The ongoing pandemic has exacerbated Bangladesh's financial stability risks because of high levels of non-performing loans, weak capital buffers, poor bank governance and risk management, the World Bank said in its latest report.
"Reduced profitability, weaker asset quality, and lower credit growth can have large second-round repercussions on the real economy," the report predicts.
The Washington-based lender published the report titled "Bangladesh Development Update – Moving Forward: Connectivity and Logistics to Strengthen Competitiveness" yesterday.
The fragile outlook for the global economic recovery adds external risks if it impacts demand for RMG products and employment of Bangladesh's overseas workforce.
"Despite the uncertainty created by Covid-19, the outlook for Bangladesh's economy is positive. Much of the pace of recovery will depend on how fast mass vaccination can be achieved," said Mercy Miyang Tembon, country director of the World Bank, in a press release.
The report said the national shutdown implemented from March to May in 2020 to contain domestic transmission resulted in severe supply-side disruptions in all sectors of the economy.
GDP growth decelerated sharply, down to an estimated 2.4 per cent in FY20. Industrial growth slowed, with a sharp decline in readymade garment manufacturing output.
The services sector growth also decelerated due to disruptions in transport, retail, hotels, and restaurants.
Early signs of recovery emerged in the first half of FY21 after movement restrictions were progressively lifted.
According to the report, in FY21, growth will be supported by a recovery in manufacturing as export demand strengthens, a rebound in construction supported by accelerating public investment, and robust service sector growth as the vaccination campaign progress.
Inflation is projected to remain close to Bangladesh Bank's 5.5 per cent target, and the fiscal deficit is projected to remain at 6 per cent of GDP.
The report said although Bangladesh was not fully aligned to international standards prior to Covid-19, the Bangladesh Bank has further relaxed loan classification requirements and allowed banks to freeze loan classifications.
"Such extraordinary measures can have positive effects in the short-term but have harmful consequences over the medium and long-term, unless they are carefully implemented and closely monitored," it stated.
Contingent liabilities from high non-performing loans and insufficient capital in banks could result in higher public domestic debt, the WB said.
The report recommended building a data infrastructure to track the impact of future shocks on households and firms that can help inform the policy response to future crises, strengthening resilience.
Underscoring the need for prioritising the efforts to make data collection more agile and rapid within the national statistics system, the report said this would entail institutionalising rapid data collection systems at the Bangladesh Bureau of Statistics.
Resolving longer-term structural challenges could accelerate the post-Covid-19 recovery, the report said.
It identified the structural reform priorities, including building institutional capacity, increasing government revenues, diversifying exports, resolving financial sector vulnerabilities, rebalancing urbanisation, and improving the business environment.
"Business climate reforms and changes to the insolvency framework could help firms recover more quickly."
Bangladesh rose by eight places to 168th in the 2020 Doing Business index, as reform momentum accelerated, the report.
"However, the country still lags comparator countries in the dimensions, including enforcing contracts, trading across borders, paying taxes, and protecting minority investors."