Private credit uptake still sluggish in May

Private sector credit flow, the main indicator of private investment, remained sluggish in May amid tight liquidity position of the banks.

However, public sector credit saw a big growth, once again vindicating the observation by economists that the country’s economic growth is fuelled by government spending contrary to private investment.  

The private sector credit recorded 12.16 percent year-on-year growth in May close to the previous month’s 12.07 percent, far below the monetary target of 16.50 percent set for June.

The total credit to private sector stood at Tk10 lakh crore in May, data released by the Bangladesh Bank on Sunday showed.

Private sector credit is likely to remain depressed in the coming days as banks have limited ability to lend, said Md Arfan Ali, managing director of Bank Asia.

The slow credit inflow to private business is concerning for employment generation, he said.

It is more concerning as the recent high economic growth has not led to higher employment generation which is a major challenge for the government for the new fiscal year beginning tomorrow (Monday).

Setting a higher economic growth of 8.25 percent, the government has set a target to improve private sector investment to 24.2 percent in the new fiscal year which remained stagnant at 23 percent for the last three years.

This would definitely require higher private sector credit flow which dipped since March 2018 when it was above 18 percent.

Though private sector credit growth remained depressed, the government’s borrowing from the banking system jumped to 47.44 percent in May which was seven percent a year ago.

The high government borrowing helped the total domestic credit growth to pick up to 15.12 percent, close to the monetary target of 15.90 percent set for June.

But this is creating worry about a further crowding out effect on private credit if the government borrowing continues to remain on the higher side.

The huge shortfall in tax collection compelled the government to heavily depend on bank borrowing to finance its expenditure.

But for private credit to speed up, stability of the financial sector needs to be addressed. Unless the high non-performing loan portfolios of the banks could be brought down, liquidity situation is unlikely to improve, bankers say.  

Moreover, high government borrowing is likely to fuel inflation too, which is already on an upward trend and is like to increase further because of the tax incidences of the budget.

Though the average inflation decreased to 5.48 percent in March from 5.49 percent in February, the point-to-point inflation increased to 5.55 percent during the month.

An International Monetary Fund (IMF) team that visited Bangladesh last week to review the financial sector apprehended that high bank borrowing by the government will create liquidity pressure in the banking system.

Daisaku Kihara, who was leading the IMF team, said that high government borrowing is a reflection of low tax collection. He suggested government to intensify tax collection to reduce dependence on bank financing.

The National Board of Revenue (NBR) expects a revenue shortfall of about Tk70,000 crore in the just concluded fiscal year.

The banks which were under a tight liquidity situation got some relief as exports and remittance inflow increased in the latter part of the just concluding fiscal year.

This calmed the money market.