural outgrowth of a competitive garment sector and a strong inflow of migrant remittances. The former has been the premier driver behind the country’s growing prominence in international trade and has helped to make Bangladesh a growing regional economic powerhouse. Owing to this, Bangladesh is projected to be the third fastest-growing nation this year and the next by major multilateral institutions.^[2]

In the wake of this development, global credit rating agencies Standard and Poor’s (S&P) and Moody’s maintained their long-standing ratings of BB- and Ba3 respectively, affirming a stable outlook for Bangladesh’s growth potential.^[1][3]

S&P: Strong Potential Marred By Economic Status

S&P maintained its longheld rating of BB- for Bangladesh, underscoring a stable outlook for the country while highlighting major fiscal constraints faced by the nation. As a whole, Bangladesh is expected to grow strongly over the next 12 months while its citizens continue to experience rising incomes.^[1] S&P’s rating greatly hinges on the level of net general government debt and the performance of Bangladesh’s external profile, namely how export demand fares.^[1]

The rating agency highlighted Bangladesh’s low economic development and limited fiscal flexibility as key constraints to assigning a higher rating. Fiscal flexibility, in particular, is an important area of study. Bangladesh’s constrained revenue generation capacity, high debt-servicing costs and voluminous spending on infrastructure improvements have played a major role in limiting fiscal flexibility.^[1][2]

On the other hand, these setbacks are weighed against a strong external profile, arising from a competitive garment export sector, large migrant remittances and substantial engagement with donors. Despite institutional weakness being a hallmark of the country, Bangladesh has experienced consistent economic growth. The tumultuous political environment of the country impedes sound policy-making and constructs barriers to creating a friendly business environment.^[1] This has resulted in foreign direct investments (FDIs) being persistently low in the country for decades. Regardless, strikes and politically motivated violence have not been overly disruptive to the economy in recent years and consequently, Bangladesh’s economy is expected to resiliently grow in the coming years.

Low economic development characterized by a GDP per capita of $1900 (2019) is also a major rating constraint.^[1]  This low level of income offers a narrow base from which the government can collect revenue, severely limiting the country’s fiscal and monetary flexibility acutely needed to immunize itself from exogenous shocks.1  However, Bangladesh’s GDP per Capita growth rate of 5.9% over the 2013-2022 period indicates strong real economic growth compared to other countries within similar income brackets.

Bangladesh also benefits from low external borrowings. Large migrant remittances and a competitive garment sector have contributed to current account surpluses over the last few years.^[1] Large food imports and reduced remittances during the period of slumping oil prices affecting Gulf States–the largest hosts of Bangladeshi workers–created a small current account deficit in 2017 and widening gap in 2018.^[1] Since then, however, exports have once again gained momentum, narrowing this deficit gap in the first half of 2019. S&P believes this trend of recovery will continue into the future. While food-related imports are expected to be lower, infrastructure-related imports are forecasted to continue, creating current account deficits around 1.85% of GDP over the period 2019-2022.^[1]

Structural Weakness in Bangladesh’s Fiscal Profile

Export earnings from the apparel sector and inflow of migrant remittances represent major anchors of Bangladesh’s strong external profile. The latter of the two faces a global threat, namely the maturation of construction in host countries, thus diminishing the need for Bangladeshi workers to work overseas.1 In addition, income tax revenue remains abysmally low while fiscal flexibility remains constricted due to the growing interest burden resulting from the progressive issuance of the costly National Savings Certificates (NSC).^[1]

Bangladesh’s low revenue mobilization is the product of a narrow revenue base. The country has only 2 million registered taxpayers out of a population of 160 million people.^[1] Government revenue was only 9% of GDP, the lowest amongst all rated nations.^[1] While the government has outlined various tax initiatives to expand the tax base, its main proposition is to reform the complicated Ad Valorem Tax (VAT) system. However, the plan has been repeatedly delayed since it was first proposed in 2012. It is expected the government will try to reform the VAT system now that the elections have concluded. Analysts believe it will be done in an attenuated manner, with multiple rates as opposed to the initially proposed single rate. S&P does not expect a significant increase in revenue from these proposed initiatives.^[1]

Although Bangladesh tends to run moderate fiscal deficits, a large portion of this deficit is financed by the costly National Savings Certificates as opposed to commercial borrowing. Bank deposits offer 5% to 8% rates to savers whereas NSCs offer between 11.04% to 11.76%. These higher rates have channeled funds away from the banking sector to these NSCs, creating a liquidity crisis in the process.^[7] Consequently, this has resulted in the government’s interest expense comprises a large 20% of its revenue.^[1] S&P forecasts the change in government debt to average at 4.2% over the period 2019-2022.^[1] The issuance of NSCs has experienced a significant increase over the last 5 years and if this trend persists into the future, the government’s interest expense liability is only expected to worsen.

Moody’s: Growth and Stability Supports Credit Profile

Moody’s Investor Service (Moody’s) maintained its long-standing credit rating of Ba3 for Bangladesh. The agency justified the rating on the grounds of strong economic growth over the past few years which it expects to persist into the future, and strong macroeconomic stability resulting from sound fiscal and monetary policy-making.^[3] In particular, the decision to remain within a deficit limit of 5% of GDP has helped to foster moderate inflation and reduce growth volatility arising from pro-cyclical fiscal policy.^[3] The effectiveness of policymaking is evidenced by stable economic growth over the last decade, low inflation and the absence of boom-bust credit cycles.^[3]

Like S&P, Moody’s also asserts the centrality of Bangladesh’s competitive garment sector and large migrant remittances in framing the nation’s strong external profile. Moody’s believes external vulnerability risks remain low despite the expectation for the current account deficit to persist (mainly due to infrastructure-related imports). On the other hand, Moody’s also touted the government’s weak revenue generation capacity as a major rating constraint. The agency also cited the state of human capital as a major obstacle to improving global economic competitiveness and moving up the value chain.^[3] While the country has an abundant supply of labor, it still experiences a pronounced shortage of skilled managers and specialists. Stating that enrollment rates for secondary education and beyond are below that of peer countries, Moody’s does not expect significant improvements in the quality of human capital.^[3]

Moody’s: Banking Sector in Crisis

Moody’s put Bangladesh’s banking system on its “negative watch” list despite the country’s robust growth in recent years.^[5] The reason behind the action lies in worsening asset quality amidst a backdrop of little to no corporate governance and a lack of capital according to the Asian Development Bank.^[8] The rising incidence of Non-Performing Loans (NPLs) has been the main culprit behind the sector’s tumultuous situation. The ratio of NPLs to total loans is the highest in the region at 11.5%, with India coming second at 10.0% and Sri Lanka behind at 2.5%.^[7]

According to data from the Bangladesh Bank, total NPL of state banks stood at 28.24% at the end of June in 2018.^[5] These state-owned banks are principally surviving on taxpayers’ money. Analysts cited poor lending practices and repeated government intervention as the premier culprits. S&P also echoed the same view as that of Moody’s, pointing out that the banking sector remains small with total assets less than 100% of GDP. In addition, state-owned commercial banks (SOCB) account for 26% of the sector’s total assets.^[1]

Conclusion

Both S&P and Moody’s have maintained their longheld ratings of BB- and Ba3 respectively for Bangladesh–affirming a stable trajectory for Bangladesh as it moves into the future. Moody’s stable outlook position implies that a rating change is unlikely to happen in the near future. S&P believes Bangladesh’s strong economic growth impetus will persist, with its people continuing to experience rising incomes. Both agencies cite a strong external profile characterized by low external borrowings, a competitive apparel sector, and large migrant remittances as a cornerstone of this strong position.

On the other hand, S&P and Moody’s mention limited fiscal flexibility arising from poor revenue mobilization as an important rating constraint. Both agencies maintain that improvements in fiscal flexibility are essential to securing a higher rating in the future and that substantial interest expenses arising from financing NSCs could potentially lower the rating as well. Overall, Bangladesh is in a good position as per S&P’s and Moody’s assessment and needs to deal with key structural problems while keeping its premier strengths, namely its external profile, unharmed in order to continue reaping the rewards of growth.

The post S&P and Moody’s Rating for Bangladesh: Forging a Stable Path Forward appeared first on LightCastle Partners.

Special Economic Zones (SEZs) play an important role in the quest for economic growth. Their primary objective is attracting foreign direct investment (FDIs), generating employment, implementing economic reforms and experimenting with new policies. The actual number of economic zones in Bangladesh is in contention. However, as per data from Bangladesh Economic Zones Authority (BEZA) ,at present, there are a total of 88 economic zones across the country, of which 59 are government-owned and 29 are privately owned.^[6]

China is often cited as the most successful country in making an export-led growth strategy work through SEZs.^[1] However, SEZs are often criticized for not uniformly distributing the benefits of economic growth across the country. In essence, their role in addressing regional disparities is now a topic of contention.1 As Bangladesh ramps up its development agenda, SEZs will soar in prominence as the government has announced its plans to establish a total of 100 SEZs by the year 2025.

Economy of Bangladesh

SEZs Boost Economic Growth in Bangladesh

The Bangladesh Export Processing Zone Act of 1980 was aimed at spurring trade and industrialization by creating employment and attracting investment from overseas. It led to the creation of the semi-autonomous Bangladesh Export Processing Zones Authority (BEPZA). The Authority leases land to industrial tenants across the country, the bulk of which are from the apparel industry, otherwise known as the Ready Made Garment (RMG) sector.^[2] The zones offer various benefits to investors such as tax holidays, duty-free imports and tax-exempt dividends. The zones also offer additional support to investors which helps them navigate through the local bureaucracy when it comes to doing business.^[2] According to BEPZA, in the two decades until 2017, EPZs brought in $4.3 billion of investment and contributed $59.4 billion to export earnings (19 percent of the total export revenue in 2017).^[2] The government is now planning to move away from the EPZ model due to its weaker domestic linkages. Instead, the current goal is to bring in more private participation within developing regions.^[2]

The Bangladesh Economic Zone Act and Hi-Tech Park Act of 2010 led to the creation of two semi-autonomous agencies–Bangladesh Economic Zone Authority (BEZA) and the Bangladesh Hi-Tech Park Authority (BHTPA). With overlapping mandates, these two authorities have been tasked with overseeing the expansion of special economic zones and hi-tech parks respectively.^[2] They operate under different regulations from that of BEPZA and promote production that is aimed both at domestic and foreign markets. BEZA has been tasked with overseeing the establishment of 100 economic zones by 2025.^[2] BEZA also differs from BEPZA in terms of its ownership structure. Whereas EPZs are owned publicly, BEZA and BHTPA would rely primarily on private capital and expertise to both build and operate these new zones.^[2]

SEZs Can Help Address Regional Disparities

A number of reasons can drive regional disparities. Differing socio-economic outcomes by region can be predicated upon the historical legacy, the availability of natural resources, vulnerability to natural disasters, state of human capital and the condition of the local political economy.^[1] Two leading explanations behind regional disparities include “the backwash effect” proposed by Swedish economist Gunnar Myrdal and “the new economic geography” model developed by Nobel Memorial Prize-winning American economist Paul Krugman.^[1]

• The Backwash Effect: Myrdal describes the backwash effect as the process of wealth relocation from less advanced regions to the central region. He argues that regional differences were the natural outcome of economic development and the conclusion of market forces that interact with initial locational conditions. His theory proposes that economic development begins in a region due to certain inherent locational advantages that the region offers such as an abundant supply of raw materials.1 This phenomenon then initiates a snowball effect, a process of cumulative causation by which more human capital and physical capital along with investment to gravitate towards this center.^[1]
• The New Economic Geography: Krugman adds a new perspective to the question of regional disparities. Using his “core-periphery” analytical framework, Krugman demonstrates how clustering forces create an uneven distribution of economic activity and income across regions.^[1] Essentially, when economic incentives to set up production interact with regions with inherent locational advantages, economic activity concentrates there and scale economies start to develop. His analysis shows that when scale economies are present in production, regions–and even countries–may become locked into disadvantageous patterns of production. This is the result of the interaction between increasing returns, costs and factor price differences in these production centers. When scale economies are a major factor, regions with greater economic activities yield more returns and therefore attract more firms and producers. The net result is that production concentrates in only a few regions, or countries.^[1]

Special Economic Zones can be a useful tool in tackling regional disparities and promoting regional development via what is known as the “spread effect”.^[1] Establishing SEZs in lagging regions–which are primarily from the western parts of Bangladesh–is an important first step towards bridging regional disparities. However, the benefits offered by SEZs in these lagging regions should be sufficiently more attractive than elsewhere to investors in order to overcome any locational disadvantages endemic to the area.^[1] Bangladesh’s policy aims to add another $40 billion of exports from the SEZs. However, based on simulations by The Asia Foundation, these export earnings will concentrate in the better-off Dhaka and Chittagong regions. Additionally, their simulations also suggest that SEZs in lagging regions will have strong impacts on employment generation, especially for women.^[1]

Recent Developments

24 new economic zones are set to be established of which 11 were inaugurated by the Prime Minister earlier this year.^[3] These new zones fall under 65 new uplift schemes designed to further boost economic output in the country. The 11 inaugurated zones include Mongla Economic Zone at Mongla in Bagerhat district, Meghna Economic Zone and Meghna Economic Industrial Economic Zone at Sonargaon in Narayanganj, Abdul Monem Economic Zone at Gazaria in Munshiganj, Bay Economic Zone at Gazipur Sadar in Gazipur, Aman Economic Zone at Sonargaon in Narayanganj, City Economic Zone at Rupganj in Narayanganj, Kishoreganj Economic Zone at Pakundia in Kishoreganj, East West Special Economic Zone at Keraniganj in Dhaka, Karnaphuli Dry Dock Special Economic Zone at Anwara in Chittagong, and Sreehatta Economic Zone at Moulvibazar Sadar in Moulvibazar.

Of particular interest is the Mirsarai Economic Zone, which is currently under construction. This is set to be largest industrial enclave in Bangladesh, aiming to bring in employment for 1.5 million people within the next 15 years and generate $15 billion of export earnings.^[4] In addition to being the largest industrial enclave, it is also the first multi-sector economic zone in the country.

A number of major local and foreign enterprises have expressed their eagerness to invest in the economic zone. Of note is BGMEA (Bangladesh Garment Manufacturers and Exporters Association), who have proposed to invest $2 billion to set RMG accessories factories at this park in order to generate employment for 500,000 people.^[4] Kunming Iron & Steel Holding Company Limited, a state-owned Chinese company, is planning on investing $2.13 billion in order to set up the Iron and Steel Industries Park.^[4]

Challenges

Despite the benefits they offer, SEZs and EPZs also pose some challenges that need to be overcome to fully utilize the potential these industrial enclaves offer. Some of the major challenges include the following:

• The large number of public agencies with overlapping mandates make it difficult for foreign investors to navigate through the bureaucratic environment of Bangladesh.^[2]
• Apart from BEPZA, which has over 40 years of experience, all the other agencies tasked with the expansion of industrial infrastructure are young institutions that have not yet developed sufficient technological capacities to address all the needs of infrastructural expansion. Political interference in site-selection also poses a threat to investment decisions.^[2]
• Social and environmental safety standards are another key area of concern.^[2] Apart from the famously poor safety standards of Bangladesh, climate change is now posing a serious threat to SEZs. As many zones are located near rivers due to scarcity of land, the destructive forces of the ongoing climate crisis on rivers is threatening the security of these SEZs.

The Way Forward

While there are certainly issues that need to be addressed if SEZs are to play the role they are meant in the context of the national economy, a number of key steps must be taken to address these points as well as build upon the existing positives. These steps can be enacted through sound policy-making and efficient legislation.

Short Term Policies

1. It is imperative to establish an internal task force with handpicked experts from international backgrounds who will be tasked with reviewing and assessing the performance of these various public agencies such as BEZA and BEPZA. By monitoring performance, wasteful investment decision making can be mitigated.^[2]
2. An environmental panel needs to be established to help bring in more effluent treatment plants and other environmental infrastructure to the right places with proper financing.^[2]
3. The incentive structure across SEZs needs to be standardized to create a level playing field where applicable, and certain SEZs need to be furnished with more enticing benefits so as to facilitate regional economic development and bridge regional economic inequality.^[2]
4. SEZs need to be equipped with efficient sea and land ports in order to effectively establish more efficient trade routes, and hence bring down logistic costs.^[7]

Long Term Policies

1. Policies need to be tailored so as to integrate SEZ development plans with national strategy to build better infrastructure, facilitate skills transfers, and human resource development.^[2]
2. Review and revise the regulatory environment and the roles adopted by major public agencies such as BEZA, BEPZA and BHTPA in order to create synergies between them.^[2] This would result in a joint vision shared by these authorities and would establish clear operating guidelines so as to avoid duplication of effort.^[2]
3. The aforementioned public agencies need to be granted full autonomy when it comes to their HR policies which is separate from those set up by the government. This will enable to freely recruit and fill positions with motivated technical personnel with the appropriate expertise in their respective fields.^[2]
4. A greater emphasis needs to be placed on export diversification in order to move into higher value goods, leading to a structural transformation of the economy.^[7] This can help future-proof the economy when automation eventually takes over apparel manufacturing in export destination markets.

Conclusion

Special Economic Zones have established themselves as a stepping stone for economic prosperity and a cornerstone in the larger scheme of Bangladesh’s development agenda. While there exists much to be desired in terms of their role in addressing regional disparities, their role in boosting the economy cannot be denied. In order to further solidify their role in promoting economic growth, SEZs should focus on a few key things: focusing on developing strong and up-to-date infrastructure should be a major priority; in addition, SEZs should pay attention to improvements in business technology and infrastructure across other SEZs in the nation; all SEZs should be sufficiently equipped with appropriate technical capabilities.

Also, the zones need to be connected to efficient sea and land ports. Port infrastructure plays a vital role in ensuring SEZs fulfill their objectives. Lastly, SEZs should also place special priority on export diversification, which ties in with a greater strategy to structurally transform the economy and move into producing high value goods.^[7] If these points are addressed, Special Economic Zones should be well poised to set Bangladesh on a trajectory of rapid economic growth and into an ever more prosperous future.

Shahreem Ahsan, Trainee Consultant at LightCastle Partners, has prepared the write-up. For further clarifications, contact here: info@lightcastlebd.com.

References

• 1. Promoting inclusive growth in Bangladesh through special economic zones – The Asia Foundation
• 2. The Rise of Special Economic Zones in Bangladesh – The World Bank
• 3. PM lays foundation stones of 24 economic zones – Dhaka Tribune
• 4. Construction of Mirsarai Economic Zone on in full swing – Dhaka Tribune
• 5. Bangladesh Economic Zones – Bizbangladesh
• 6. Economic Zones Site – BEZA
• 7. How to make special economic zones successful – The Daily Star

The post An Update On Special Economic Zones in Bangladesh appeared first on LightCastle Partners.

Carried on the back of its competitive apparel industry and large pool of migrant remittances, Bangladesh’s strong and admirable growth in recent years is the product of multiple factors. However, behind this picture lies another story not talked about nearly as much–the role of education in enabling this transformation.

As the economy matures, the engines of growth take on more complex forms. With Vision 2041 looming ahead, the need to equip the nation with a strong information technology-enabled services industries remains pertinent. Despite being the foundation for future growth, the sector is currently falling short of expectations. In order to enable this sector to thrive and produce the results needed from it, access to quality tertiary education is vital in creating future industry leaders.

LightCastle Partners co-authored The Asian Development Bank (ADB)’s latest publication titled, “Bangladesh: Computer and Software Engineering Tertiary Education in 2018.” which hopes to improve labor market outcomes for graduates of computer science engineering and information technology.

Ryotaro Hayashi, social sector economist of the South Asia Department from the Asian Development Bank, and LightCastle Partners co-authored the report.

Nine universities were surveyed for this paper: Bangladesh University of Engineering and Technology (BUET), University of Dhaka (DU), Jessore University of Science and Technology (JUST), Ahsanullah University of Science and Technology (AUST), BRAC University (BRACU), Daffodil International University (DIU), East West University (EWU), and Islamic University of Technology (IUT). This article summarizes the key takeaways of the study.

The Study Reveals 3 Broad Findings

University, Gender and Year of Graduation Affected Job Placement Status

Overall, the job placement rate for CSE/IIT graduates stood at 77.1 percent while the remaining 22.9 percent either did not find jobs or were not looking for jobs.1 20.4 percent of graduates found jobs within 1-3 months of graduation, while a substantial 35.5 percent of graduates found jobs more than one year after graduation. Overall employment rate after graduation stood at 86.2 percent.

The ADB tracer study defined job placement rates as the number of people currently employed out of the total sample. 

The tracer study defined job placement rate as the proportion of people currently employed out of the total sample.

Job Placement Rate =  (Currently Employed)/(All Sample)

The study found that job placement rates varied across 3 major factors: university, gender and year of graduation.

Job placement after CSE/IIT graduation was 77.1% with large variations across universities.

Islamic University of Technology (IUT) graduates’ job placement topped the chart at 92.4 percent, followed by BUET at 91.1 percent. BRACU graduates secured a job placement rate of 87.1 percent. BUET graduates secured the highest employment rates of 97.9 percent with BRACU trailing close behind at 96.8 percent. IUT graduates experienced the third-highest employment rate at 94.4%.

Females experienced lower job placement rates than males

Job placement amongst female CSE/IIT graduates was lower than that of men. This suggests that there exists stark gender disparities within the IT/ITES industry. According to the Bangladesh Institute of Development Studies (BIDS), the overall employment rate for women was 18.4 percent lower than that of males. This gap arises out of women’s family commitments which include being a homemaker, and their inability to travel abroad. Employers were also concerned about security reasons when considering the employment females. Working location, family constraints, lack of proper professional and vocational skills, maternity leave, high turnover rates, reluctances to take on challenges, and absenteeism were also major factors in the decision-making process for employers.

Job Placement Increased the More Time Passed Since Graduation

Job placement rates increase as more time elapses since the day of graduation. As of 2018, graduates who graduated in 2015 experienced a job placement rate of 86.2 percent, while those from the years 2016 and 2017 experienced lower job placement rates of 74.3 percent and 70.1 percent respectively. In 2017, 13.8 percent of employers indicated that first-time job-seekers coming from university were not well-prepared for the job they were applying to. 62.0 percent of employers stated that fresh graduates lacked the appropriate job-specific skills and competencies. Additionally, only a quarter of graduates found employment within 6 months of graduation.

Interest in CSE/IT, Scholarship Opportunities, and Salary Affected Access to Education and Employment

There are multiple reasons as to why access to education and employment in CSE/IT sector differed. Among them, 3 important factors were:

1. Interest in computer science engineering.
2. Availability of scholarship at universities.
3. Salary offered upon graduation.

Most graduates were engaged due to their interest in CSE.

Graduates in CSE/IT were primarily engaged in the discipline due to their genuine interest in the field. In addition to this interest, they also believed that there existed good employment opportunities in this sector. With prospects of career advancement, the potential to earn a good salary also featured amongst graduates’ reasons for choosing their courses.

65.3% of universities offered no scholarship opportunities.

Of all universities surveyed, IUT graduates (70.7 percent) received the most scholarships, followed by Jahangirnagar University graduates (62.0 percent), and graduates of BUET followed behind with 43.4 percent graduates receiving some kind of scholarship or stipend support. Of those who did not receive any kind of scholarship or stipend, 65.3 percent stated that there was no scholarship/stipend support program at their university. 14.0 percent could not meet the scholarship criteria, 16.5 percent of graduates said their parents could afford to pay for them, while only 4.2 percent of graduates said they could make a living through their part-time job.

69.8% of unemployed graduates cited “low salary” as the chief reason for not accepting a job offer.

Among the unemployed graduates, 78.0 percent considered it very important to find a job. However, 69.8 percent of graduates cited low salary as the premier reason for not accepting a job offer. 46.2 percent of graduates cited poor working conditions as the second most important reason behind their decision to not accept a job offer.

The Internet was the Most Popular Job Search Method

The vast majority of graduate job-seekers look for employment on online job-matching sites (36.7 percent). The problem with this approach is that most employers don’t rely much on the internet for recruitment purposes. Most employers in the IT sector use private employment services and job fairs to recruit employees.

The Majority of Graduates in CSE/IT Believe Better Facilities are Necessary

Generally, most graduates were satisfied with the quality of education they received at their respective universities, however, they believed that the education needed to be adjusted to teach a more proper level of hands-on skills for the job market. Room for improvement still exists and according to the study, most graduates believe their universities needed to improve their facilities. 87.5 percent of Jessore University of Science and Technology graduates,  82.9 percent Dhaka University graduates and 71.1 percent of Jahangirnagar University graduates believed there was a strong need to improve university facilities.

ICT and Problem Solving Skills are the Areas Where Universities Should Focus Most

The use of ICT (51.1 percent) and problem-solving skills (49.6 percent) rank top on the list that graduates believe universities need to focus more on. Among graduates of the universities surveyed, most respondents believed that soft skill training needed to be improved.

Universities Need to Provide Quality Internship Programs

84.5 percent of CSE/IIT graduates from Jessore University of Science and Technology (JUST), 64.3 percent of graduates from Daffodil International University, and 60.0 percent of graduates from Ahsanullah University of Science and Technology said that it was necessary to improve the quality of internships available. Only 19.7 percent of universities provided internships which lasted 4 months. Amongst those who availed these internships, 92.5 percent of graduates found internships useful for work interviews.

Summing Up

The proper development of the IT sector is a fundamental ingredient in the recipe for Bangladesh’s future. The sector’s growing importance backed on the heels of equitable and quality-oriented CSE/IIT university education will enable Bangladesh to lay the foundation to power the future engines of economic growth. Improving industry infrastructure, smoothing discrepancies over access to education and employment across gender, university and year of graduation, and developing a market-responsive and skills-oriented curriculum will establish the foundation to empower the IT sector’s growing relevance in the local economy.

Particularly crucial steps towards success revolves around 3 actions. Firstly, access to CSE/IT programs needs to be expanded, particularly towards women to bridge gender disparities. Secondly, the quality and relevance of CSE/IT programs need to be upgraded through greater hands-on experience, more practice, improved career guidance and quality internship programs. Third and lastly, universities need to strengthen support for start-ups in an effort to raise the number of high tech entrepreneurs.

If these fundamentals are tackled swiftly, it is appropriate to hope that Bangladesh will be well-poised to deal with the challenges of a more complex and technologically-oriented global economy. The task then falls to the hands of university authorities, employers, and policymakers to synthesize the way forward.

Download the full report

Shahreem Ahsan, Trainee Consultant at LightCastle Partners, has prepared the write-up. For further clarifications, contact here: info@lightcastlebd.com.

The post A Brief Overview: Asian Development Bank Tracer Study – “Bangladesh: Computer and Software Engineering Tertiary Education in 2018” appeared first on LightCastle Partners.

Regional economic power in South Asia has primarily been concentrated in India. However, with Bangladesh’s meteoric rise to regional prominence–owing to its booming economy–the economic balance of power in the region is beginning to show the first signs of a paradigm shift. India was the strongest regional economy over the 40 years between 1970 and 2010, with an Annualized GDP growth rate of 8.7 percent in contrast to Bangladesh’s 7.6 percent and Pakistan’s 6.7 percent. However, in the three years since 2016, Bangladesh’s GDP–at current prices in dollar terms–grew at a Compounded Annual Rate (CAR) of 12.9 percent, which is more than twice that of India’s 5.6 percent.^[4]

With India’s economy beginning to slow down, analysts believe India is in the middle of a quasi-recession.^[6] If current trends persist, Bangladesh could surpass India’s per capita income by the year 2020.^[4]

What’s Causing India’s Economic Slowdown?

A recession is defined as three consecutive quarters of contraction in GDP. In India’s case, the GDP growth rate has fallen to the 5 percent region in the first quarter of FY20, the lowest in over six years–continuing a trend of dipping growth rates for five consecutive quarters.^[5][6] This indicates that “Asia’s No.3 economy” is headed towards tougher times. The generally accepted consensus–as things stand now–points towards a complex set of factors driving the current economic slowdown. Chief amongst these are India’s policy failures.^[9]

Among the leading drivers behind the slowdown was the rising incidence of non-performing assets in India. In the first half of 2019, new banking credit plummeted by a mighty 88 percent, resulting in growth falling from 8 percent in 2018 to just 5 percent this year.^[9] This suggests a virtual “freeze on lending”. Due to growing demographic pressure, India needs to maintain a growth rate of 7.5 percent to keep the level of unemployment constant. Under the influence of methodologically unsound forecasts and cronyism, the state banks under the previous government (2009-2014) let non-performing loans inflate to a $200 billion bubble.^[9] This period was plagued by numerous scandals, amongst which were the cases of misallocation of resources.^[10]

India’s labor and land acquisition laws also impede investment and a pro-growth climate. Current labor laws make hiring and firing workers very expensive–this is a stumbling block for economic growth.^[10] Similarly, land acquisition is also very cumbersome. For example, to acquire a piece of land, one would have to get the approval of two-thirds of the people who have a part of that land.10 This poses a threat to infrastructure development. The state of infrastructure is a key area of concern for Chinese investors. The government also failed to adequately support new and small businesses. Instead of providing a robust policy framework that made it easy for small businesses to operate, the government introduced its highly controversial demonetization scheme which hurt many small businesses.^[10]

Another key driver behind India’s economic downturn is investment. Both private and government investment has been a key driver of GDP growth since the liberalization of 1991.^[5] Gross Fixed Capital Formation (GFCF) has been the main component of investment, and–despite increasing–its contribution to the economy fell by 6.2 percent in the period 2014-2019 than in 2011-2014.^[5] This is largely a result of the government’s lethargy in reforming many of the laws surrounding land acquisition.^[10] Decreasing levels of investment prevent infrastructure development, creates impediments in establishing small businesses, prevents entrepreneurs from investing in research and development (R&D) and results in technological stagnation. High levels of investment in the economy creates long term profitability for many years, enhancing operational efficiency and raising the level of innovation.^[5]

One of the foremost effects of this slowdown has been the sudden spike in job losses arising from the automobile sector and FMCG industry. The growth of the Indian economy has been dominated by consumption, including both Private Final Consumption Expenditure (PFCE) and Government Final Consumption Expenditure (GFCE).^[5] In the last five years, consumption expenditure by Indian households accelerated with an average growth rate of 7.8 percent. However, the sharp fall in PCFE to 3.1 percent in the June quarter significantly contributed to the economic slowdown.

Any large enough fall in consumption expenditure will initiate a chain of events that will prolong the recession even further. A fall in consumption spending leads to lower levels of employment and output as consumption directly affects the two. This results in macroeconomic price deflation. Consequently, the lower level of prices prevents firms from recovering production costs, forcing them to halt operations. This further initiates a layoff process, reducing earnings even further. Eventually, the economy finds itself in a vicious cycle, sinking deeper and deeper into a state of shock.

Bangladesh Fares Better than India

Bangladesh’s GDP in dollar terms has grown by 12.9 percent, more than twice that of India’s.4 Consequently, per capita income in Bangladesh has grown at three times the pace of India’s income growth. According to the United Nations Conference on Trade and Development, while India’s per capita income increased by 13.8 percent between 2013 and 2016, Bangladesh’s per capita income grew 39%. According to certain estimates, if Bangladesh manages to keep Gross National Income (GNI) and GDP growth rates up, the country’s per capita income will overtake that of India’s by 2020.^[3]

Bangladesh is performing better than India across a host of different human and social development indicators. Two of these important indicators include infant mortality and life expectancy. A newborn in Bangladesh is more likely to live to the age of five as opposed to infants in India and Pakistan. As of data from 2016, infant mortality stands at 28.2 percent in Bangladesh, 34.6 percent in India and 64.2 percent in Pakistan. In addition, life expectancy is also higher in Bangladesh at 72.5 years with India and Pakistan trailing behind at 68.6 years and 66.5 years respectively.^[4]

India vs Bangladesh in the Race for Development

Bangladesh’s economy differs structurally from that of India’s. The service sector has the lion’s share in terms of its contribution to India’s growth whereas its industrial sector’s contribution is lower than desired. In contrast, Bangladesh has a booming industrial sector responsible for its rise to economic prominence.^[1] This has serious ramifications for job creation and employment in both countries.

Bangladesh’s booming industrial sector allows it to create jobs. As countries move from agrarian production towards manufacturing, this very same industrial sector absorbs the bulk of the excess labor, creating employment in the process. This increases the overall spending power of the populace and helps boost consumption, thereby promoting growth. On the other hand, most of the Indian population is still stuck in agriculture, which contributes the least to Indian GDP.^[1] India’s industrial sector is struggling to grow fast enough to absorb the excess labor transitioning out of agriculture.

Bangladesh’s great success lies in its being able to fill the gap left by Chinese exporters of RMG products as policy-makers in Beijing shift their focus towards increasing domestic consumption and investment, and away from exports. China’s total exports declined from a record high of $2.35 trillion in 2013 to $2.2 trillion in 2016, creating space for other exports of consumer goods to absorb this unmet demand.^[4] The strength of Bangladesh’s domestic industries have enabled the country to increase exports from 6.7 percent in 2018 to 10.1 percent in 2019, despite the escalating trade war between the U.S. and China.^[1]

According to a report by the Asian Development Bank, “Growth in garment exports rose from 8.8% to 11.5%, reflecting strong demand from the US and newer markets for Bangladesh like Australia, Canada, India, Japan, the People’s Republic of China (PRC), and the Republic of Korea.” India failed to capitalize on China’s shifting focus during this same time period, as evidenced by its contracting export revenue–falling from a record-high $488 billion in 2013 to $433 billion in 2016.^[4]

Despite having a limited basket of export products against a backdrop diminishing export demand, Bangladesh has successfully increased exports by finding new markets and edging out other garment exporters such as India. In contrast, India’s export earnings limped forward at an average rate of 1.5 percent per annum since 2012-2013.

What Lies Ahead

Bangladeshis are expected to become richer than Indians by 2030, with per capita income projected increase by 4 times the current amount throughout the 2020s.7 Standard Chartered India states that Bangladesh’s per capita income will rise $5,734.6 in 2030 while India’s will reach $5,423.^[4] In 2018, Bangladesh’s per capita income stood at $1,599.8 while India’s stood at $1,913.2.7 On the back of healthy domestic consumption, a good demographic dividend, rising investment, and strong export-led growth, Bangladesh will be part of what Standard Chartered is calling the “7% club”–a list of nations expected to grow at levels above 7 percent.^[7]

If India’s economy does find itself in a full-fledged recession, and Bangladesh continues its stellar track record of consistent high levels of growth on the back of its export revenues and migrant remittances, the forecast that predicts that per capita income in Bangladesh will exceed that of India’s will in all likelihood hold true.

However, with the advent of increased automation in textiles in destination markets, the RMG sector is at risk. It can be argued that India–which relies more heavily on the service sector–has stumbled upon a new model of development that discards the traditional model of manufacturing. In most years, India is growing strongly, despite the recent dip in growth rate. The force behind this growth is India’s service sector.^[2] The famous Indian outsourcing companies represent a facet of this service industry. Other examples of the industry include software, finance, logistics, tourism, online services, and health care.^[2]

As increasing automation starts to dominate, textile manufacturing is becoming less labor-intensive. There is a risk that the apparel industry could migrate back to the developed world, where labor is expensive but capital is cheap. This implies that the developing world is at risk of premature deindustrialization. Essentially, this means that if the Bangladeshi RMG industry cannot compete with rich-world robots, then the sector can no longer create mass urban employment.^[2]

Some of this reverse migration may already be underway. If this is the case, then poor countries such as Ethiopia will face a hard time escaping poverty. In the wake of this development, some analysts argue that the only path towards development left for poor countries would India’s service-centric model discussed earlier.^[2]

Other economists are not so pessimistic, however, and argue that there is still plenty of work left for industrious people in developing countries. In Bangladesh’s case, it appears as though policymakers anticipate this looming threat of automation and hence there is an attempt being made to move towards export diversification in the form of automobiles and electronics.^[2]

The Possible Impact of India’s Recession on Bangladesh

Bilateral trade between India and Bangladesh is strong. In Fiscal Year (FY) 2017-18 bilateral trade stood at $9.5 billion. That figure rose to $9.85 billion in fiscal year 2019. The World Bank estimates that bilateral trade potential between the two nations is actually $16.4 billion. However, for Bangladesh, bilateral trade with India essentially means a trade deficit. As of 2019, the deficit stood at $7.35 billion. This sum is only projected to increase moving into the future.^[11]

The reason behind this deficit lies chiefly in Bangladesh’s import of raw materials from India. This is of strategic importance, as these raw material imports are principally for the apparel or ready-made garments (RMG) sector, which happens to be the most crucial driver for Bangladesh’s economic growth. 87 percent of Bangladesh’s exports to the U.S. include RMG items. These are in part made from cotton, yarn and other fabrics imported from India. Therefore, Indian raw material imports are of vital importance to the country’s RMG sector.^[11]

India’s economic slowdown can have a number of effects on bilateral trade between the 2 nations. India’s exports exceeded $400 billion in 2018. As India’s economy is slowing down, output is declining and with it, income. Bangladesh has not been able to capture India’s import market. India is importing a plethora of items from the global market but not from Bangladesh. Similarly, Bangladesh exports these very same items but not to India. With the recession in India, Bangladesh is likely to face increased protectionist trade policies from India in an effort to keep imports low and net exports high, thereby preventing aggregate expenditure from falling further.

Indian businesses are also likely to lobby for more protection against Bangladeshi imports to limit competition and protect their own interests domestically, especially if Bangladeshi products are cheaper. Additionally, many Indian products will not be moving “off the shelves” due to the slowdown. This raises Indian businesses’ inventory costs. If there exists no feasible way to clear inventories in the event of a stronger recession, there may be a possibility Indian products will be “dumped” in the Bangladeshi market. This would further hurt Bangladesh’s trade deficit with India.

Bangladesh’s decision to devalue its currency in the face of increasing competitive pressure from competitor exporting nations such as India and Vietnam brings with it another slew of problems. As a devalued currency raises import costs, the Bangladeshi RMG sector’s raw material import costs may rise, which would further hurt the sector’s global competitiveness. Much of the capital equipment required for industry in Bangladesh is imported, many of it from India and China. The devalued currency in this wake would further hurt investment in Bangladesh.

The actual manner in which India’s recession may affect is a broad issue. However, the above talking points are a start to further exploring this issue and devising appropriate strategies to tackle this situation.

Conclusion

While Bangladesh’s booming economy is the talk of a great many economic conferences, India’s economic slowdown is also dominating headlines. A robust external profile characterized by a competitive garment sector and large migrant remittances has paved the way for Bangladesh to boast impressive GDP growth rates year after year. Conversely, the fall in consumption expenditure in India along with stagnating levels of investment have been the premier driving forces behind India’s economic slowdown. Despite this, India still has a strong service sector capable of sustaining the economy during difficult periods and will continue to grow in prominence as the threat of automation looms over the horizon.

India’s economic slowdown, however, may prevent Bangladesh from fully benefiting from regional trade, who may be facing greater protectionism from India, an ever-increasing trade deficit, and the possibility of “dumping” by India. However, if current trends persist, Bangladesh is well-poised to breeze past India on the front of per capita income by the year 2030. Building on its key strengths, anticipating future threats, and focusing on a holistic and comprehensive view of development will enable Bangladesh to pave the way towards the future it always desired.

Shahreem Ahsan, Trainee Consultant at LightCastle Partners, has prepared the write-up. For further clarifications, contact here: info@lightcastlebd.com.

The post What an Indian Recession Could Mean for Bangladesh? appeared first on LightCastle Partners.

Online education throughout the world has been recently going through a boom, currently offering fully-fledged degrees from some of the world’s top universities on platforms like edX and Coursera. Though they haven’t gone as far as to replace traditional classroom learning, they have provided alternative avenues for those seeking quality education and are constrained by time, budget, and distance. In Bangladesh, these avenues have the potential to be far-reaching, as online learning can be the key to rapidly equipping the workforce with relevant skills for the market, preparing students for national exams, and providing supplementary education to the greater population.

Bangladesh has come a long way in ensuring access to education and gender equity in enrolments at the primary and secondary school levels. The gross enrolment rates in 2018 were 114% and 61% respectively compared to 90.8% and 47% in 2008. ^[4] However, recent trends over the last 5 years have shown declines in pass rates from primary school to HSC levels as shown in the table below. There has also been considerable concern regarding the quality and relevance of education towards equipping students with skills essential for their future. This includes basic competencies needed to address current market demands as well as core skills needed in a rapidly changing globalized environment.

Enrolment Pass Rates of Students from Primary School to HSC
Gross Enrolment Rate is according to the capacity of school

Source: BANBEIS

Growing Digital Inclusion, The Enabler

Bangladesh ranks well below its neighbors in the South Asia region in terms of infrastructure and affordability of mobile internet. The country has many obstacles to overcome in achieving digital inclusion for the greater population. However, it is critical that steps be taken to enable its youth to rapidly fill the education gap between industry, academia, and geography. This is because online education can solve a plethora of issues in regard to providing quality and relevant education in rural and suburban areas. Not only can it allow them access to top educators, if complemented by existing infrastructure, it has the potential to rapidly scale and train its future workforce and entrepreneurs to create a Digital Bangladesh, a vision set by the government for 2021.

Despite 3G networks covering over 90% of the country, high costs of mobile data packages are preventing those at the bottom of the wealth distribution from gaining access to the internet. According to a GSMA report, it would cost 11% of the monthly earnings of an individual at the bottom 20% of the income distribution to purchase a 1GB package.^[3] This is due to high levels of taxation and fees which are preventing operators from providing lower prices.

Positioning The Market for Bangladesh

The global online education market in 2017 was $1.60 bn and is set to grow at a compound annual growth rate of 10.26% to reach $287 bn by 2023.^[5] In India the market is set to grow to $1.96 bn in 2021 from $247 mn in 2016.^[6] The industry in Bangladesh is still in its early growth stage and there is no census to its current market size. However, given the culture of coaching centers in Bangladesh, there is a visible and significant market demand for supplementary educational services and test preparation.

The online education market can be divided between academic and professional skills-oriented hubs. The majority of academic education providers focus on test preparation, with a few covering the preceding classes and a limited number of university-level courses. Although online English language education portals are present in the local market, they face considerable competition from the global field.

So where do online education portals in Bangladesh fit in a world of globalization where just about anyone can start providing lessons and host their videos free of cost? The answer is in supplementary education for grades 1-8, test preparation, and reskilling & online certifications, similar to the current situation in India. ^[6] 

In Dhaka, fees for 1-to-1 tutoring for SSC and HSC test preparation can cost as much as $100+/month depending on the qualifications of the tutor and urgency of demand from parents. A majority of parents in the country have a strong belief in the necessity of after school tutoring, especially given the weight of national exams in counting towards higher education admissions. Online education has the potential to rapidly achieve economies of scale given the only associated costs are the need for a camera and an internet connection and widespread 3G coverage in the country. Bangla language education portal are further protected from competition outside local markets due to a language barrier, making it an ideal catalyst for the future of education.

Challenges and Paving the Way Forward

The major issues towards making the way forward and reducing the education gap between geography, industry and academia involve addressing the concerns of major stakeholders in bringing online education to the masses, namely teachers, guardians, and the government. Recently a number of health concerns have arisen due to heavy usage of social media, which has created a stigma against internet usage among the older generation. Teachers involved in after school supplementary education also have a direct economic incentive against this as it would mean greater competition for them and potentially lead to lower earnings overall. Finally, to ensure access to the greater population, policies must be developed by the government so that online education is formally recognized as a legitimate medium of instruction.

In China, there is an ongoing online education program backed by the government and targeted towards rural areas.^[8] The initiative had been taken to reduce the urban-rural education gap and provide schools with access to specialized teachers as a large proportion face shortages. As a result of the new widespread accessibility of education now, demand in China is driven by concerned parents who want their children equipped with the skills needed in both school and industry. A similar case of success in implementing online education is also being seen in India, where Byju, the leading online education company, has recently been valued at $5 bn with a 2.4 million paid user base. ^[7]

To bring online education forward as the catalyst for reducing the skill gap requires addressing a negative social stigma against internet usage and social media. Proper ICT infrastructure must also be ensured in government schools so that the burden of initial set up costs are spread among a larger base. There is also a need for those in education, both teachers and staff, to be trained to use properly use ICT in providing online education as a supplement and not a replacement. This is because online education is to a considerable extent lacking in engaging students with their immediate surrounding environment.

As much as this new trending market has the potential to fast track education in the country, its potential drawbacks must also be assessed and checks be properly placed. This is because there have been a number of cases in the country where parents have left their to mobile devices from a young age, leading to internet addiction and late speech development. The subject of online learning must not only ensure quality education for all but also the personal development of students. And given the successful number of case studies throughout the world, it is a proven solution towards enhancing the quality of education irrespective of wealth and geography.

Mohammed Shehab, Business Analyst at LightCastle Partners, has prepared the write-up. For further clarifications, contact here: info@lightcastlebd.com.

The post Online Learning – A Catalyst for Narrowing the Education Gap in Bangladesh appeared first on LightCastle Partners.

Despite being a developing country with a ready-made garments sector that is focused on cheap production, Bangladesh leads the world in “green RMG”.^[2] Green RMG, the increase of which has also been termed the green revolution, refers to environmentally-sustainable production practices in the sector. It includes waste management, energy efficiency, and water conservation. As concern for climate change rises globally, producers, buyers, and consumers are all becoming aware of the transparency and implications of the apparel industry supply chain.

The RMG industry dominates Bangladesh’s exports with a share of 83% and it grew at a rate of 8.76% to reach exports of $30.6 billion in 2018.^[1] As one of the most important industries of the economy, the RMG sector has a unique pressure upon it to adjust to global trends and stay competitive.

While incidents like Rana Plaza painted the Bangladeshi RMG industry as unsustainable and unsafe, it has actually been leading the green revolution. Not only does Bangladesh have the highest number of LEED-certified factories ^[2], but it also has the highest-rated LEED Platinum denim factory, knitting factory, washing plant, and textile mill in the world.^[3] With fast fashion threatening to increase the environmental footprint of the industry dramatically, it is now more necessary than ever to promote green practices.

Global Apparel Production Working on Environmental Footprint

The global apparel manufacturing industry was valued at $658 billion in 2018, growing at a rate of 4.6% over the past five years.^[4] As a result of its size, the apparel industry accounts for 6.7% of total global carbon emissions.^[5] Textile mills generate around one-fifth of the world’s industrial water pollution.^[5] Moreover, as global demand rises and shifts towards synthetic fibres from natural fibres, this footprint is expected to increase.

Sustainability is increasingly becoming a buzzword in global fashion, with high-end brands using recycled fabrics in their latest designs. Forty-three brands, including companies like Adidas and Target, pledged to reduce their Green House Gas (GHG) emissions by 30% by 2030.^[7] Gucci’s parent group Kering, which also owns other high fashion brands such as Yves Saint Laurent and Balenciaga, announced in September that it would become carbon-neutral in its operations and entire supply chain. H&M has set a goal to use 100% organic cotton for all its products by 2020.^[8] As one of Bangladesh’s largest buyers, H&M’s shift in strategy to sustainability is a crucial development for Bangladesh.

Global trends in international textile manufacturing include the incorporation of technology through methods such as lean manufacturing, digital energy management, and automation. The adoption of preferred fibre materials, such as synthetics or recycled fibres, reduce the creation of micro-plastics which harm ocean life and are difficult to dispose of properly.

Both consumers and executives alike are starting to see sustainability as a necessity. However, this is in stark contradiction to the rapid rise of fast fashion, a rapid and cheap form of production and consumption focused on e-commerce that has large-scale and harmful environmental impacts.

Fast fashion has increased the consumption of apparel as the number of garments purchased by the average consumer increased by 60% and halved the lifetime of an average clothing item.^[9] While this translates into higher sales and production, it also means a more damaging effect on the environment as fast fashion depends on e-commerce, creating a high carbon footprint from shipping. Carbon emissions could increase by 70% and water consumption by 20% if fast fashion continues its growth at current environmental impact rates.^[9]

BGMEA Programs Actively Promoting Green RMG

The key issues for the factories in terms of environmentally-friendly practices are the depletion of groundwater, waste management of both chemicals and solid wastes, energy efficiency, and surface water pollution.

Textile production in Bangladesh is extremely water-intensive, using 200-250 litres per kilogram of fabric produced, whereas the global standard is 60-70 litres. About 70% of this water is sourced from groundwater.^[6] The fibre production, yarn preparation, and dyeing processes are where most environmental impact takes place.

There are 91 LEED-certified factories in Bangladesh, which is higher than any other country.^[2] Of the 10 highest rated LEEDS certified factories, six are located in Bangladesh.^[1]The LEED (Leadership in Energy and Environmental Design) certification, awarded by USGBC, is considered to be the global standard of compliance and safety.

FIGURE: Number of LEED Certified Green Factories / Source: USGBC

To promote green practices, the Bangladesh Garments Manufacturers and Exporters Association (BGMEA) has opened a separate Environmental Cell. Initiatives include the Partnership for Cleaner Textile, called the PaCT Project, and TREES, among many others.

PaCT is a partnership among the International Finance Corporation (IFC), BGMEA, the Embassy of the Kingdom of Netherlands, and several global apparel brands. It has partnered with over 200 factories to date to implement resource conservation practices, resulting in cumulative cost savings of approximately $16.3 million.^[10] Zero Discharge of Hazardous Chemicals, ZDHC, is also a shared commitment between major retailers and brands to move towards its titular goal by 2020.

The BGMEA has also worked to raise awareness about saving water and energy among its members through posters, seminars, and workshops. The most well-known and highest-rated factories have been crucial proponents of this green revolution.

The Way Forward

Despite being one of the lowest carbon emitters, Bangladesh is highly exposed to the impacts of climate change. As developed countries start prioritising environmental impact through legislation and changing consumer patterns, poorer countries are at risk of falling behind due to an inability to adapt.

While the high number of LEED certifications is encouraging and a point of pride, these factories form a small fraction of the total 2,500+ that operate in the industry. To increase the scale of the green revolution, government policy will need to support the shift to sustainable practices. Green financing is a crucial step here that will encourage investment in environmentally-friendly technologies.

The achievement of green practices in RMG is also crucial for the achievement of several of the United Nations Sustainable Development Goals, especially SDG 12 of Responsible Consumption and Production and SDG 13 of Climate Action. It is also necessary to market the advancements in sustainability to foreign buyers and consumers. The green revolution may be the push needed by Bangladesh to take over China’s share in the market, as the latter suffers from the blow of the US-China trade war and shifts to higher-value manufacturing.

Mondrita Rashid, Trainee Consultant at LightCastle Partners, has prepared the write-up. For further clarifications, contact here: info@lightcastlebd.com.

The post Bangladesh: An Unexpected Leader in Green RMG appeared first on LightCastle Partners.

Onions are dear to the cuisine of the sub-continent, so a shocking rise of 658% over the past year in the price of local onions alarmed consumers and has become a hotly discussed topic for the entire nation.^[1] The steep rise has been attributed to several causes, such as a lack of imports from India, consumer panic and rumour-mongering, and even an artificial shortage created for profits.

Although prices have been rising over the year due to spikes in demand caused by Eid-ul-Adha and lower Indian imports, the hike has been steepest over the past few months. Between July 2nd and October 31st, the price increased by over 400%. ^[2]

FIGURE: Onion Prices in Bangladesh (Jul – Nov 2019) / Source: Tridge Intelligence

Ultimately, the shortage could have been prevented with some foresight from importers, who were overdependent on Indian imports, and authorities, who did not prepare accurate forecasts of demand and supply and thus did not hold sufficient stock. The crisis has highlighted several flaws in the local commodity market which must be addressed.

Indian Export Ban Hit Local Market Hard

Indian onion farmers suffered at the hands of droughts in 2018 and a delayed monsoon in 2019. This was followed by damagingly heavy rains which lead to lower yields than most years. This led to a shortage, and the Indian onion market suffered its own onion crisis with prices rising by 47%. ^[4]

As people started protesting the hikes, the Indian government took several initiatives. First, the initial 10% export incentives were removed, and a Minimum Export Price (MEP) was set at $850 per tonne. When even this failed to work, India, the largest exporter of onions, banned exports completely and instead imported onions from Egypt. ^[8]

As Bangladesh imported over 550,000 tonnes of onions from India in the 2018-19 fiscal year, the sudden ban has crippled supply ^[2]. Imports from Myanmar have risen as a result, which previously constituted less than 1% of imports. ^[6]

Local Production Plagued by Disincentives

Local demand is 2.4 million tonnes annually, and local supply is 1.7 million. ^[2] This makes Bangladesh the 9th largest onion producer in the world. ^[6] The local harvest this year has been limited due to dry weather and a shorter monsoon than expected.

Although onion demand is high in the country, farmers face certain challenges in its production which is why it is a relatively less popular crop. Not only does onion yield fluctuate with poor weather conditions, but there is a lack of structural support. Irrigation for the crop is difficult for small-scale farmers to develop, and there is limited access to processing and cold storage facilities. Fluctuations in price and yield are also discouraging, for which no policy support is provided by the government.

FIGURE: Onion Production / Source: Bangladesh Bureau of Statistics

September to December is the time when local production is most limited and given that India’s onion crisis is not a recent development, the authorities’ short-sightedness may be one of the problems to blame for the historic price hikes. ^[8]

Rumours Fuel Consumer Panic

Rumours and panic regarding price increases led to spiralling demand, which traders took advantage of through hourly price increases. ^[5] Consumers have suffered significantly under the anxiety caused by the dramatic rises in the price of the staple commodity. The price rises have cost consumers approximately $37.5 million just between July and October ^[2].

The price of other essential spices and vegetables has also been rising, with a Tk 40 increase in the price of garlic over the last week of November. ^[3]

Salt, like onions, is a staple, and this was another market where consumer panic was evident. Prices reached Tk 100 per kilogram whereas the average tends to be under Tk 35 per kilogram, simply due to consumers buying larger amounts to stock up and attempt to be prepared for the potential price rises. ^[6]The government, however, guaranteed that salt stocks are sufficient to prevent price hikes.

The salt market’s situation shows how rumour-mongering and consumer reactions impact the prices, as traders attempt to take advantage of speculation. The spread of misinformation is also to blame for different prices in different locations.

Government Reaction Targets Traders

Traders have been taking advantage of the market to fix prices at high amounts and limit supply so that prices continue to soar. Over 2,000 traders accused of illegal activities have been jailed and fined since the onion crisis began. ^[7] The National Security Intelligence (NSI) identified 29 businessmen and 16 importers who were accused of manipulating the market through hoarding and rumour-mongering. ^[9]

The Trade Corporation of Bangladesh (TCB) deals with such shortages and crises in the food market. It has continued selling onions at Tk 45 at many outlets throughout the country, and 35 locations in Dhaka, allowing those unable to afford the inflated onions to get some relief. ^[3]

The commerce minister has assured worried consumers that prices will stabilize and start falling once the market receives the supply of 12,000 tonnes of onion that were imported and reached the ports on November 29. ^[3] Onions have been flown in from Myanmar, Turkey and Egypt.

Unfortunately, many may say that these measures are too little, too late, as consumers have already paid the costs. A preventive approach, as opposed to a reactionary approach, would have helped keep the market stable.

The Way Forward

This is not the first time Bangladesh has suffered from an onion crisis, however. In 2013, a shortage caused prices to rise rapidly. Reasons were determined to be overdependence on imports from India and disincentives to local onion production caused by the subsequent price reduction from imports. The story has not changed significantly.

Ultimately, it is evident that the forces that caused the onion crisis did not develop suddenly or out of the blue. Limited global harvests due to dry weather caused the Indian onion crisis, which caused the Indian government to ultimately ban exports after several export restrictions were induced. The Bangladesh market was not prepared, without back-up import sources and stocks of onions. Restrictions on Indian exports are unlikely to be removed as an uneven distribution of monsoon rains will lead to poor harvests. ^[4]

The main issues highlighted by the onion crisis are thus overdependence on the Indian market, volatility caused by consumer panic, lack of incentives for production, and a lack of foresight.

Overdependence on Indian imports is a weakness of the Bangladeshi commodity market that needs to be addressed with urgency, which can only be done by providing incentives for local production. Subsidies, fertilizers, guidance, and other resources will be needed to increase production capacity. This is also crucial for long-term sustainability.

Consumer panic can be addressed by identifying and eradicating sources of misinformation. Traders who attempt to inflate the market through rumours must also be identified, and this is a move that the government has focused on.

Going forth, it is crucial that authorities, importers, and traders be responsive to global trends and indications. While increasing production is a long-term concern, being wary of potential shortages and gaps and how they can be addressed with alternate sources is a short-term, and necessary, solution.

The post Onion Crisis Highlights Weaknesses of Local Commodity Market appeared first on LightCastle Partners.

As a country rich with rivers and waterways, Bangladesh has been a hotspot for shipbuilding since the Mughal era. Until recent times, it was better known for its shipbreaking industry. Bangladesh became a ship-exporting country in 2008 when orders for multi-purpose carriers began to come largely from European countries such as the Netherlands and Germany. Bangladesh’s nature as a waterway-rich country enabled it to have strong technical knowledge about shipbuilding in the domestic market which translated well internationally.

However, despite being marked by the government as a strategic industry for growth, the shipbuilding industry has not been meeting performance expectations. A slowdown in the global economy combined with infrastructural limitations have restrained the growth of the industry.

Global Economy and Demand Dwindling

The market for small ocean-faring vessels is expected to grow to $400 billion by 2026.^[1] The demand in the global market for ships is directly related to the economy and its growth. As ships are used for commercial purposes, the level of business and maritime shipping needs is where the demand for ships is derived.

Speculation of a global recession approaching in late 2020 and the US-China trade war have dampened demand in the global market, as they impacted business confidence which directly impacts the demand of businesses to buy shipping vessels. The deceleration of the Indian economy also had an impact, as India is one of the largest economies of the Asian region and the world.

As climate change becomes a rising concern, fuel consumption will become a higher priority in vessel selection. The demand for green energy-run ships is also rising, as recently Western Marine Shipyard Ltd., the largest Bangladeshi shipbuilder, has acquired an order for an LNG driven vessel from Norway.

Large manufacturers in the shipbuilding industry, such as China, Japan, and South Korea, are more focused on the construction of large vessels, and make up nearly 90% of the ships built annually.^[4] The three Asian giants focus on large vessels above 50,000 Dead Weight Tonnage (DWT), and Bangladesh is focused on utility vessels or ships smaller than 12,000 DW.^[5] This means that Bangladesh has specialised production, which does not clash with the larger global producers. The demand for smaller vessels has shifted to developing countries as larger manufacturers hit capacity limits and costs are lower for smaller shipbuilding nations.

In terms of order volume, Korea reclaimed the top spot from China. The major shipbuilders in Korea are powerful conglomerates such as Hyundai, Daewoo, and Samsung. This is in stark contrast with Bangladesh, which has relatively smaller companies that are focused only on shipbuilding and thus have limited funds and resources.

Local Players Face Impact of Slowing Demand

Bangladesh has over 200 shipbuilding companies, largely concentrated in Dhaka, Chittagong, and Narayanganj. Seven of these are incorporated companies: Khulna Shipyard Ltd., Western Marine Shipyard Ltd., Ananda Shipyard Ltd., Chittagong Dry Dock Ltd., FMC Dockyard Ltd., Karnaphuli Shipyard Ltd., and Ready Point Shipyard Ltd. Western Marine dominates the market, with an 89% share of the exports.^[1]

The nature of the industry involves construction lasting several years, after which the sale is realised. Thus in years of large ship hand-overs, export values are higher. Over the past 10 years, over 40 ships have been exported, resulting in exports of over $180 million.^[6] Major international destinations include African countries like Mozambique and Gambia, as well as countries like Germany, New Zealand, and Pakistan.

As the global market has slowed down, domestic demand has risen to improve the prospects of the industry. Government megaprojects and rising construction have created a need for over 300 vessels in the coming two years.^[3] Road congestion, as well as the rising cost of road transport, have further increased the demand for maritime vessels.

Government Policy Gradually Advancing

There is a lack of a proper governing body to not only provide policy support to the builders but also create regulations and standards. Scarcity of capital, further exacerbated by a lack of affordable funding is an issue that needs to be addressed by the government as well, as it would allow the solution of the infrastructural and technological problems faced by the shipbuilders. Skill development is also an issue as Bangladesh lacks the management and expertise to expand into more sophisticated construction.

Recently, the Ministry of Industries has drafted the Shipbuilding Industry Development Policy 2019, including policies such as a 10-year tax break, cheaper financing, and cash incentives. The government has also been considering the development of a $0.59 billion special fund dedicated to the advancement of the industry.^[7] Moreover, with the aid of the Asian Development Bank, the government has trained over 7,500 workers in 3 years to add to the manpower and productivity of the sector.^[8]

Infrastructural support is perhaps the most crucial support needed by the industry at this point. Inadequate electricity supply and outdated technology are limiting the growth of the industry on the supply side. Perhaps the most important feature missing in the Bangladeshi shipbuilding industry is the towing tank which would allow hydrodynamics tests to be run, improving performance of the ships at sea.^[2]

The Way Forward

The technology-heavy aspect of the shipbuilding industry makes it an attractive focus for Bangladesh as not only is it higher-value manufacturing, as opposed to RMG, but it also improves the perception of Bangladesh’s technical expertise to global buyers which may encourage investment and growth of other industries.

The slowdown in the global economy may prove to be an advantage for Bangladesh as this will shift demand from large carriers to smaller vessels, which will be considered more affordable. As countries like China and South Korea specialise in larger vessels, this is a field with relatively less rivalry. However, if the global recession continues for longer than expected, these large builders may shift their production to smaller vessels as well.

The government is aiming to earn $4 billion from the industry over the next five years.^[6] The policy changes that have been proposed must be enacted, and backward linkage facilities such as for steel, furniture, and power generation, must be locally produced for lower cost and strong industry structure. Local makers must be supported financially and through more robust infrastructure.

With a crucial multiplier effect on investments and employment, the shipbuilding industry could carry Bangladesh to the next phase of its development as a middle-income country.

Mondrita Rashid, Trainee Consultant at LightCastle Partners, has prepared the write-up. For further clarifications, contact here: info@lightcastlebd.com.

References

1. Export earnings from shipbuilding hit 457% growth – Dhaka Tribune
2. Bangladesh’s shipbuilding industry: How breakers turned into builders – Dhaka Tribune
3. Shipbuilding thrives on domestic demand – The Daily Star
4. Annual Report 2017-2018 – Western Marine Shipyard Limited
5. ‘Bangladesh gaining global recognition as a shipbuilding nation’ – Dhaka Tribune
6. Shipbuilding policy – The Financial Express
7. Govt considers Tk 50b special fund for shipbuilding sector – The Financial Express
8. Shipbuilding industry: Govt produces skilled workforce of 7,500 in three years – The Financial Express
9. Shipbuilding – A promising first half, an uncertain second one – The BRS Group

The post Shipbuilding Industry in a Slump appeared first on LightCastle Partners.

One fine morning Dipa, a millennial living in Dhaka, woke up to a clogged toilet. After getting the toilet fixed by requesting plumbing service through Sheba.xyz (online service market) Dipa rushed to work on a Pathao (ride-sharing platform) bike. She jump started the day by ordering a coffee on Hungrynaki (online food delivery company). Later that day after realizing that she forgot to buy bus tickets for her parents Dipa bought them through Shohoz (online ticketing service) and paid through bKash (mobile financial service). On her way home Dipa set a doctor’s appointment using Doctrola (online doctor’s appointment service). She ended the day by having dinner which was prepared with groceries bought through Chaldal (online grocery shopping).

The startup ecosystem in Bangladesh starting its journey in the early 2010s has experienced a remarkable transformation and is finally coming of age. At present, the number of startups stands around 1000+ and is estimated to grow multifold in tandem with the digital ecosystem. Around 63% of the Bangladeshi population is aged below 35^[1] and with the internet, smartphone and social media penetration rates of 55%, 31% and 20% respectively, the market for technology-enabled services is set to grow.^[2]  Simultaneously, Middle and Affluent Consumers (MAC) will keep growing at a y-o-y 10%+ driving consumption.^[3] Propelled by the healthy growth of digital enablers and the rising purchasing power of consumers the booming startup ecosystem is making the lives of thousands like Dipa’s easier each day.

How is the ecosystem developing?

The startup ecosystem which mainly formed around Dhaka and Chattogram has been growing on the back of sectors like IT, e-commerce and digital marketing. Gradually, the focus has been shifted to ride-sharing and logistics due to the rising consumer demand as well as recent investments received by industry players: Pathao (US$12 Mn from Go-Jek), Shohoz (US$15 Mn from Golden Gate Ventures), Deligram (US$2 Mn from Skycatcher). Fintech company bKash, with an active user base of 31 Mn and investment from Ant Financial, is changing Bangladesh’s mobile financial sector and encouraging new entrants. Driven by the recent shifts in technology and business processes the demand for online courses is growing — giving rise to Edutech startups.

To gain deeper understanding of the ecosystem, we interviewed founders and top management from 100+ startups across the industries from Dhaka and Chattogram. We asked them about the current and expected sentiment of their respective industries. Applying harmonized index formula, each industry has been scored on a scale of -100 to +100. The overall startup confidence index stands at +40 which indicates a positive sentiment. At the same time we asked investors to mention the top sectors they preferred based on current performance and future growth prospects.

Both the investors and startups have rated Fintech and Ride-sharing and Logistics as two of the most promising sectors. Healthtech and Edutech are esteemed to be on the forefront of the next growth. Despite investors’ high confidence in e-commerce sector and lucrative funds raised by Chaldal (US$5.5 Mn from International Finance Corporation), Daraz (acquired by Alibaba), Sindabad.com (US$4.2 Mn from Aavishkaar Frontier Fund), players are considering the sector as a low confidence one as the percentage of online purchase is still less than 1% of the total retail purchase regardless of the high disposable income and internet penetration rate.^[4]

Who are the ecosystem builders?

Bangladesh’s startup ecosystem has had a late start compared to its regional peers. However, the exemplary growth was possible due to the successful implementation of a number of countrywide incubators and accelerators programs. The global and local incubators and accelerators have been assisting entrepreneurs in aspects ranging from scaling up their ideas to raising funds and becoming sustainable in the long run. GrameenPhone Accelerator powered by Seedstars is one of the largest tech accelerator programs that has assisted successful startups such as – Sheba.XYZ (online service marketplace), CMED Health (A.I. enabled healthtech platform), Repto (online learning platform) among others to graduate. Since 2016, Banglalink incubator, in association with ICT Ministry, has been facilitating innovative ventures to grow further. Jeeon (m-health platform), ishkul (school management software), 6 Axis Technologies (personal and industrial robotic automation solution provider) are some of the most promising alumni graduating from the network. Robi Axiata Limited has recently launched R-Ventures (a reality show and investment platform) aiming to transform digital business ideas to a reality.

In recent years a significant number of local incubators and accelerators programs are coming up to guide both tech and non-tech startups. Startup Dhaka grabbed the attention from the global market with its flagship documentary in 2013 highlighting the promise of startups in Bangladesh. Tiger Cage, SD Asia and Future startups have been inspiring youths through their media presence to pursue an entrepreneurial career rather than waiting for jobs. Global players namely Truvalu, YGAP are running accelerator programs for Impact Enterprises. SmartCap – a platform by LightCastle Partners targeted at Impact Enterprises has run or supported more than 15+ accelerator programs till date. Mentoring entrepreneurs, facilitating access to finance, creating market linkages are some of the focus areas of SmartCap.

Who are the investors?

The Angel market is growing rapidly in Bangladesh with presence of players such as -Bangladesh Angels, Pegasus Tech Venture, SBK Tech Ventures, Bangladesh Venture Capital among others. The angel’s network – a consortium of angel investors in the country has been working towards bringing together promising early stage startups to and introduce them to serial entrepreneurs, tech executives and investors. Majority of the angel investors are focused on tech startups at present which might shift to impact sector in the coming years.

Where is the ecosystem headed? Venture capital firms have been playing an integral role in building the startup ecosystem. Emergence of sector specific VC firms are helping startups targeted to serve niche market e.g. Ignite Impact Ventures is focused on social-impact oriented technology startups in frontier market.

Bangladesh, with a target to become the next Asian tiger needs to maintain a stable GDP growth with a healthy employment rate. Around 60 thousand students graduate each year and roughly 19% of them make it to a job.^[5]  Additionally, the plummeting growth of Ready-made Garments (RMG) sector is signaling major job loss for blue-collar workers. Expanding private sector especially the SME/Startup business segment can be one of the most effective solutions for keeping the economy thriving.

Startups in Bangladesh, despite of being the most potent engine for growth, face challenges in three levels. Firstly, the absence of proper mentorships and access to funds make it difficult for early stage startups to escalate. Through proper implementation of accelerator and incubator programs and circumvention of capital needs through investors’ network, this challenge can be addressed. Secondly, due to market malpractices (e.g. lobbying, using speed money, bad payment terms), the financial cost rises manifold resulting in closing down of ventures at an early stage.  Lastly, the older generation have a negative outlook towards entrepreneurship and assume that one only does business if one fails to get a respectable job. Therefore, younger generation often prefer waiting to get a job rather than creating it.

Our interviews with startup founders and top management revealed that 32% of them had positive sentiment about the ecosystem development while 27% had negative sentiment. One founder said “the ecosystem will not gain enough traction unless there is a continued series of startup success stories. In order to become a success story one must complete the full circle which means graduating from the startup phase.” Another said “In the next 6 months to one year, a tectonic shift will happen in the ecosystem and local investors should prepare themselves to accommodate the change.” One founder added that the ecosystem is enabling only for early stage startups but not for those requiring more investment.

Bangladesh was ranked 116th out of 126 economies in the Global Innovation Index 2019.^[6] Although the economy has been performing well compared to its regional peers, in terms of innovation Bangladesh got the lowest rank which indicates the lack of investment in areas such as – research and development, infrastructure, knowledge creation and diffusion among others. Having one of the most inefficient regulatory structures, Bangladesh ranked 176th out of 190 countries in the Doing Business Index.^[7] Nonetheless, all these adversities could not prevent Bangladeshi entrepreneurs from raising multi-million-dollar funds, nor discouraged foreign investors to enter the market. Moreover, local ride sharing platform – Pathao extended its operation to Nepal in October, 2018 as the first Bangladeshi startup.

In 2018, Bangladeshi startups raised around US$27 Mn while Indian startups received US$4.2 Bn in funding.^[8] The discrepancy between two markets with similar digital ecosystem depicts the absence of an enabling environment. Factors such as – accelerator and incubation programs, mentorship and training, availability of funds in the market will not be enough to bridge that gap. The entire business environment needs to transform in a way that it facilitates the growth of startups. Although our startup ecosystem has come a long way since its inception, it has a long path ahead to finally come of age.

This article was written by Silvia Rozario, Business Consultant, and co-authored by Mohammed Shehab, Business Analyst at LightCastle Partners. Interviews and Data Collection were done by Asif Newaz, Business Analyst at LightCastle Partners. For any queries, you can reach us at silvia.rozario@lightcastlebd.com.

The post Bangladesh’s Startup Ecosystem: Coming of Age appeared first on LightCastle Partners.