Muhid Hasan :
The country’s economy faces a double whammy as the government remains committed to borrowing from banks while the Bangladesh Bank frequently changes its policies to tackle a myriad of micro and macroeconomic problems.
This duo of issues has a domino effect across various sectors, hampering private sector credit flow and subsequently affecting investment and employment in the country.
Currently, the government is over-relying on domestic banks rather than seeking foreign financing. Initially, it targeted borrowing Tk 1.32 lakh crore from banks for FY24 but later increased this amount to Tk 1.55 lakh crore.
At the end of May this year, the government’s net bank borrowing stood at more than Tk 61 thousand crore.
In the current month, the government plans to take an additional loan of about Tk 62 thousand crore from the banks to meet its fiscal year-end expenses for FY24.
This significant borrowing contributes to a liquidity crisis in the banking sector, resulting in sluggish private sector credit growth.
Furthermore, in the proposed budget for FY25, the government plans to borrow Tk 137,500 crore from banks, accounting for nearly 54 percent of the total deficit. In the proposed budget for FY 2024-25, the estimated deficit will stand at Tk 2,56,000 crore, which is 4.6 percent of the country’s gross domestic product (GDP).
Industry insiders have noted that the government’s higher bank borrowing significantly increases the crowding-out effect on the private sector by reducing its borrowing capacity.
The private sector is already suffering due to high interest rates on bank loans, and banking sector deposits are only projected to grow by Tk 1.6 lakh crore next fiscal year.
Dr. Salehuddin Ahmed, former governor of Bangladesh Bank (BB), remarked, “Running a deficit budget is unsustainable. Spending more than we earn will only widen the gap.”
He suggested the current demand to control spending and focus on raising income, adding that printing more money to finance the deficit budget won’t solve the problem but will worsen the economy.
He also pointed out that the banking sector is facing an ‘image crisis’ due to the liquidity crisis caused by government borrowing. Additionally, Bangladesh Bank’s major policy measures, including adopting a contractionary monetary policy, have yet to achieve their intended outcomes to infuse dynamism into the country’s economy.
Measures such as interest rate hikes and the elimination of the interest cap have failed to tame inflation.
The increase in the repo rate, raised by 200 basis points from 6.50 percent on July 1 last year to 8.50 percent on May 9 this year, has led to higher lending rates, making it harder for private-sector businesses to secure loans and raising operating expenses in recent months.
Due to rising interest rates, private sector credit growth has been sluggish. According to Bangladesh Bank data, growth dropped to 9.9 percent in April from 10.49 percent in March.
It was 9.96 percent in February, 9.95 percent in January, and 10.2 percent in December 2023. The private investment-to-GDP ratio has also followed a downward trend, recorded at 24.18 percent in FY 2023 and 23.51 percent in the current FY 2024.
Factors such as import restrictions, taka depreciation, higher inflationary pressures, and weak monetary policy implementation have adversely affected investment in Bangladesh. Similarly, industrial output is consistently declining.
Data from the Bangladesh Bureau of Statistics (BBS) revealed a marked slowdown in factory output growth, with estimates showing a drop to 6.66 percent for FY24, down from 8.37 percent last year and a sharp fall from the 9.86 percent and 10.29 percent growth rates observed in the two preceding fiscal years.
Experts attribute the decline in industrial production to reduced loan facilities from banks, a forex crunch, local currency devaluation, low imports of capital goods, intermediate goods, raw materials, and uncertainty among investors about overall conditions, including volatility in exchange rates.
The recent steep currency devaluation by the central bank, which raised the dollar price to Tk 117 from Tk 110, has further increased import costs in the country.
Over the past two years, the taka has lost 36 percent of its value against the dollar, with the exchange rate rising from Tk 86.45 to Tk 117.
FBCCI President Mahbubul Alam noted that Bangladesh Bank has struggled to maintain stability in its decisions regarding major policy measures, including those affecting the banking sector.
“This instability has caused businesses to suffer due to indecisiveness and frequent policy changes,” added Alam. He also expressed concerns about the rising dollar rate, which could increase the number of defaulted loans.
FBCCI President further mentioned that the issue of currency reserves would need to be resolved and clarified that while banks might have some control over setting loan interest rates, they would ultimately be regulated by Bangladesh Bank.
According to recent data from the central bank, import LCs worth $56.19 billion were opened in the first 10 months of the current fiscal year, slightly down from $56.36 billion in the corresponding period last year.
Import LC settlements totaled $55.31 billion, down from $62.40 billion in the same period last fiscal year, representing an approximate 11 percent decrease in LC settlements year-on-year.
This decline is attributed to import controls enforced by the government and the central bank to prevent the erosion of foreign currency reserves.
The decline in industrial output growth has had an adverse effect on job creation in the country.
Data from the Bangladesh Bureau of Statistics (BBS) showed that the number of unemployed people increased by 2.4 lakh in the first three months of this year, rising to 25.90 lakh from 23.50 lakh in the previous quarter (October to December).
The country’s unemployment rate stood at 3.51 percent in the first quarter of 2024, compared to an annual unemployment rate of 3.36 percent in 2023.
However, a large group of experts has criticized the reported unemployment rate, calling it “unrealistic” for a country like Bangladesh. They estimate the actual unemployment rate to be between 20 and 25 percent.
Even thriving sectors like the ready-made garment industry have not been able to increase employment in recent years.
The country’s total workforce stood at 7.37 crore in the first quarter of this year, marginally up from 7.36 crore in 2023.
Dr. Salehuddin Ahmed observed that the number of unemployed people has increased due to slow business activities, as many businesspeople are unable to access adequate loan facilities.
Additionally, for the 28th consecutive month, monthly wage growth for workers has remained below inflation.
This trend indicates a worsening poverty situation, as many people are being forced to cut consumption amid falling real incomes. The latest report from the Bangladesh Bureau of Statistics (BBS) showed that monthly wage rate growth was 7.88 percent in May.
However, inflation has remained over 9 percent for the 15th consecutive month since March last year, exacerbating the economic challenges for the populace.