Act fast to straighten up the financial sector

Looking back on our achievements after 50 years of Bangladesh's independence, we can say that the country has reached a satisfactory level in overall development indicators. But the main goal will be to move forward by consolidating what we have achieved and taking pragmatic actions. 

Bangladesh is a small land. But a country with a large population. Many said it would not be a developing state. It can't thrive, it's a "bottomless basket". Someone else said, a "test case of development". That was in the context of that time. They could not judge the capabilities and aspirations of the people of Bangladesh. We have gone through many ups and downs to reach this stage.

Now we have stepped into the new year of 2023. In this context, let's look at the year 2022. So far, we have dealt with the pandemic satisfactorily. The economy slowed down. By mid-2021, we overcame the slowdown and accelerated the economy. But after the start of the Russia-Ukraine war in February 2022, Bangladesh, like the whole world, has had a negative impact. So in 2022, we could not move forward satisfactorily because our risks were manifold. 

The internal challenges were compounded by external challenges from the outside. For example, inflation soared, and foreign reserves were decreasing. There are problems with export. Remittances are not increasing much. Due to the war in Ukraine, the price of fuel has increased and the price of consumer goods has increased. These gave us a big jolt. In addition, internal factors in the country have increased the risks and challenges. For example, we have problems in the banking sector. There is a problem in the capital market. 

There is a lack of discipline in the financial sector with corruption and money laundering. Lack of capacity to implement projects is also a problem. If we do not overcome these risks, it will become a big obstacle in the way of transition.

Our achievements are not unsatisfactory. There has been a transformation in the economy of Bangladesh. The agricultural sector, which once had a huge contribution, is now no more than 20-22%. Agriculture is the backbone of our economy; a lot of people depend on it. The rural economy has undergone a transformation. The rural economy is now not only dependent on crop production. There are duck, chicken, and fish farms. Our fish is also being exported.

Inclusive development is being talked about in Bangladesh. Not more than 50% of our people are within the formal banking system. There are microfinance institutions (NGOs), savings societies, and cooperatives within the informal system. Inclusive financing has opportunities but has not yet reached the majority of common people. Especially small and medium entrepreneurs still do not get adequate access to bank loans.

The biggest challenge is that our income and wealth disparity is increasing day by day. Progress is being made, but the biggest thing is that the gap between rich and poor is widening. Many will say that the poor and village people did not have mobile phones before; they were not modern. You can find gymnasiums and even beauty parlours in rural settings. 

They do not really matter when we talk about the social and economic development of all people. Even in the rural areas and in the pockets of poverty, some are well-endowed and rich. But the overall scenario in both urban and rural areas is deprivation and hardship of the disadvantaged and marginal people.

The main objectives of Bangladesh's independence were to ensure political freedom and economic liberation and social development at the same time, Ensuring people's rights in social development, quality of life, education, health, right to information and policy making. But we have not achieved these yet.

Broadly speaking about policies, macroeconomic policy, fiscal policy, then monetary policy, we have an export policy, trade policy — it is one thing to take the policies that we have and it's another thing to set the strategies. The biggest thing is to implement the strategies. Many activities are promised in our budget but not implemented later. ADP has many plans and many projects which are not completed on time. Similarly, many targets and instruments are mentioned in monetary policy, but these are not satisfactorily achieved.

The consumption of food items by poor people cannot be attained due to a fall in the purchasing power of their fixed income. Many people are excluding protein-enriched foods, including fish and meat, from their food list to reduce food costs.

There is a flaw in the market management; when the prices of goods, especially the prices of rice, flour, sugar and edible oil, decrease in the international market, it does not have an effect on the local market. Prices of domestically produced goods rise without a valid reason.

Money management should be done efficiently by the Bangladesh Bank. Domestic production should be increased for the stability of the power and energy sector. In this case, there is no alternative to increase green initiatives.

The banking sector is still weak. No meaningful reform measures have been taken till now. Default loans are increasing. Irregularities still exist in lending.

Bangladesh Bank's foreign exchange reserves are now $36.3 billion. How will import costs be met with it? Because in the days ahead, imports may face challenges due to the dollar crisis.

The state of the dollar market raises doubts about whether the government will be able to meet debt service liability and other expenses to be incurred in foreign currency.

There are seven crises: the dollar crisis, fuel price, inflation, food crisis, climate change, the Ukraine war and Covid-19. Steps should be taken to increase the minimum wage. Living standards have collapsed due to falling incomes. Due to the fear of a food crisis, production should be increased. It has to be subsidised due to the high cost of fertilisers and other inputs for agricultural production. Power and energy have short-term and long-term problems. Allocation to the renewable energy sector should be increased along with suitable strategies and programs.

In the country's banking sector in 2022, various loan irregularities, corruption and fraud occurred. In particular, the incident of some loans without due diligence to bad borrowers and non-existent institutions and the issue of placing observers in the banks were widely discussed. Apart from this, dollar price manipulation, LC fraud and money laundering and the state of affairs of weak banks are also discussed. 

Those concerned say that Bangladesh Bank is failing to control irregularities and corruption in the banking sector due to various reasons, including undue interference by owners, political pressure and lack of good governance. Due to these irregularities and corruption, the amount of default loans is continuously increasing. As a result, the country's banking sector is becoming weak.

Bangladesh has received the green signal to get loans from the International Monetary Fund (IMF), ADB and World Bank. Bangladesh Bank continues to issue various circulars to increase the facilities of businessmen to reduce the default loans of the banking sector. However, actual default loans are not decreasing. Banks' loan recovery rate is also decreasing. Reluctance to repay loans, even among good customers, while providing facilities to defaulters is an ominous sign for the banking sector.

At the beginning of the year, the dollar was on a wild horse. Moment by moment, the price of dollar started increasing. Against the taka, the price of the dollar exceeds Tk120. The dollar is not available below Tk112-113 in the open market. However, the Bangladesh Bank has brought down the cost of imports by imposing restrictions on imports. However, it is difficult to control the dollar rate as the bank rate, open market rate, and remittance sector rate are different. As fuel prices increase, power generation also decreases. As a result, there was no end to people's suffering due to load shedding at various times of the year. 

Industrial production also declined due to the energy crisis. The government stopped the import of almost all commodities except essential items, including food. Traders said production was halted by 25-40% due to the energy crisis. During the energy crisis, almost the entire country went through difficult times. Due to the gas-power crisis, the industrial sector is going through a severe crisis. Many factories remained closed for 12 hours a day. Production capacity has been disrupted by 30-40%.

Bangladesh's debt from foreign sources has doubled in the last five years. According to the data of Bangladesh Bank, the growth of loans to the private sector has been higher than the loans taken by the government. 

The country's total borrowing from foreign sources was $45.81 billion in the fiscal year 2016-17. In 2022, the foreign debt of the public and private sectors combined exceeded $95.85 billion as of June. This debt in Bangladeshi currency stands at more than Tk1,016,000 crores, which is about 22% of the country's total GDP. Some 73% of this debt is from the government, and the remaining 27% is from the private sector of the country.

At the end of 2023, the Bangladesh Bank has predicted that the amount of foreign loans in Bangladesh will be $115 billion. About $20 billion of foreign debt must be repaid with interest every year. In 2021, the country's foreign debt repayment, including interest, was $11.7 billion. In 2022, almost twice that amount had to be repaid in foreign debt.

The current lack of discipline in the financial sector is rooted in a lack of accountability, transparency and good governance. This is a major obstacle to equitable distribution. One of the driving forces of our economy is the growing middle class. The economy will suffer inequality if the middle class connected to the global knowledge base in the digital age does not get adequate benefits from education, health and services. It will have a negative impact on society. There may be various unrest and anarchy. 

We have a number of challenges to overcome the current malaise in the macroeconomy and reach the potential of our financial sector. For example, the dollar crisis, collection of default loans, pressure on foreign debt repayment and lack of funds for mega projects, the possibility of a decline in exports, and handling the pressure of inflation. 

Steps should be taken to increase the minimum wage. Domestic production should be increased to avoid a food crisis. Subsidy should be continued in the agriculture sector. There are short and long-term problems in the power and energy sector. For this reason, the allocation for the renewable energy sector should be increased. 

For the banking sector, measures should be taken to increase the trust and confidence of the customers. The rate of interest on investment should be left to the market system. In order to strengthen debt collection, strict punishment to the defaulters should be ensured and if necessary various facilities and opportunities to the defaulters should be stopped.

The main challenge of the financial sector is the establishment of good governance. Otherwise, growth will slow down. Service quality should be increased by expanding technology-based banking. Cyber security should also be emphasised. Skilled and trained manpower is the driving force for the development of this sector. Adequate capital and liquidity must be preserved to avoid disaster in this sector. Customers' deposits must be protected.

Dr Salehuddin Ahmed is a Former Governor of Bangladesh Bank and a Professor at BRAC University, Dhaka