Bangladesh, long known in the West as an "international basket case", is doing its best to consign to history the dismal label so firmly attached to it by US diplomat Henry Kissinger. The economy is humming and the stock market surging. Now the government is being urged to pursue reforms while the opportunity lasts.
The Dhaka Stock Exchange General Index (DGEN) has doubled in the past nine months, including a phenomenal 25% one-day jump in mid-November. It has risen 10% in just the last three weeks and is now on the verge of closing above the 5,000 mark, which it crossed briefly earlier this week.
This is a remarkable change in fortunes for the country since Kissinger, then running the US State Department, expressed his views soon after Bangladesh won its independence from Pakistan in 1971. An important force for good since then has been the Grameen Bank's extension of microcredit, the idea for which Muhammad Yunus received the 2005 Nobel Peace Prize.
The country's per-capita inflation-adjusted gross domestic product (GDP) has more than doubled in the past 35 years, according to the World Bank, and its poverty rate fallen by 20% in the last two decades. Urbanization, especially around the capital Dhaka, has driven this growth.
The UN still classifies it as a "least developed country" (LDC), but the decline in the budget deficit, high rates of export and import growth, and increasing foreign currency reserves earned Bangladesh plaudits in a recent country review paper for the UN's Brussels Program of Action for the LDCs. The report encouraged the government to continue to pursue attempts to reform the budgetary system, financial institutions, and the revenue sector.
The drive to pursue any such reforms may be weakened by an economy faced with unpleasant headwinds as the global economic crisis continues to make its impact felt.
Three-quarters of the country's export earnings are pulled in by the garment industry, backed by foreign direct investment (FDI). This has been hard hit by a decline in demand as a result of the global financial crisis.
FDI, which has been encouraged through the establishment of a handful of Export Processing Zones, where foreign investors receive incentives for opening factories, also took a hit last year and is expected to continue to slow in 2010. Remittances from abroad, which contribute significantly to foreign exchange, also face a slowdown as Bangladeshi workers overseas struggle to keep jobs and maintain pay levels.
As is the case in some East Asian countries, the lack of integration of local financial and banking institutions with the worldwide industry shielded Bangladesh somewhat from being swept up in the economic maelstrom of the global crisis. The possibilities of increased prices for food and fuel are now the country's major macroeconomic challenges.
The Bangladesh Bank has followed a monetary policy intended to control inflation while increasing capital investment. While increasing credit to the private sector, however, it is restricting credit to government. The bank anticipates that both food and non-food inflation in Bangladesh will continue over coming months. Its target figure is 6.5%. Bank governor Atiur Rahman says there are dangers of speculative bubbles, as real productive opportunities may lag behind available investment capital. Those worries seem so far not have dragged on the stock market.
It was the landslide election of a political alliance led by the Bangladesh Awami League at the end of December 2008 (following a provisional military government that postponed the planned January 2007 elections) and the institutionalization of a relatively stable democracy that created the political preconditions for the present exceptional, near-parabolic rise in the stock market.
The banking sector remains the market bellwether, and the country's largest mobile telephone operator, Grameenphone, represents 17% of total market capitalization. Other significant sectors include pharmaceuticals and energy, notably gas.
There had been some hope, in the middle of the last decade, that a Bangladesh-India-Myanmar dispute over Bay of Bengal maritime boundaries might be resolved in conjunction with development of an east-to-west gas pipeline extending to Kolkata.
The Bangladeshi government, which would have garnered transit fees from the project, was however the only one not to sign off on the final proposal. Since then, Myanmar has decided to send its gas by pipeline to China.
There has been so much natural gas development in Bangladesh that the Asian Development Bank estimates that overdependence on gas for power generation and in industrial and residential sectors in fact represents a threat to the country's energy security. At some time in the future, the government will have to rethink its pricing structure, which makes gas available to users at a minimal price. Electricity demand regularly outstrips supply.
It the country is able to overcome transparency issues and continue cooperation with its South Asian neighbors (as a recent summit meeting with India indicates will happen), then the country's economic prognosis is far more positive than its earlier reputation.
Bangladesh is considered a "frontier market" under the FTSE classification, although not by MSCI. Yet Goldman Sachs includes it among the "Next Eleven" (N-11) that it judges have the potential to become one of the world's largest economies in the present century, a category separate from the BRICs - the fast-growing developing economies of Brazil, Russia, India and China.