According to the World Bank forecasts Bangladesh economy is expected to
grow at the rate of 7 percent compare to the government’s target of 7.8 percent
this year.
Bangladesh has been enjoying an average growth of 6.2% for the last ten years.
Bangladesh is streaming towards her vision to become an upper-middle-income
country by 2021 and developed country status by 2041.She has been enjoying resounding growth mainly due to strong
macroeconomic condition supported by international trade and foreign
remittance. Unfortunately, financial sectors have shown the worst performance
in a decade. Although,the internal debt has been dominating for a while but
very unexpectedly external debts have skyrocketed by 141 percent to USD 54.73
billion in two years which was only USD 38.88 billion in 2016. Bangladesh bank
posits that short-term foreign borrowings are mainly responsible for this
sudden surge. However, the main cause of this is still unknown and many argue
it might be connected with the upcoming national election.
In the recent
past we have observed a number of economic policy measures as the national
election is approaching. First of all, we have seen a major monetary policy
inconsistency at the eleventh hour of the government. Easy money before the
election was more or less predictable. However, the government, one the one
hand, pursuing banks to decrease their interest rates, on the other hand,
interest rates on government saving certificates remain unchanged. Government
has already raised more than Tk.80,000 crore through various saving
certificates. Consequently, banking system has started to suffer from the
liquidity constraint. It is more than evident that the government didn't change
the interest rates policy on Sanchaypatra because they don't want to make
middle class voters angry right before the upcoming election.
Tax reform is
another vivid example of intentional policy delaying. There is a clear budget
deficit issue that needs to be addressed immediately. International
multilateral organizations are also pushing to reform the taxation system to
broaden the tax base. Government had developed a detailed plan but suddenly
stepped aside just thinking of the upcoming national election. However, many
prominent economists have welcomed this move as they argue the implementation
of which would have pushed inflation upwards right before the election.
Non-performing
loans (NPL) have been increasing alarmingly and recently crossed 10% threshold.
A number of state banks and 4th generation private banks have been suffering
acutely due to higher NPL. The amount of defaulted loans, including
non-performing and written-off loans, as of June 2018, reached to Tk 1316.66
billion, with five state-owned banks accounting for Tk 562.83 billion, or 43
per cent, of the amount. To add an insult to injury, the government has
recently amended the Bank Company Act 1991, provisioning for further family
control over private commercial banks as four of a family, instead of two, were
allowed to become bank directors for consecutive terms extended to three from
two, turning banks into more of a family business.
The dire
consequences of this Amendment have been widely debated in the mainstream news
media. For example, it is argued that
recent changes in bank corporate governance structure could lead to the
family-dominated board of directors who would definitely work for their own
interest rather than depositors. This may increase huge ownership concentration
risk as well as preferential credit disbursements for directors’ favorite and
own business group. Consequently, this new practice could trigger an even
significant increase in NPL which would ultimately lead to capital erosion
and banking failure. Moreover, decreasing interest rate, liquidity crunch,
fierce competition and market saturation could trigger massive banks’ failure
which would affect not only the financial sector but also the real sector of
the economy. It is more than evident that the government has amended the act
right before the election year to make powerful bank lobbyist happy.
There were
already 58 scheduled banks in Bangladesh among them 32 conventional private
commercial banks are now operating in the industry according to Bangladesh
Bank. The role of banking and finance on economic growth is well-documented.
However, too much finance could lead to detrimental consequences evidenced in
the latest global financial crisis. Many economists already argue that we don’t
really need any more banks saying the sector is already saturated and its
overall health has been declining.
Bangladesh has relatively low banking penetration compare to many developing
countries. However, not surprisingly, most of the existing third and fourth
generation banks are mainly concentrating on two big cities, Dhaka and
Chittagong. In spite of this, at the eleventh hour, the government has given
away license to four new banks merely on the political ground.
Hostile
takeover has been on the rise in the recent past. A powerful business group
from Chittagong is moving aggressively by taking control of several banks and
insurance companies. Regulatory authorities and government are reluctant to
take measures to control the misconducts in country’s vulnerable capital market
right before election. This would
increase corporate malpractice and financial instability in the long run which
could be detrimental to the overall
economy.
Against this backdrop, one can easily be skeptical about the
future of financial sector in Bangladesh. Government has taken a number of
policy measures which could bring unwanted consequences in the long run. This
would not only affect the financial sector but also the real economy as both of
them are highly integrated. The sheer greed of some ill-minded bankers and
businessmen could drive the economy in the wrong direction and fall off a cliff
edge. As political business cycle predicts immediately after the election is over
(and the next election is far away), politicians tend to “bite the bullet” and
reverse course by raising taxes, cutting spending, slowing the growth of the
money supply, allowing interest rates to rise, etc. Thus the regular holding of
elections tends to produce a boom-and-bust pattern in the economy because of
the on-again-off-again pattern of government stimulus and restraint encouraged
by trying to schedule an artificial boom at every election time.
