Structural problems, bad loans

Published:  01:48 AM, 05 April 2018

Confidence on banks drops

Lack of confidence on the country's banking sector is a result of prolonged structural problems and exceedingly high non-performing loans of over Tk 80,000crore.

The current level of inefficiency in the banking sector leads to a loss in GDP by around 1 percent annually, which was equivalent to around Tk 10000 crore in FY 2016-17.

The observation came at a Quarterly Review of the Bangladesh Economy (QRBE) organised by South Asian Network on Economic Modeling (SANEM) at Westin Hotel in the city yesterday. Dr Selim Raihan, Executive Director of SANEM and Professor of Economics, University of Dhaka presented the keynote.

In recent times, excessive lending by some private banks increased the ADR ratio above 90 percent for these banks. Such excessive lending happened in the context of a sluggish private sector investment growth. There is a concern that a large portion of this lending is misused. The banking sector is now characterized by weak regulation and monitoring and no visible punishment of irregularities backed by political patronage.

Bangladesh has successfully met all three criteria for LDC graduation in the first review in March 2018. It is expected that Bangladesh will be able to meet the graduation criteria in the second review in 2021 and will finally graduate from the LDC status in 2024.

Benefits of graduation from the LDC status are cited to include an improved country-image and higher rating for investment by international rating agencies which may attract larger foreign direct investment.

However, there are a number of risk factors for Bangladesh regarding this graduation from LDC. Simulation results from the global dynamic general equilibrium model suggest that the loss of preferences in the markets of European Union, Canada, Australia, Japan, India and China in 2027 (the year which will mark the end of preferences for Bangladesh if the country can officially graduate from the LDC status in 2024) might lead to an annual reduction in total exports of Bangladesh by 11 percent which would be equivalent to around US$ 6 billion given the current projection of growth in exports.

Also, many of the exemptions of WTO provisions, including the cut in tariff and subsidies and adherence to intellectual property rights (especially for pharmaceuticals sector), which are currently enjoyed by Bangladesh as an LDC, will no longer be available after 2027.

Dr Selim Raihan said Bangladesh has already graduated from the World Bank's 'low-income' category to 'lower-middle income' one. Consequently, the scope for loans at lower interest rate would be limited.

He said it is important to mention that much of the aforementioned prospective benefits are not 'automatic' as the country has to work quite a lot to materialize those benefits. In contrast, almost all of the possible losses would be 'automatic' as soon as the country graduates from the LDC status.

He said, therefore, the country has to prepare itself over the next 9 years to counter these losses. Bangladesh has a poor record of attracting foreign direct investment, high concentration of exports, weak competitiveness, and poor physical and social infrastructures.

The country need to attract the large volume of foreign direct investment, noticeably diversify their export baskets, enhance competitiveness, and significantly improve physical and social infrastructures. Improvement in the quality of economic and political institutions and quality service delivery by the public institutions are very crucial in sustaining the development process.

Lack of independence of Bangladesh Bank intensified the problem. Recent decisions on allowing state agencies to deposit 50 percent of their funds to deposit in private banks and slashing CRR by 1.0 percentage point to 5.5 percent may lead to a bigger crisis. Also, cutting down interest rates on NSD is not it a valid proposition, he said.

In light of previous budget experiences, the key challenges of Budget for FY 2018-19 are low revenue mobilization through taxes, poor performance in income tax generation, low ADP implementation, quality of public spending and low spending on human development.

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