The financial sector faced a number of serious challenges this year
The economy of Bangladesh has expanded significantly in 2017, despite ups and downs in the performance of major economic indicators. The financial sector however faced a number of serious challenges, which could threaten the progress in the future.
According to the Centre for Policy Dialogue (CPD), a sound financial sector is the key for a sustained economic development for any country. It facilitates the financial mechanisms between borrowers and lenders, helps expedite capital accumulation, and ensures use of resources into productive sectors.
However, in 2017, the country’s financial sector, especially the banks, faced a severe governance crisis, which caused the industry to face a record increase in non-performing loans (NPL), financial scams and liquidity shortages.
The amount of defaulted loans in the banking sector at the end of September, 2017 stood at Tk80,307 crore, while the amount at the end of December, 2016 was Tk62,172 crore. Which indicates that default loans amounting to around Tk18,135 crore was accumulated during the nine months of 2017.
Over these months, the fourth generation banks that emerged, allegedly on political considerations, quickly became a burden on the government. Two of these new banks– the Farmers Bank and the NRB Commercial Bank, were found entangled in irregularities, and contributed in destabilising the entire banking industry.
The Farmers Bank has been facing liquidity crisis and the depositors are now seriously concerned over getting back their deposits.
Under the circumstances, the government came up with the Banking Companies (Amendment) Act-2017, which permits four family members on the bank board of directors for nine consecutive years and allows granting licenses to new banks.
The central bank however took action against some irregularities, such as removing the managing directors of two scam-hit banks.
Another challenge surfaced in 2017, the banks began to centralize under the grip of one corporate group, as Chittagong-based S Alam Group took control over three banks throughout the year.
Besides, just like the banks, the non-bank financial institutions also got involved in irregularities. For example, Bangladesh Industrial Finance Company (BIFC) reportedly failed to pay back Tk31.73 crore it owes to state-owned Rupali Bank, because it is facing a liquidity crunch.
Another non-bank financial institution named First Finance, has a cash reserve deficit of Tk221.87 crore as of September, 2017, which prompted the central bank on December 3 to slap it with a fine of Tk2.21 crore.
Addressing the issue, the Director General (DG) of Bangladesh Institute of Bank Management (BIBM) told the Dhaka Tribune: “Despite some unexpected incidents in the financial sector, the performance of macroeconomic indicators were good in 2017.
“The growth in credit disbursement, increased amount of deposit, cut in lending rate, increased number of Letter of Credit (LC) opening, operating profit of banks and even the capital adequacy ratio of the banks in line with the Bangladesh Bank requirement, showed that the country’s financial sector is in excellent health.”
However, the banking sector irregularities, such as the Farmers Bank and NRBC Bank scams, volatility in foreign currency exchange rate and rising monopoly have challenged the financial sector.
He opined that such incidents have caused trouble for the country’s financial system and destabilized the sector, which reduced the clients’ confidence on the banking system.
Facing the challenges, the BIBM DG stressed for both improvement of internal governance in the banks and further strengthening the central bank.
State of other macro-economic indicator
According to the Ministry of Planning, Bangladesh’s economic growth accelerated to 7.28% as of June 30, 2017, while the per capita income rose from $1,602 to $1,610.
Meanwhile, the Bangladesh Bureau of Statistics (BBS) data shows that the growth rate in FY2016 was 7.11%, while the per capita income was $1,465.
The record GDP growth was the biggest achievement for the country’s economy in 2017, though the global development agencies disagreed with the figure.
The government has succeeded in maintaining the overall inflation rate at around 5.5%, but, the price hike of food items was a major topic of discussion in 2017, following the extensive flooding across most of the country back in August.
The price of rice saw an increase by Tk15 to Tk16 per kg, depending on their varieties. The price hike forced the government to import 2,155,590 metric tons rice of from July 1 to December 17.
The price of onions also witnessed a surge. On December 10, the price of one kg onion stood at Tk120, which was almost the same of the price of one kg chicken.
The overall investment slightly rose in 2017 to 30% of GDP from 29% in 2016, while the private sector contributes 23% of the GDP. Credit growth to private sector has exceeded all expectations in 2017 as it rose to around 19% from 15% in 2016.
According to Bangladesh Bank’s quarterly report on currency and exchange rates, until September this year banks gave out Tk7,97,789 crore in loans, whereas by the end of September 2016 it was Tk6,75,139 crore.
But, a number of economists are concerned that the investments in the disbursed credit was not visible, which raised the question of whether the money is being siphoned out of the country.
The country observed good performance in infrastructural development sector, but the slow speed of construction for the related projects, especially first track projects such as Special Economic Zones (SEZs) was slow.
This delay could increase the estimated cost of the projects.
The Padma Bridge project became visible to the naked eye for the first time this year. However, there was also a concerning issue regarding the faulty design of eight of its spans.
Exports and Imports
The country’s export growth was quite slow during the first months, which posted increasing trend after six months, depending on the exports, around 5% year-on-year growth was posted.
While, the imports marked four times growth, especially considering the capital machinery import, which economists opined as either a sign of increasing investments or money laundering.
In 2017, the government for five consecutive years, failed to implement the new VAT law amid pressure from the business community, which created problems in revenue collection.
On the other hand, the tax to GDP ratio was also around 10%, as the revenue from direct tax was not increased than the usual amount.
The remittance inflow to Bangladesh in 2017 has seen a 10% negative growth, which was mostly caused by “Digital Hundi.” However, the indicator has seen a positive mark during the last months of the year.
In poverty reduction, the country kept a steady pace, though the rate of reduction has declined.
According to the World Bank’s “Bangladesh Development Update September 2017”, the strong GDP growth did not reflect in the job market.
Readymade garments factories, the largest job provider in the private sector, have seen a fall in job creation, while the participation of women has also declined.
Power price adjustment
As of October, 2017, a total of six power plant projects have been implemented, and from those plants, 962 MW power has been added to the National Power Grid, according to Bangladesh Energy Regulatory Commission (BERC).
But, on November 23, the BERC announced the hike in retail price of per unit electricity by Tk0.35, which sparked some controversies across different sections of the people in Bangladesh.
The policymakers, Consumers Association of Bangladesh (CAB), chamber leaders and a section of political leaders claimed that the increase would have a far reaching impact and it was an unwise and inappropriate decision.
Pressure from Rohingya influx
Bangladesh’s economy has faced a different kind of challenge in 2017. A total of 671,800 Rohingya entered into Bangladesh from August 25 to December 21, according to the Refugee Relief and Repatriation Commission (RRRC), Bangladesh.
The government has to make additional expenditure on new infrastructure for the refugee population.
However, on November 23, Bangladesh and Myanmar agreed on a deal to return hundreds of thousands of Rohingya refugees to Myanmar. The process is set to begin from January 23, 2018. l