No investment growth projected for FY25, yet BB expects inflation to shrink to 5% by next year
The surge in non-performing loans (NPLs) is expected to exceed 30% of total outstanding loans
There will be no investment growth this year, as macroeconomic stability has yet to be achieved, and the uncertain political situation will negatively impact investment. Still, the central bank aims to bring down inflation to 7–8% by June and 5% by next year, relying solely on a stable exchange rate, according to the latest monetary policy.
The Bangladesh Bank (BB) unveiled the monetary policy for the second half of FY25 today, projecting economic growth to slow down to 4–5% in FY25 before bouncing back to 6% in FY26.
Governor Ahsan H Mansur announced the first monetary policy under the interim government, formed after the ousting of Sheikh Hasina on 5 August.
"I do not even dream of investment growth because it will not happen," he said while addressing a press conference on the monetary policy announcement.
Citing macroeconomic and political instability as the two key reasons, he said, "Everything is not possible through monetary policy."
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Referring to economic theory, he added, "One instrument for one target. Monetary policy is one instrument, and its only target is to manage inflation. We cannot achieve too many objectives with a single instrument."
However, he hoped that inflation, which has remained above 10%, will come down to 7%–8% by June this year and further decline to 5% by next year.
He blamed high inflation primarily to exchange rate volatility and expressed hope that if the exchange rate remains stable, it will help reduce price pressures.
Meanwhile, Bangladesh's GDP expanded at its lowest rate in four years, reaching 4.22% for FY24, according to the Bangladesh Bureau of Statistics.
This growth rate is 1.6 percentage points lower than the earlier estimate of 5.82% made in May last year. The previous lowest economic growth of 3.45% was recorded in FY20, which was severely impacted by the coronavirus pandemic.
Monetary policy
The newly announced monetary policy for January-June of FY25 maintains a contractionary stance, keeping the policy rate, also known as the repo rate, at 10% as inflation began to ease in December.
The unchanged policy rate signals that the central bank has no intention of making borrowing more expensive, as lending rates are currently between 11% and 12%, which aligns with the central bank's expectations.
In a presentation at the press conference, Md Habibur Rahman, deputy governor of the Bangladesh Bank, said they kept the policy rate unchanged due to high inflation. "Considering the inflation level, the monetary policy is not excessively tight, as real interest rates are still negative."
He also mentioned that the transmission of the policy rate has started to take effect, contributing to easing inflation. "Lending rates are now 11% to 12%, above the policy rate, reflecting an effective monetary policy."
Addressing the global trend of cutting policy rates, the governor hinted at reducing the policy rate in the second half of the current year.
Fahmida Khatun, executive director of the Centre for Policy Dialogue, told The Business Standard that there have been no major changes in the policy rate as the central bank expects inflation to decrease further in the next six months.
However, she noted that the economy will likely stay in a low-level equilibrium during this time. "The central bank raising the policy rate has had some effect, as inflation slightly decreased in January."
Mohammad Ali, MD and CEO of Pubali Bank, welcomed the decision to keep the policy rate unchanged, stating that private sector credit demand has dropped.
"As a result, banks are increasingly investing in bills and bonds, pushing the 2-year bond rate below 11%. He believes this decision is beneficial for controlling inflation.
Mosleh Uddin Ahmed, MD and CEO of Shahjalal Islami Bank, noted that given that policy rates are typically above inflation rates globally, there is no scope for a rate cut at the moment.
He added that while inflation could be reduced by June, significant investment growth in the next six months is unlikely, and businesses must accept the ongoing pressure.
Pvt sector growth
The Bangladesh Bank also kept the private sector credit growth ceiling unchanged at 9.8% for June, while actual growth was 7.3% in December, reflecting a sluggish investment scenario.
The public sector credit growth ceiling was increased to 17.5% for June, up from 10.5% in the previous monetary policy target. The increase in the credit ceiling for the public sector was driven by expectations of higher government borrowing amid rising expenditure costs, as stated in the monetary policy statement.
Explaining the projection of high government borrowing, Habibur Rahman said the government borrowed from the banking system in the last six months, supporting the contractionary monetary policy, as the central bank ceased printing money.
Syed Mahbubur Rahman, MD and CEO of Mutual Trust Bank, told TBS that private sector growth reached 7.3% in December. However, a 30% decline in capital machinery imports reflects a slowdown in new investments.
"With businesses feeling uncertain, achieving 10% growth in such a short time seems highly unlikely."
Regarding private sector credit growth, CPD's Fahmida noted that the central bank has set a target of 9.8% for January-June, with growth recorded at 7.28% in December.
Despite this, she believes private sector credit growth will increase, as imports of capital materials are expected to rise, even though imports of capital machinery may decrease.
How additional $11b to stabilise forex
The governor hoped an additional inflow of $11 billion from remittances and exports in FY25 will help maintain stability in the foreign exchange market.
He said major import payments ahead of Ramadan were already settled in December, which will ease pressure on the exchange rate and contribute to stabilising it, ultimately helping to control inflation.
He also highlighted that $600 million had already been spent on importing commodities for Ramadan, with only a small amount to be paid in February.
Payments for fertilisers for Boro farming have been settled, he said. "So the seasonal demand for payments is already covered, with no new payment pressures expected. The only ongoing demand will be from the power sector."
The governor further noted that remittance inflows are expected to exceed $6 billion compared to the previous year, and export growth is projected to bring in an additional $5-6 billion.
"This means that total dollar inflows for the current fiscal year are expected to rise by $11-$12 billion. As a result, pressure on the exchange rate will ease, ensuring continued stability."
NPLs likely to exceed 30%
The monetary policy report highlighted that the surge in non-performing loans (NPLs) is expected to exceed 30% of total outstanding loans, raising significant concerns for the banking sector.
Contributing factors include systemic weaknesses, regulatory gaps, and exploitative practices such as money laundering and illicit capital flight.
'It is important to note that several banks are currently facing a significant liquidity crisis, which has been worsened by rising NPLs, slow deposit growth, and weak loan recovery," it said.
According to the latest data from the central bank, as of September 2024, the total NPLs in the banking sector have reached Tk2.84 lakh crore, accounting for nearly 17% of the country's outstanding loans, which total approximately Tk16.83 lakh crore.
To help stabilise liquidity, the central bank is allowing struggling banks to borrow from the inter-bank market under central bank guarantees, said the report.
However, the growing demand for funds has prompted the central bank to provide temporary liquidity support to some of these banks, it said.
Additionally, measures have been implemented to absorb excess liquidity from the banking system through the issuance of BB bills, aiming to prevent long-term financial imbalances.
In response to the situation, the BB has introduced comprehensive guidelines aligned with international best practices for loan classification, provisioning, and recovery, according to the report.
Two banks turn around
Governor Mansur at the conference said they are actively working on banking sector reforms, and to date, the boards of eleven banks have been restructured.
"For banks facing liquidity challenges, we will provide additional support if necessary. Our goal is to ensure that no small depositor leaves the bank empty-handed," he said.
He mentioned that there is positive progress in some banks. For instance, Islami Bank no longer requires liquidity assistance and has become financially stable. Similarly, United Commercial Bank has effectively turned around.
"We will continue with the reform process, conducting asset quality reviews at the banks. This will help determine the extent of the damage at each institution," he said.
However, he said the recovery of Islami Bank does not mean all of their issues have been resolved. They still have non-performing assets, and this will remain a challenge.
"Over time, they will be able to address these issues, though it may take three to four years for them to fully strengthen. Capital Adequacy Ratio (CAR) and NPAs cannot be resolved in a short period, added the governor.
Recovering laundered money
The governor said efforts to recover laundered money have been strengthened with the addition of both local and international technical assistants.
Three task forces are actively working, supported by audit firms, with oversight from an international audit firm, he said.
"We are following international legal procedures, starting with seizing domestic assets before focusing on identifying and recovering funds abroad," he added.
Mansur said Inter-ministerial coordination is crucial. "We aim to make tangible progress within a year, but fully resolving cases could take three to four years."
