Tackling difficulties related to economic growth

Published : 20 Nov 2019 07:05 PM | Updated : 07 Sep 2020 10:38 PM

In its latest development update, the World Bank has identified that several factors need to be addressed by Bangladesh authorities to overcome derailing of economic growth. They have suggested that GDP growth for this fiscal year could end up at about 7.2 per cent, the second highest in South Asia after Bhutan (7.4 per cent). It has been suggested that banking sector vulnerabilities and uncertain global outlook will cast a shadow on the momentum generated in our economic paradigm. They have pointed out that the economy looks set to grow at a robust pace in the medium term but downside risks were primarily domestic in nature.

In this context they have also acknowledged that private sector credit growth was weak, constrained by banking sector liquidity. One of the reasons for this is liquidity remaining constrained because of high default loans that has continued to rise instead of reduction. It may be mentioned that economists have pointed out that as of June, the default loan ratio stood at 11.7 percent of total outstanding loans, up from 10.4 percent a year earlier. In addition, the default loans are not evenly distributed, with the state banks accounting for almost half of the total -- a result of directed lending, poor risk management, and weak corporate governance and prudential oversight.

Bernard Haven, senior economist of the World Bank and co-author of the report has also observed that “weak governance in the banking sector could impair its capacity to extend credit and support growth if the economy slows down”. This view has been based on the fact that for the banking sector, the overall and Tier 1 capital to risk-weighted assets ratio (CRAR) marginally exceeds internationally accepted minimum requirements. The latest stress test by the Bangladesh Bank in December 2018 indicates that credit concentration risk has also become a threat to capital adequacy. In support of this assumption it has been observed that “the default of the top three large borrowers results in 22 out of 48 complying banks falling below the minimum regulatory CRAR.”

In addition, it appears that the Bangladesh Bank has made several concessions in the loan classification rules and write-off policies that are a departure from the global norms enacted in 2012 following the Basel III guidelines. This has resulted in affecting the confidence of foreign suppliers on the ability of domestic banks to honour letters of credit payment obligations. As a result, LCs issued by domestic Banks is now commonly requiring confirmation by a correspondent Bank to be acceptable by overseas suppliers. This has increased the financing cost of import transactions.

At the same time, we are having another awkward evolving situation not just because of the rising default loans but also because of the declining deposit growth, US Dollar sales by the Bangladesh Bank to moderate the exchange rate and pressure on Banks to limit lending rates to 9 percent. This is also constraining the supply of loanable funds by Banks. It is this scenario that has led economists to warn that “increased bank borrowing by the government in such a situation will increase the risk of crowding out the private sector with adverse effects on private investments.” They have also drawn attention to the fact that the external risks are also rising, although Bangladesh may look forward to benefit from trade diversion in the short term. Such a view is being supported through the contention that escalation of tariff by the US against China may provide a temporary boost to exports in the short run for Bangladesh if it can capture some of the trade diversion. However, on the other hand, slower growth forecast in Bangladesh’s major export markets can also slowdown the country’s momentum within this equation. This view is being supported by analysts claiming that Euro area growth is projected to fall from 1.8 percent in 2018 to 1.4 percent in 2020, while growth in the US is forecast to decline from 2.9 percent in 2018 to 1.7 percent in 2020.

Anxiety has also been expressed by the World Bank regarding the possibility of a loss of competitiveness through exchange rate appreciation because of the Bangladesh Bank’s interventions in the foreign exchange market to stabilise the Taka-US Dollar rate. The World Bank report has also noted that Public Investment Management (PIM) remains a challenge as Bangladesh’s Annual Development Programme (ADP) continues to be overloaded with many projects where time for project completion and cost overruns have become omnipresent. This view on the part of the World Bank has persuaded them to justifiably call for closing the infrastructure gap and timely implementation of ADP.

It would be appropriate at this juncture to recall that while the World Bank has now forecast the Gross Domestic Product (GDP) growth rate of Bangladesh at 7.2 percent for 2019-20, the Government’s projection for the same fiscal year in the national budget was 8.2 per cent. It may be recalled that the GDP growth rate for 2018-2019, officially estimated at 8.1 percent, was higher than the previous fiscal year’s rate of 7.9 per cent.

However despite the anxiety of the World Bank, a note of assurance in our economic growth has been found in the comment made by Mercy Miyang Tembon, Country Director of the World Bank for Bangladesh and Bhutan- “Bangladesh’s economy is projected to maintain strong growth backed by sound macroeconomic fundamentals and progress in structural reforms”. 

It would be appropriate at this point also to refer to another emerging element. Our trade deficit has narrowed slightly in the first two months of this fiscal year, helped by a decrease in imports. Between July and August, trade deficit, stood at US$1.98 billion, down 6.24 percent year-on-year, according to data from Bangladesh Bank. Imports stood at US$8.62 billion, down 2.30 percent year-on-year .This decreasing trend has however been identified as an example of sluggishness within our macro-economic paradigm.

Mansur, Chairman of Brac Bank has observed that the import growth would have declined more if the import payments for petroleum products had not increased significantly. It may be mentioned that imports of crude petroleum rose 137 percent year-on-year to US$151 million. The import of capital machinery however fell 24.42 percent year-on-year to $760 million.

It has also been observed by Fahmida Khatun, Executive Director of the Centre for Policy Dialogue (CPD) that the export earnings from the garment sector have slightly declined in July and August. This has raised an alarm. It has consequently been correctly suggested that the relevant authorities should explore new destinations more actively to give a boost to the RMG export. This will be an example of economic diplomacy and should be taken forward by all our diplomatic Missions abroad.

Despite all the anxiety one needs to be able to call the glass as half-full and not just half-empty. One needs to remember that despite all the anxiety, Bangladesh Bank data has revealed that the current account balance enjoyed a surplus of US $313 million during the July-August period, up from a deficit of US$7 million a year ago. It appears that an increased flow of remittance has played a major role in registering the robust current account.

The observations made by World Bank and the anxiety among economic analysts have gained greater attention from those involved with investment and this has been reflected through the Dhaka Stock Exchange plunging to a three year low in the second week of October. Shares fell and sent the key index to its three-year low of 4,810.21 points. The DSEX, the benchmark index of the bourse, lost 127.61 points in the four days available for trading. This wiped off Tk 12,642 crore in investors’ share value despite a number of recent steps taken by the government to give a boost to the market. There have also been reports of the Chittagong Stock Exchange falling. This bourse’s benchmark index, the CSCX has also been declining in recent times. 

Market insiders have however been critical of the government and observed that this erosion is partially due to the government and the stock market regulator having failed to boost investors’ confidence by taking action against the manipulators of junk stocks.

Such a situation will definitely affect the possibility of foreign investment in our Stock Exchanges and needs to be addressed more firmly and without hesitation. Time is of the essence in the context of financial regulatory implementation.

This brings one also to the question of ensuring sustainable banking reforms for achieving a sustainable financial platform. These reforms will require banks to assess, manage and report on social and governance risks in their lending operations. It needs to be remembered that Bangladesh has been  among the group of countries advancing implementation of sustainable banking framework over the past few years. Since 2011, Bangladesh Bank has also developed several policies to promote sustainable finance, including policy guidelines on green banking in 2013 and Guidelines on Environmental and Social Risk Management in 2017. These guidelines have encouraged Banks and Financial Institutions to incorporate environmental and social risk management into their credit activities, and to publish green banking and sustainability reports. International Finance Corporation (IFC) Vice President Georgina Baker has praised the Bangladesh government’s commitment to sustainability and importance of the banking and financial sector in achieving progress towards sustainable development goals and nationally determined contributions.

This means that we have the potential for success. This raises optimism in one’s heart. The path ahead is difficult. However we can overcome the existing challenges by bringing together regulators, policymakers, trade associations and development institutions. They can then define the least common denominators and not only help to overcome challenges but also turn sustainable finance policies into action. We might have slipped two positions in the latest World Economic Forum's Global Competitive-ness Index but one is confident that we can move forward again through a more effective  business dynamism, a diversified product market and greater skills created through further investment in the ICT sector.

Muhammad Zamir, a former Ambassador, is an analyst specialized in foreign affairs, right to information and good governance