Private sector credit growth in Bangladesh dipped in August compared with that in the previous month, amid slow business investment, liquidity crisis in banks, and overall political unrest.
Economic challenges such as high inflation, foreign exchange volatility, dollar shortage, and an energy crisis have further dampened business activities, making businesses hesitant to seek bank loans.
Bangladesh Bank’s latest data showed that the growth dropped to 9.86% in August from 10.13% in July.
However, it still remains high as per target set by central banks for first half (H1) of FY25 (July-December) to 9.80%.
Data shows August's credit growth was the lowest in the last 11 months.
Earlier in September 2023, the growth was 9.69%.
The rate was 9.84% in June, 10.35% in May, up from 9.9% in April, which was 10.49% in March, 9.96% in February, 9.95% in January and 10.2% in December of 2023.
Reason behind slow growth
Syed Mahbubur Rahman, managing director & CEO of Mutual Trust Bank Limited (MTB), considers political unrest to be the reason for the decrease in the opening of LCs.
He said: “Import LC opening has decreased due to two reasons. First due to the recent political unrest in the country. Then there was a disruption in the communication system. Banks were also closed at that time. It has directly affected import and export. The internet shutdown also disrupted communication across the country, affecting direct imports. As a result, the demand for credit in the private sector was low. Hence, private sector credit growth slowed in August.”
The banker talked about the reluctance of investors as the second reason for LC openings declining.
Economists and bankers also said that the private sector credit growth declined in August due to stagnant business activities amid major political changes and unrest across the country.
The unrest began in July, with business disruptions stemming from curfews, protests, and an internet blackout. Protests were led by the Anti-Discrimination Students Movement, which began on July 1 and ended on August 5 when Sheikh Hasina resigned as prime minister and fled to India on August 5.
In August, tensions continued amid the formation of an interim government, violence and sweeping changes in different administrative bodies.
The domino effect from the political unrest spilled over to economic activities which remained almost at a standstill during most parts of that month. As part of the private sector entrepreneurs' cautious business approach following the regime change, they more or less halted their business expansion plan to avert any further investment woes, sources said.
Apart from the chaos associated with the changeover in state power, the latest event of flooding that inundated major parts of the country's southeastern regions also forced the private-sector players to be watchful before putting in any further capital investment.
Therefore, credit demands declined as businesses took a wait-and-see policy, bankers said.
Moreover, the liquidity crisis worsened in the banking sector which saw massive loan scandals and irregularities during the Awami League regime, they said.
Many people withdrew their deposits amid fear of losing their money, bankers said.
Therefore, money in circulation soared to Tk292,000 crore in August from Tk250,000 crore in the same month in 2023.
In addition, the banking sector’s loan disbursement capacity also diminished due to high amounts of defaulted loans, deposit withdrawals by clients and ongoing economic challenges, bankers said.
Many banks are now facing a cash crisis and have sought assistance from the central bank and larger banks to meet their daily cash needs, they said.
According to Bangladesh Bank data, deposits (excluding interbank and government deposits) fell to Tk1,731,260 crore in August, down from Tk1,734,026 crore in July and Tk1,742,224 crore in June.
On the other hand, the central bank’s contractionary monetary policy also weighed heavily on the private sector credit growth.
It raised the policy rate to 9.5% to make the money more expensive in a bid to control inflation.
A dollar shortage in the country has curtailed business operations and reduced the demand for credit, the official exchange rate reached Tk118 from Tk93 against the US dollar within a year.
MPS target
The central bank has lowered the private sector credit growth target for the July-December period (H1) of FY25 to 9.8%, down from January-June's 10% to reduce the credit flow for tackling inflation.
The private sector credit growth target was at 10.90% for FY24 FY24 H1 (July-December).
However, the actual growth till June of last fiscal year stood at 9.8%.
On the other hand, projected growth in public sector credit is 14.2%, as per the Bangladesh Bank monetary policy statement (MPS) for the first half of FY25.
