High currency depreciation eats into private credit: Cenbank study

Infographic: TBS

The high depreciation of the taka will give rise to a liquidity mismatch in banks' balance sheets, with export-import financing largely consuming private sector credit due to higher dollar prices when other sectors will be deprived of loans, finds a study by the Bangladesh Bank.

The study notes that private sector credit growth is mainly driven by export-import financing due to high exchange rate costs.

The growth of export-import financing in terms of the local currency climbed to 19% in September this year, which was 9% in the same period last year. But in terms of the greenback, the growth was negative 0.5% – meaning banks were spending more money for less amount of export-import.

The exchange rate of the taka against $1 depreciated by 16.47% to Tk99 this November from Tk85 in the same period a year ago.

However, banks are now spending Tk105 per dollar for import settlement.

Moreover, although private sector credit growth has shown an increasing trend in recent months, this is not the case in reality as the high growth was due to the depreciation of taka, says the study, adding that private sector credit growth was 13.7%, 14%, and 13.9% in June, September, and October this year, respectively, when the exchange rate-adjusted growth was 11.9%, 10.9%, and 10.8%.

The exchange rate- and global price-adjusted growth rates were much lower at 6.6%, 7.3%, and 8.8% during the same period.

Therefore, the recent high growth scene reflects the result of significant exchange rate depreciation, says the study report published on Wednesday.

According to the findings of the study, even though the value of imports grew significantly due to high commodity prices in the global market, the price-adjusted value was negative, which means the country was spending high despite lower imports, creating pressure on the national budget.

The total import growth was 60.5% in the October-December period last year, but global price-adjusted growth was 8%.

But import growth declined sharply in recent months after the Bangladesh Bank imposed various restrictions on imports amid the dollar crisis.

The import growth was 11.7% in July-September this year but the global price-adjusted growth was negative 13% during the period, according to the Bangladesh Bank findings.

Overall, adverse commodity price shocks and exchange rate volatility can lead to challenges for the economy through credit channels which ultimately impact the bank's balance sheet, says the report.

First, a surge in import payments to those of export earnings leads to an increase in bank credit to the trade, which may create a potential liquidity mismatch.

Second, the shocks could unfavourably impact economic activities and agents. including the government's ability to meet its debt obligations, thereby potentially causing banks' balance sheets to deteriorate. Large commodity price shocks can also affect bank balance sheets by weighing on a country's reserves and increasing the risk of currency mismatches.

Third, a sharp increase in global commodity prices can impact commodity importers' budgetary balance, which may drive the government to adjust its budget in order to contain any such budgetary imbalance.

In view of tackling external factors-driven imported inflation, there are not many policy options available other than making appropriate supply-side interventions, while managing the exchange rate adversities requires market-oriented flexibility, according to the report.