Magic game of investment numbers

The calculation of private sector investment in the proposed budget for the fiscal year 2020-2021 gives the impression that the finance minister has got hold of Aladdin's magic lamp to pull out investment out of thin air.

The estimates the finance minister has made appear far removed from the reality on the ground. Here is how: 

While private investment increased only 2.39 percent in the last four fiscal years, the government estimates it to jump by 187 percent just in a single year.

In the new budget, Finance Minister AHM Mustafa Kamal has set a target to elevate private sector investment to 25.3 percent which had come down to 8.8 percent in April this year amid stagnated business activities. In the revised budget for the outgoing fiscal year, private sector investment has been projected to grow at 12.7 percent.

To support the big jump in private investment, minister Kamal estimated private sector credit growth at 16.7 percent in the next fiscal year – double from the current level of 8.8 percent which is the lowest in the country's recent history.

If the government has to raise private sector investment to the expected level in the forthcoming financial year, it will require an additional supply of approximately Tk4,46,000 crore, according to the Centre for Policy Dialogue (CPD). The investment figure is 78.52 percent of the total budget and 14 percent of the country's GDP (gross domestic product).

In making his estimate on private sector investment, the finance minister has completely ignored the current state of the banking sector, which will mainly finance private investment. 

Moreover, the finance minister, by setting highly ambitious targets, seems also to have forgotten the current status of the business community which is struggling for survival in the face of the Covid-19 onslaught. 

If we take a look at the health of the banking sector, the main lender to the private sector, its ailing situation will pour cold water on the finance minister's ambitious estimates. 

For instance, City Bank, one of the most profitable banks in the country, just announced a 10 percent pay cut for its employees from the current month in the wake of massive losses. It has also suspended extra bonuses to its employees, which will ultimately lead to some 16 percent income loss for the bank's employees.

Many other private banks also are preparing to cut down salary costs, which stands in stark contrast to the finance minister's optimistic calculation about private investment.

Amid this situation, it is very unlikely that there will be any boost to private sector credit growth in the next fiscal year to support private investment, said Mashrur Arefin, managing director of the City Bank Limited.

Banks were already under pressure for an interest rate cap from before the pandemic, he said, adding, "The Covid-19 situation has increased credit risk multiple times than in the normal period and banks will be reluctant to lend in the private sector." 

Moreover, there is a risk of liquidity pressure as deposits will not come to banks in the post-coronavirus period due to a reduced interest rate and loss of income.

In this circumstance, the government's higher bank borrowing will absorb the liquidity of the banking sector. So, there is little scope to increase money flow into the private sector, he observed.

The government in its proposed budget set a target of borrowing around Tk85,000 crore from the banking system to meet the budget deficit.

On top of that, the banking sector is burdened with implementing stimulus packages of Tk50,000 crore. 

All these burdens come at a time when banks are sitting with excess liquidity of Tk1,13,000 crore as of April. 

The liquidity figure shows there is little room to maneuvre for banks to invest in the private sector.

When this unprecedented pandemic driven economic downturn demands more public investment, the government has kept its investment target unchanged at 8.1 percent in the new budget. In the next two years, it will go down.

In the post-budget reaction presented in a virtual press conference on Friday, the CPD commented that the private sector investment target, as set in the proposed budget, is unrealistic.

Mustafizur Rahman, distinguished fellow of the CPD, said private sector credit growth has been projected to double at a time when the banking sector is under pressure of high bank borrowing and implementation of stimulus packages. 

Amid this situation, private sector credit growth will be in pressure, he said, adding if the government cannot achieve the private investment target, employment generation will fizzle out eventually creating social unrest. 

Pointing out that the government in its previous budget had made commitments to form a banking commission and take measure against defaulters, he said the government has not kept its commitments. 

Instead of taking action against loan defaulters, the government has brought them gifts on platters by offering special loan rescheduling facility at 2 percent down payment, which is being considered as an achievement, he said.