Political business cycle and ailing financial sector

A political business cycle or opportunistic political business cycle that results mainly from the manipulation of various policy tools, fiscal and monetary policy, by  incumbent politicians hoping to stimulate the economy just prior to an election and thereby greatly improve their own and their party’s reelection chances. Expansionary monetary and fiscal policies such as tax cuts, falling unemployment, falling interest rates, new government spending on services for special interests, etc have politically popular consequences in the short run. Unfortunately, these very policies, especially if pursued to excess, can also have very deleterious consequences like hyper inflation, low rate of savings and private investment, decrease in international trade, increase in government's share of the GNP at the expense of people's disposable incomes, and financial instability in the longer term. 

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.