Expressing deep concern about the ballooning non-performing loans in the banking sector, the World Bank yesterday urged the Bangladesh government to fix the financial sector with an action plan, particularly to shore up the struggling banking industry.
Qimiao Fan, World Bank Country Director for Bangladesh, Bhutan, and Nepal, made the call in launching the “Bangladesh Development Update: Powering the Economy Efficiently” report in Dhaka.
In the report, the World Bank said the country needs to improve financial sector governance, including banking sector performance, especially the high share of non-performing loans (NPLs), which reached 10.4% in the last fiscal year.
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The stressed loans are mainly concentrated disproportionately at the six state-owned commercial banks that account for 48% of total NPLs, while 40 private commercial banks accounted for 44% percent of all sour loans.
“More importantly, sound and efficient financial and energy sectors are very critical in sustaining Bangladesh’s economic dynamism. Indeed, evidence from around the world is very clear. Progress up the middle income ladder is only possible with an efficient financial sector that can intermediate between savings and investment,” said Qimiao Fan.
There is also significant vulnerability in the financial sector with increasing non-performing loans (NPL). When the financial sector struggles, the real economy cannot reach its full potential, Qimiao said.
“So action is needed to improve the financial sector, particularly the banking sector. These include improving corporate governance of banks, reduction in interest distortion rates, and dealing seriously with NPLs,” said Qimiao.
“To realize its goals of achieving upper-middle income status, Bangladesh must make sure its economic fundamentals are sound,” said Zahid Hussain, World Bank Lead Economist and author of the report. “As immediate measures, the country needs policies to contain inflation, correct the exchange rate, and remove interest rate distortions.”
For the first time since FY2011, Bangladesh faces a deficit in the overall balance of payments, putting pressure on the exchange rate and international reserves. This has resulted from a substantial widening of deficits on the trade, services, and income accounts, he added.
Calls for higher efficiency in electricity generation and distribution
Zahid said, notwithstanding great strides in increasing the electricity supply over the past decade, the country still faces enormous challenges in meeting the rapidly increasing electricity demand, driven by a fast growing economy.
“There has been lots of progress with electricity but there is more room to increase power generation for consumers at a reasonable price. To this end, the government has to bring reforms to gas use policy and a price setting formula,” said Zahid Hussain.
Prioritizing more efficient plants would reduce idle gas capacity by 8.1% and electricity shortage by 15.2% a year. On the other hand, the government has to ensure transparency in price setting and accountability, he said in his presentation.
He also called for diversifying electricity import destinations and better load management of electricity as merit based load dispatching could save $1.5 billion annually in fuel costs.
The global lender also stressed strong revenue mobilization by increasing use of technology in tax administration. It also urged clarifying the implementation of the VAT Act, expected to be implemented by July next year.
The World Bank also urged product diversification within the garment sector, and to reduce Bangladesh’s high dependence on EU and US markets as export destinations, by widening its regional trade.
