‘Economic growth flying like a kite on the loose’

The economy is counting enormous opportunity costs from a slide in revenue collection, growing soured loans and the tanking capital market. And the situation is only compounding because of a weak export performance.

For example, if Bangladesh could meet its revenue target in the last fiscal year, it could finance three more Padma bridges in a single year. Or alternatively, it could have a super health system four times stronger than today's, or could double the money in education or social protection.

To add up to the lost opportunity, the banks' piling default loans could build seven power plants like the 1,300MW Rampal plant. Or build five metro rails in Dhaka or even three power plants like the 1,200MW Matarbari project.

And the falling capital market has failed to become an alternative funding source for companies, putting more and more pressure on banks.

This is how the Centre for Policy Dialogue (CPD), an independent think-tank, highlighted the need for urgent reforms in the four areas that have been showing signs of great stress in fiscal year 2019-2020.

"The story of Bangladesh's economic growth has become like a kite not attached to its string and spool," Dr Debapriya Bhattacharya, distinguished fellow of the CPD, said at the launching of the centre's report titled "The State of the Bangladesh Economy".

"The data on GDP growth show no connection with the reality. Such inconsistencies act against the economy," he said at the event.

Tax evasion, non-performing loans, extra cost of projects have become major problems for the economy. A sizeable portion of the money earned through corruption and irregularities is being siphoned off from the country, Debapriya claimed.

In discussing the weakening revenue collection efforts, the CPD showed that Bangladesh's revenue-GDP ratio has been declining since FY2012 and stands much lower than the average rate in developing countries (around little less than 40 percent).

And alarmingly, any increase in GDP is generating lesser revenue growth now from five years ago.

"In the first quarter of the current fiscal year, the revenue collection fell Tk14,906 crore short of the target. To meet its revenue collection target, the National Board of Revenue will have to collect 56.6 percent more revenue in the next nine months when compared to the corresponding period of the previous fiscal year," Towfiqul Islam Khan, senior research fellow of the CPD, said in his keynote presentation.

"Currently, about 58 percent of the total e-TIN holders submit income tax returns. There are about 70 lakh potential taxpayers in Bangladesh. Due to exemptions offered in different forms, revenue of about Tk19,000 crore was lost in FY2019," said Towfiqul Islam.

And all this means an increased pressure on deficit financing in meeting public expenditure demands.

Talking about the banks, the CPD said the banking sector is in the grip of despair and mounting liquidity stress runs the risk of economic downturn.

The banks, in their current state, cannot sustain the ambition of high growth, the CPD said.

The amount of non-performing loans has sky-rocketed and the private banks have not been spared from the weakness, which have gone for massive rescheduling and writing-off of loans.

"The pressure of non-performing loans and slow deposit collection is pushing down on the credit flow to the private sector. So, excessive government borrowing from the banks will slow down the flow of credit, investment, production, employment and growth," Dr Fahmida Khatun, executive director of the CPD, said.

The CPD observed that the recent moves by the central bank have rather favoured the defaulters on the premise that defaulters are mostly honest. But this has not dealt with the wilful defaulters on a different level.

The CPD said it is surprising that bad borrowers are getting longer time to repay loans than good borrowers and that those who had initially taken loans at higher interest rates can now repay at a much lower rate by being defaulters.

"This may encourage borrowers to default," the CPD observed. "Such special privileges offered to loan defaulters may lead to a moral hazard problem since it could encourage all borrowers to take greater risks."

Rescuing banks through recapitalisation has been futile and the amount spent on this purpose during FY2009-2017 would be sufficient for building four deep-sea ports like Payra.

The CPD felt that the central bank has "totally failed" to provide leadership in guiding commercial banks and financial institutions, and upholding its sovereignty. It had rather been cowed down by the finance ministry and individuals with political influence.

Moreover, the owners themselves have become the supervisors of banks. Lengthy disposal of loan default cases has created a huge backlog in settlement of bank loans. And banks cannot take actions against the defaulters.

The CPD said the capital market is plagued by irregularities and malpractices where prices of bad shares rise abnormally.

The merchant banks are forced to sell shares because of falling prices and institutional investors play a meagre role to backstop the slide.

Majority of the listed companies are suffering from high non-performing loans and a lack of corporate governance.

The CPD also said actions on allegations of insider trading leave much to be desired.

In its analysis, the CPD identified that low level of dividend offered by the listed companies in FY2019, an abnormal rise of prices of Z category shares, forced sales of shares by merchant banks, and meagre role of institutional investors deepened the stock market crisis.

No visible impact of strategic partnership with Chinese consortium has been seen.

Though economy is growing fast, the capital market is yet to become an alternate source for investors, the CPD said.

External sector

Expressing concerns over the mounting pressure on external sector performance, the CPD said for the first time since FY10 the growth of exports in the first quarter has been negative in the current fiscal year.

Except for foreign remittance, no other external indicator is positive while the share of the sector is about 40 percent of the economy, said CPD Distinguished Fellow Prof Mustafizur Rahman.

If this trend continues over the rest of FY20, the overall balance, forex resources, exchange rate will come under increasing pressure.

"In view of this, maintaining a competitive exchange rate, reversing the negative export trend and ensuring a robust flow of remittances and replenishing the forex resources will be required to maintain a robust balance of payment and ensure overall macroeconomic stability," according to the CPD analysis.

The continuation of current remittance inflow is challenging as labour market has been going through volatility worldwide.

"Although remittance earning has been slightly positive, many workers are returning from the traditional labour markets," Mustafizur Rahman said.

The CPD said declining forex reserve will constrain the central bank's capacity in trade and exchange rate management. The forex reserves, following rapid rise between FY11 and FY17 remained stagnant.

As of September in FY20, it has come down by about $1 billion compared to the corresponding time of FY19, according to the analysis.