Private sector growth cooling down

The current economic state shows that the apprehension of the global rating agency is likely to come true.

Hints of an economic slowdown is looming as the year started with slump in all major economic indicators like private sector credit growth, import and export data raising fears of hard times ahead.

Export growth have been on the decline for months. New data released yesterday show private sector credit growth fell further and imports shrank. 

All point to a slowdown in private sector activity, a concern up in the air for months.

The private sector credit growth, which reflects the country's investment situation, continued to fall for four consecutive months till January. 

The credit growth to private sector came down to single digit in November and since then it remained sluggish reaching 9.20 percent in January, according to Bangladesh Bank data. 

The import expenditure in terms of LCs (Letters of Credit) settlement declined by 5.5 percent year-on-year in January, reflecting declining demand in the manufacturing sector. 

Banks are also being cautious now in lending despite having huge excess liquidity due to interest rate capping, said industry insiders. 

Outbreak of coronavirus in China contributed to the fall of import growth as China is accounted for 25 percent of import in Bangladesh. 

In the first month of the current year, export fell by 1.70 percent year-on-year in January. 

Export growth also declined in the first seven months of current fiscal year by 5.21 percent year-on-year, central bank data shows. 

Just three months back, Fitch, projected that Bangladesh's economic growth will roll back to 7.5 percent in current fiscal year. 

The current economic state shows that the apprehension of the global rating agency is likely to come true.

There is no yardsticks like Purchasing Managers Index (PMI) here to measure industrial output and new orders on monthly basis, nor are there any records of job enrolments. 

But market analysts believe slower private credit growth and falling import will hurt manufacturing activities, squeezing the job market. 

Export growth, which already feels the pinch of the global economic slowdown, may be affected further by fall of import, they feared. 

Forex build-up, liquidity piling up

The private sector credit growth was far below from the monetary target of 14.8 percent set for current fiscal year.

The reluctance in lending hit import and caused a squeeze in supply of necessary goods in the market creating inflationary pressure. 

A silver lining is that, though export remained sluggish, foreign currency reserve remained strong thanks to low import expenditure. 

The strong inflow of remittance spurred on by the government's two percent cash subsidy contributed to keep foreign exchange market eased.

Remittance, the only positive indicator of the economy, remained downward in first two months of the year based on month-to month as manpower export remained lethargic. 

In February, remittance fell by 2.88 percent month-to-month, however, year-on-year growth was 10 percent. 

The consequence of slow private sector credit growth and import expenditure was reflected in piling up excess liquidity and foreign exchange reserve.

Foreign exchange reserve crossed $ 33.36 billion mark in February, highest in last two and a half years.

The inter-bank exchange rate remained stable for last three months at Tk 84.90 to Tk 84.95 which is also indicative of slowing economic activities. 

The government's capping of lending rate at 9 percent from April 1 has also made the banks conservative because they have to keep their non-performing loans to a bare minimum if they have to lend at a single-digit.

The adoption of this new business strategy by banks to avert risky lending is causing excess liquidity to pile up and private sector credit growth to drop substantially.

Liquidity increased by 65 percent to Tk1 lakh crore in November last year from Tk60,000 crore in May, according to Bangladesh Bank data.

Most of this excess liquidity lies with the private banks.

Of the excess amount, a major portion remains invested in government treasury bills while just around Tk6,000 crore sits idle as cash.

When banks increasingly invest in government treasury bills, liquidity rises.

Moreover, banks have adequate holdings of foreign currency amid increasing remittance growth and a fall in opening letters of credit.

Currently, banks' total foreign currency holdings are around $1 billion – which is considered sufficient for banks' daily transactions. 

Public borrowing only stimulus 

When all major economic indicators remained downward, government borrowing was the only stimulation for the pace of economic growth. 

Though, credit flow to private businesses remained sluggish, public sector credit growth remained upward riding on government borrowing. 

Government borrowing recorded 65 percent in January surpassing the monetary target of 44.12 percent for current fiscal year. 

Negative sales of saving instruments increased government borrowing. 

Moreover, banks seemed to prefer to park money with government treasury bills instead of lending at 9 percent. 

The reason behind this is the interest rate of government treasury bills surged up to 9.5 percent which banks find a better option to invest in than lending.

In November, Fitch projected that Bangladesh's economic growth will continue to slow down to7.2 percent in fiscal year 2020-21 as demand for Bangladeshi exports is falling following the slowdown in global trade.

The projected growth rate is far below the government's projection of 8.2 percent for FY20. 

Bangladesh achieved 8.15 percent growth in fiscal year 2018-19. 

Unrealistic forecast

"The government's growth forecast is not realistic. Except for BBS data, information from other sources, including national accounts, shows a downward trend," said Dr Ahsan H Mansur, executive director of the Policy Research Institute (PRI).

"How will growth rise if export-import falls? And if the growth is so high, why is the tax revenue so low?" he asked.

Prof Mustafizur Rahman, distinguished fellow of the Centre for Policy Dialogue, thinks that the economy is slowing down in recent times and it can have knock-on impact on employment, growth and per person income.

He blamed poor governance and lack of supervision by different institutions for the slowdown. Excessive delay in implementation of projects is also affecting the economic growth, he said.

Sheikh Fazle Fahim, president of the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI), attributed the recent economic slowdown to some internal and external reasons.

On the lowest private sector credit growth in over 11 years, the FBCCI president said, "It is temporary as our financial sector is going through some restructuring processes". He hoped the economy will bounce back in the second quarter.

While considering external factors, he mentioned the disruption of the global supply chain due to the outbreak of coronavirus in China. Good thing is that, Fahim said, shipment from China has resumed after the pause.