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MCCI: Corrupt banking sector poses biggest economic risk

  • Published at 09:40 pm May 13th, 2019
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The review notes that Bangladesh’s economy is progressing well, although its performance remains below its true potential

The Metropolitan Chamber of Commerce and Industry (MCCI) states that the corrupt banking sector is the biggest risk in the economy and requires strict monitoring by the Bangladesh Bank to bring discipline to the ailing sector.

Other downside risks, the chamber says in its quarterly economic review released yesterday, include inadequate infrastructure, lack of investor confidence, growing requirement of subsidy payment and growing income inequalities.

“The corruption-ridden banking sector is perhaps the biggest downside risk now, which calls for strict vigilance by the central bank to bring discipline to the sector,” the chamber says in its analysis titled ‘Review of  Economic Situation in Bangladesh January-March 2019 (Q3 of FY 19).

The review notes that Bangladesh’s economy is progressing well, although its performance remains below its true potential.

According to the data of Bangladesh Bank, at the end of December 2018, the total amount of defaulted loans in the banking sector stood at Tk93,911.40 crore or 10.30% of the total outstanding loans.

In the same time, the four state-owned Sonali, Janata, Agrani and Rupali Banks' indicators of business operations were mixed. Although the number of loss making branches was reducing, their defaulted loans remained always high, with some having both provision and capital shortfall.

In the executive summary, the MCCI says: “Inadequate infrastructure, lack of investor confidence in the economy that discourages making fresh investment, and shortage of power and energy are now major impediments to the country’s accelerated economic development”.

The chamber also mentions power and gas shortage, insufficiency of investment and weak infrastructures as the major obstacles to growth, as they disrupt industrial production and also discourage new investment.

“The government needs to address these impediments to attract more FDI in the country,” it says.

Private sector credit registered a much lower growth of 12.54% during the period between February 2018 and February 2019, compared to 18.49% during the corresponding period a year ago (February 2017 - February 2018), according to the central bank data.

Private sector credit growth was also below the central bank's target of 16.5% set for the second half of FY19. Public sector credit, on the other hand, recorded a growth of 24.76% at the end of February 2019, compared to a negative growth of 14.24% at the end of February 2018.

As per the estimate of BBS, the country’s GDP growth in the present fiscal is likely to be 8.13%, up from 7.86% in the past fiscal. The multilateral lenders that previously downgraded the country’s growth projection to below 7% have raised their projection to between 7.3% and 8.0%, says the MCCI.

Performance of the economy

The MCCI thinks that despite the impediments to growth, however, the economy has done exceptionally well over the past two decades. Internationally accepted indicators of both economic and social progress have placed Bangladesh at the forefront of the developing world. Poverty has fallen and people's living standard improved significantly, mentions the  review.

The agriculture sector performed well in the quarter under review. The sector grew at a robust rate of 4.19% in FY18 compared to a moderate growth of 2.97% in FY17. 

In FY18, the broad industry sector managed to grow by 12.06%, exceeding the growth rate in the previous fiscal by 1.84 percentage points, despite the shortage of energy, both gas and power.

“The power supply situation improved in the quarter under review but the demand for power, too, shot up” said the review.

Money and Capital Market

MCCI said in review that total liquid assets of scheduled banks stood at Tk.247,149 crore at the end of February 2019, which was 34.89% higher than the minimum liquidity requirement of the scheduled banks. 

The interest rate spread in the banking sector remained unchanged at 4.15% throughout the three months of the quarter under review. However, the weighted average interest rate on deposits rose slightly to 5.35% in March 2019 from 5.34% in the previous month, while the interest rate on lending also increased to 9.50% in March 2019 from 9.49% in February 2019.

“The capital market witnessed a declining trend most of the time in the quarter under review, and also panic sales by jittery investors amid a lack of confidence, says the review.

MCCI also says, in Bangladesh, foreign investment accounts for less than 2.0 per cent of the premier bourse's total market capitalization, which is the lowest among South Asian countries.

Inflation

According to the review, a comparison of point to point inflation data for rural and urban areas in March of FY19 shows that the general and non-food inflation rate was higher in urban areas than in rural areas. Food inflation, however, was lower in urban areas than in rural areas.  

The general point to point inflation continued to go up for the third consecutive month of the quarter under review, rising to 5.55% in March because of rising prices of food items. 

Exports and Imports                        

The MCCI observes that the readymade garments (RMG) played a major role in the overall increase in exports, contributing 83.98 per cent of total exports in July-March of FY19. In the corresponding nine months of the previous fiscal year, RMG exports accounted for 83.18% of total exports.

The chamber thinks that non-RMG sectors such as agriculture, frozen foods and pharmaceuticals were doing better, while the continued weakening of the Taka against the US dollar, political stability, government’s policy support, improvements in safety measures in the apparel sector, and the US-China tariff war that forced global brands to change their sourcing destination to Bangladesh are some of the other factors that boosted exports. 

Import payments increased mainly due to higher imports of intermediate goods and fuel oils. Imports may rise slightly in the coming month ahead of the holy month of Ramadan. Usually, large quantities of essential commodities are imported to meet the additional demand of consumers during the month of Ramadan, said the review.

Foreign Direct Investment   

MCCI finds the net foreign direct investment (FDI) very low in terms of the country's development needs. According to a government estimate, the country needs to attract average annual FDI inflows of $6.7 billion to graduate to an upper middle income country by 2021

During July-February of FY19, the FDI increased by 24.79% $1.183 billion from $948 million in the corresponding eight months of the previous fiscal year. In the calendar year 2018, the net inflow of FDI in Bangladesh increased by 67.91% to $3.61 billion from $2.15 billion in the previous calendar year.