The Centre for Policy Dialogue (CPD) analysed that the economy of Bangladesh is now under pressure as its four major segments have been facing several types of problems.
The independent think-tank raised red flag in four areas of the economy – Revenue mobilisation, Banking sector, Capital market and Balance of payment – where immediate attention was required.
CPD said that the government would fail to achieve the growth target for the current fiscal year as revenue collection, baking sector and stock market were in a bad shape for lack of structural reforms.
CPD made the remarks while launching the report titled ‘State of the Economy in FY 2019-20’ at CIRDAP Auditorium in the capital.
CPD Distinguished Fellow Debapriya Bhattacharya said the economy is now in the weakest state in the last 10 years. He mentioned that the problems in the sectors would further increase stress on macroeconomic stability and cause slow gross domestic product (GDP) growth if the problems were not addressed.
He also stressed that the government would not be able to meet its budget target considering the state of the economy in the first three months of the current fiscal year.
“The government is running an economy based on government investment which is not a good sign. The policies are adopted on an ad hoc basis, without having enough data. Also, there remain questions about authenticity of the available data,” he said.
He also questioned the authenticity and estimation of GDP growth, asking that while major economic indicators were declining, how the GDP could grow. “If the private sector investment does not increase, how can the GDP grow?” he wondered.
CPD Research Director Khondaker Golam Moazzem said volatility in the country’s stock market was leading to further crisis in the economy.
“Lack of good governance and inactive role of institutional investors are major problems in the stock market. As of October, only nine companies reported higher dividends, 52 companies’ dividends declined and 23 companies declared no dividend,” he said.
He said the government tried to stabilize the stock market only through injecting money.
“Such measures are short lived and the market will become volatile soon. Injecting cash will never solve the problem. The leadership of the securities regulator should be reconstituted to strengthen the stock market. Also, the Financial Reporting Council should be reformed to ensure quality IPOs,” he said.
CPD Distinguished Fellow Mustafizur Rahman said the balance of trade was negative in the first quarter of the current fiscal year for the first time in the last 10 years.
“If the trend continues throughout the current fiscal year, the overall balance, forex reserve and exchange rate will come under increasing pressure,” he said.
Mustafiz said the only growth registered in remittance, increasing by16.6% in the first quarter of the current FY20.
“But the number of workers going abroad is declining. It was 10.08 lakh in 2017, declined to 7.34 lakh in 2018 and in the opening quarter of current fiscal it was only 4.7 lakh. The trend indicates, the number will decline further,” he predicted.
“We need to develop skilled manpower to take preparation for the LDC graduation. Also, we need to diversify our labor market,” he said.
He also said the government should also devalue the Taka to stay competitive with the neighboring countries.
CPD Senior Research Fellow Towfiqul Islam Khan said the government was dependent mostly on indirect taxes rather than focusing on direct tax income.
“We estimate that there would be a huge revenue shortfall in FY20 as the tax net is not being broadened. This will increase government’s bank borrowing and create further pressure on the banks and private sector investment,” he warned.
He also suggested that government should be careful on providing tax exemption in different sectors.
Revenue Collection was lowest in decade in first quarter
CPD said the revenue collection in first quarter was the lowest in a decade and forecasted higher revenue shortfall in the current fiscal. As per Bangladesh Bank data, the overall deficit recorded a 73% growth, additional about Tk14,194 crore, in July-August of FY20 which was 23.8% of the annual target.
The government borrowing from banks witnessed 311% growth in first quarter, additional about Tk18,555 crore, which was 53.8% of the total annual bank borrowing target.
Net government credit registered a 34.9% growth in July-August period which was the highest since FY12. At the same time private sector credit registered the slowest growth, around 10%, since FY14.
The CPD said the government should stop black money whitening and bring the tax evaders to book.
Banking Sector is in crisis
The think-tank said mounting liquidity crisis in the banking sector posed the risk of economic downturn.
CPD executive director Fahmida Khatun, in her presentation on the banking sector, said that all major parameters of the banking sector indicated its persistent fragility with no signs of revival on the horizon.
In the recent past, the difficulties of the sector have been exacerbated by the symptoms like drop in private sector credit growth, mounting liquidity stress, unsuccessful cap on interest rates, unabated non-performing loans, massive loan rescheduling and writing-off, worrying capital inadequacy in certain banks and futile recapitalisation of banks, she said.
The total volume of non-performing loans increased to Tk1,12,430 crore in June 2019 from Tk1,10,970 crore in March.
Fahmida Khatun also mentioned that during the April-June period of 2019, a total of Tk 15,460 crore bank loan was rescheduled and another Tk 54,464 crore was written off. “The government also provided Tk 1,100 crore bailout package to rescue Farmers Bank. This has set a bad example and will encourage other banks to indulge in irregularities,” she observed.
“Earlier, we used to see bad loans only in state-owned banks. But now we see the private banks are also in the race. It means the efficiency of the private banks is also declining,” she noted.
Nearly zero to below zero real interest rate on deposit, cap on deposit rate at 6%, falling confidence of depositors due to high non-performing loans and illicit financial outflows were the main reasons for weak deposit growth, said the CPD report.
“The government could build three Padma bridges, five metro rails, and seven power plants like Rampal with this amount of non-performing loans,” said the report.
Country’s leading think-tank said the government’s repeated recapitalization to the state-owned banks and bailing out private bank were setting bad precedence and encouraging irregularities in the sector. The stock market was grappling with vested quarters’ influences and listed companies were failing to give dividends, leaving the general investors to worry.
Stock market going down and down
Regarding capital market crisis, CPD research director Khondaker Golam Moazzem said that weak institutions and weak governance were the major weakness of the market.
CPD identified five institutional and governance related weakness — poor quality IPOs, anomalies in financial reporting, lack of transparency in BO accounts, suspicious trading at secondary market and questionable role of institutional investors — concerning the market.
The CPD report said irregularities and malpractices by influential quarter created scope for siphoning off large amounts of money. As a result, the small investors have been betrayed time and again, who lost their hard earn money.
Many listed companies’ dividends fell and some failed to provide any dividend also. On the other hand, junk stocks were jumping abnormally, but no effective steps were taken against them from the regulator, CPD found.
As a result, institutional investors are behaving like silent audience. On the other hand, higher bad loans and lack of corporate good governance mounted the crisis of confidence. Institutional investors’ transactions sometimes create instability in the market. As institutional investors hold almost 60 percent of the shares in the market, they need to behave in a stable manner.
Crisis between Grameenphone and the Bangladesh Telecommunication Regulatory Commission was also a reason of the market’s slide.
About the lack of quality IPOs, CPD said that a number of IPOs have been approved by the BSEC whose stock price rose in the first few days and then plummeted to a very low level. Sometimes they went below the offer price.
Export also de-grows
The CPD proposed that government should adopt policy of gradual depreciation of currency in line with the competitive currencies.
“In January-September, the competing currencies with BDT were moving at a faster pace,” it said.
“What is also becoming increasingly apparent, based on export performance, is that without addressing the underlying factors of competitiveness, incentive alone will not serve the purpose,” observed the CPD.