Rahman Makes Bangladesh an Outlier Among Bleak Emerging Markets

Euromoney, November 2015 

If Bangladesh is the world’s most perilous economy, it appears that nobody has told the central bank. Nomura reckons the country tops its Food Vulnerability Index at a time when a historically vicious El Nino weather system is going to cause a renewed food price spike. But on the ground in Dhaka, they are actually exporting rice to Sri Lanka and India, while the country’s economic indicators appear to be among the most stable in all emerging markets. What’s going on?

The answer may be that a long-standing policy of financial inclusion for the poor is bearing fruit, not only in terms of social equality but national economic performance. The jury is perhaps still out but it would be a rare good-news story if correct, and its author is the governor of the central bank, Atiur Rahman.

Rahman joined Bank Bangladesh from an unusual route in 2009: an academic who had worked his way out of rural disadvantage, the son of a landless farmer with no education, he was a professor of Development Studies at Dhaka University before taking the top job. Once there, with apparent pride in ruffling a few feathers, he set about a policy based upon what he calls “touching the ground”: engaging with the real economy.

Recalling his own background, the centrepiece of this approach was to try to bring one million tenant farmers into the financial mainstream. He created a line of 5 billion taka and put the money into some of the world’s largest MFIs with instructions to commit the money to share croppers and other underprivileged groups who had never before been reached by finance. Several years on, he says 15 billion taka has been disbursed, all of it recovered, and a million households have benefited, with 62% of beneficiaries women.

There is an obvious social and humanitarian benefit to work like this, but what’s striking is that six years into his tenor, it appears to be bearing fruit in the broader economy. Bangladesh is growing at 6.5% this year and Rahman is predicting more than 7% next year. Inflation has dropped from 12% to 6.5%, reserves have increased four times over, and if there’s pressure on the currency, it is upwards, at a time when other emerging market currencies are plunging. Rahman has no doubt that the two things – grass-roots inclusivity and impressive top-line numbers – are linked. “Money needs to touch the ground,” he says. “You can throw money in the air, but it will only create bubbles and inflation.”

But what about the food shock? Are there dangers ahead? Rob Subbaraman, the author of the Nomura report, says that despite an era of depressed commodity prices, soft ones like food “have the greatest potential for a surge” given what may be the harshest El Nino since records began in 1950. “We know emerging markets are in a funk right now, and the last thing they want is a surge in food prices.”

This recalls the time in 2008 when, as food prices rose and countries began to hoard rice, Bangladesh found itself unable to buy rice on the open market at any price, and was saved from a desperate situation by a strong domestic harvest. “It is completely the other side now,” Rahman says. “Because of the support we have given in increasing agricultural loans, we are now running a surplus in food production.” He says food price inflation has fallen from 17% to 5%. Subbaraman agrees that “stockpiles are healthier, but the thing I’ve got in the back of my mind is that when food prices really start rising, the most vulnerable are the poor. Each country thinks of its own self-interest and each country wants to hoard its food. I’m glad stockpiles are looking OK but I’m conscious it can change quite quickly.”

For the moment, though, Bangladesh is in a rare situation of seeing financial indicators stronger than its peers. “I have a pleasant challenge of addressing surpluses, not deficits,” Rahman says, noting the assistance the country has received in this respect from remittances from overseas workers. He believes other financial inclusion programmes – such as empowerment of women and bringing street kids into the financial system – are also creating a groundswell of wealth and stability that is being reflected in rosy headline data.

And, as any microfinance professional will tell you, the poor just don’t seem to default. “Many people thought during the financial crisis that many farms would go bust and NPLs would go up,” Rahman says. “But they have not. They have come down to single digits.” Revolutionary stuff.