Recovery on some fronts, but investment gaps, banking instability still key concerns

Summary:

• Bangladesh's economy shows recovery with rising exports and remittances
• Card transactions grew 16% in 2024, rebounding after earlier decline
• Letters of credit for imports rose 14.48% in October, 5.27% November
• Remittance inflows surged 22%, reaching nearly $27 billion in 2024
• Merchandise exports increased 15.63% year-on-year in November 2024

Bangladesh's economy has shown signs of recovery in the final quarter of 2024, with notable improvements in key indicators such as card transactions, remittance inflows, exports, and the issuance of letters of credit (LCs) for imports.

For example, City Bank, the country's largest card issuer, has seen a significant turnaround in transaction volumes. During the peak of the student-led mass uprising against Sheikh Hasina's government in July, card transactions dipped by 1% month-on-month.

However, stability in subsequent months spurred recovery, with transaction growth reaching 6% in August and surging to a remarkable 30% in November.

On average, card transactions grew by an impressive 16% over the past 11 months, a substantial improvement compared to the meagre 1% growth recorded in 2023.

The opening of LCs for imports also picked up in October and November, reversing a three-month decline. This uptick reflects a growing demand for goods, both for consumption and production, indicating an increase in economic activity and business optimism.

Bangladesh Bank data shows LC openings rose by 14.48% in October and 5.27% in November, after a 7% decline during the first quarter (July-September) of the current fiscal year.

"There are signs of recovery, and imports are increasing. But the concern lies in the lack of new investments,"

Mostafa Kamal, chairman of Meghna Group of Industries (MGI)

Remittance inflows have also surged, reaching nearly $27 billion in 2024, a 22% year-on-year increase. This growth was driven by a 9% rise in the official dollar rate and a crackdown on money laundering in the year's final five months.

Formal channel remittances totalled $26.67 billion as of 28 December 2014, up from $21.92 billion in 2023, according to central bank data.

Also, merchandise exports posted a 15.63% year-on-year increase in November, earning $4.11 billion. Improved foreign exchange availability further supports the recovery narrative.

However, significant challenges remain. Bangladesh's ability to generate enough jobs for the approximately 25 lakh youth entering the workforce annually is limited due to the lack of new investments, which are critical for creating employment opportunities.

Inflation remains a pressing issue, with rates stuck in double digits for nearly three years. This continues to strain consumers and manufacturers alike.

Another concern is the ongoing stress in the banking sector, which faces liquidity shortages and impending changes to loan classification rules. Starting in April 2025, loans will be classified as non-performing after three months of delinquency, down from the current six-month threshold, as part of Bangladesh Bank's efforts to align with Basel III international standards.

What businesses say

"There are signs of recovery, and imports are increasing. But the concern lies in the lack of new investments," said Mostafa Kamal, chairman of Meghna Group of Industries (MGI), the country's largest commodity importer and a leading industrial conglomerate.

MGI had planned to launch three new projects worth $800 million (over Tk9,000 crore) in 2024. However, delays in securing gas and electricity connections have pushed the timeline back, with operations now rescheduled to begin in 2026.

Among these projects, Meghna Re-Rolling & Steel Mills Ltd stands out, with the International Finance Corporation (IFC), a member of the World Bank Group, committing $100 million in financing.

Kamal pointed to worsening law and order, along with rampant extortion and bribery, as key reasons behind the sluggish investment climate in the country.

Echoing similar concerns, MA Jabbar, managing director of DBL Group, one of Bangladesh's largest apparel exporters, said while exports are likely to grow in 2025, the growth will be modest due to insufficient new investments.

"Bangladesh needs fresh investments in both backward and forward linkages to drive export growth," Jabbar told TBS.

What bankers say

Sheikh Mohammad Maroof, managing director of Dhaka Bank, said high inflation in the country has led to reduced demand and subdued business activity. Despite this, imports have been on the rise, primarily due to increased commodity imports ahead of Ramadan, which is a few months away. "LCs for these goods are being opened now, which is contributing to the increase in imports," he explained.

On the rise in back-to-back LCs driven by export orders, Maroof said, "We are seeing export growth during the current fiscal year, with further potential in the future. Increased orders have boosted the import of raw materials for these export products through back-to-back LCs. These exports are expected to materialise between March and May."

Central bank data reveals that back-to-back import LCs worth $4.55 billion were opened during the July-November period of the current fiscal year, reflecting a 15.45% increase compared to the same period in the previous fiscal year.

However, concerns over the country's financial stability persist. A managing director of a private bank, on condition of anonymity, warned that pressure on the dollar is unlikely to ease in 2025 due to rising external debt.

"If foreign direct investment does not increase substantially, the dollar pressure will remain," he told TBS.

This banker pointed out additional challenges arising from the International Monetary Fund's (IMF) prescriptions for the banking sector. Under the IMF's guidelines, loans will now be classified as non-performing after three months of non-payment, down from the current six months. "This decision does not take into account the country's current economic and business conditions," he said.

These changes could drive up business costs, increase LC confirmation charges, and negatively impact credit ratings, said the banker, warning that the new loan classification rules will impact not only businesses but also banks, as they limit banks' ability to provide lending support to entrepreneurs.

The central bank's revised guidelines on stress testing, issued on 30 December, present another hurdle. "Approximately 70% of banks will fail to maintain the required capital adequacy ratio if the new stress testing rules are implemented," he stated.

According to the new guidelines, every scheduled bank must establish a rigorous and forward-looking stress-testing framework tailored to the nature, size, and complexity of its operations and risk profile.

The combination of these factors – rising inflation, stricter loan classification rules, and enhanced stress testing requirements – poses significant challenges for the banking sector, even as imports and exports show signs of recovery, bankers said.