Key highlights:

1. Tk1,56,000cr defaulted loans in banking sector
2. Foreign reserves decreases to $21b in December 2023
3. In 2023, the country’s import growth was minus 16%

A new government has been formed through the 12th Jatiya Sangsad elections with the Awami League coming to power for the fourth consecutive term. This new government will have to face various challenges at home and abroad. Maintaining the country’s economic stability is one of the major challenges this government will have to face in the coming days.

The economic challenges the new government will face are not new. These problems already existed, but the government could not pay much attention to them due to the election. Now, after assuming responsibility, the government should focus on solving all the existing problems. 

Huge defaulted loans haunt banking sector

One of the primary tasks for the government will be to regulate the banking sector where the amount of defaulted loans has increased alarmingly over the years. Performance of most of the banks is below standard due to the lack of good governance.

According to the latest Bangladesh Bank data, the total amount of defaulted loans in the country's banking sector is Tk 1,56,000 crore. However, it is not the actual amount of defaulted loans. If the amount of rescheduled loans is added, the amount of defaulted loans will be much higher. The amount of defaulted loans is increasing continuously and the authorities are not being able to put a halt to it. The management of the banking system has been weakened due to the high amount of defaulted loans.

In this situation, the depositors are not very interested in depositing money in the bank. The confidence of the people on the banking system is declining. Most of the banks have fallen into liquidity-crisis. These banks are resolving their problems by borrowing from Bangladesh Bank under special arrangements.

It is natural that if the banks cannot collect deposits they will face liquidity crisis. Due to liquidity crunch, banks are not being able to provide loans to the entrepreneurs at the desired level. As a result, loans provided to the private sector is far below the target. Entrepreneurs are thronging the banks for loans, but the banks are incapable of providing the desired loans due to the liquidity crisis. Effective measures should be taken to overcome this, so that the banks can get over this crisis and conduct their operations normally.

A healthy banking sector is essential for an emerging economy like Bangladesh. Entrepreneurs in our country mainly depend on the banking sector for capital. The banking sector is the only source of hope for them. If the banking sector cannot support them properly, they will not be able to do business. Existing laws should be properly implemented to resolve the problems of the banking sector including defaulted loans. And if needed, the existing laws have to be amended. 

Declining export-import a big challenge

The country’s main foreign exchange earning sector is the commodity export sector which increased by less than 2% in 2023. Manpower export is our second largest foreign exchange earning sector. Even there, the growth rate is less than 3% in 2023.

On December 27, 2022, the country’s foreign exchange reserves stood at $34 billion which came down to $21 billion on the same day of 2023, according to the Bangladesh Bank data. 

In 2023, the country’s import growth was minus 16%. Industrial raw materials and capital machineries are also included in imports. In the first five months of the financial year 2023-2024, the LC (letter of credit) opening rate decreased by 14.06% compared to the same period of the previous fiscal year (2022-2023). During the time, LC opening for consumer goods import decreased by 27.47%. In the first five months of the fiscal year 2022-2023, LCs worth $3.64 billion were opened for import of consumer goods which decreased to $2.64 billion during the same period of the current fiscal. Similarly, in the first five months of the fiscal year 2022-2023, LCs worth $116 crore were opened for import of capital machinery. But during the same period of the current fiscal, LCs worth $96 crore were opened for capital machinery import which is 16.98% less than the previous fiscal.

During the July-November period of the fiscal year 2022-2023, LCs worth $1,041 crore were opened for the import of industrial raw materials. During the same period of the current fiscal year, the amount was $920 crore which is 11.62% less compared to the previous fiscal.

Declining imports of industrial raw materials and capital machineries are not a good sign by any means. The decrease in imports of these products means that investment in the private sector has come to a standstill. A decrease in industrial investment in the private sector means that GDP growth will decrease which ultimately will decrease the creation of employment opportunities. As a result, poverty alleviation programs will be disrupted. 

Inflation remains most critical problem

The local currency is gradually depreciating against the US dollar. On December 27, the interbank US dollar exchange rate went to Tk 110. Depreciation of the local currency will fuel inflation. High inflation has been a major challenge in our economy during the last year when the overall inflation remained above 9%. As a result, the number of people living below the poverty line is increasing.

Inflation is the most critical problem in our country's economy. Some opine that inflation will come down once the interest rate of bank loans is increased. But raising interest rates might not reduce inflation. Increasing the interest rate on bank loans will reduce the growth of loans provided to the private sector which would lead to the reduction of GDP growth, hampering the poverty alleviation programs of the government.

One way to reduce inflation is to reduce import duties. Lowering the tariff rate on imported goods may reduce the price of the goods in the domestic market. At the same time, monopoly pricing of business syndicates must be controlled.

“The government has to take a strong stance to stop monopoly pricing by the market syndicates. Many problems will be alleviated if the market remains normal.” – Former DU VC AAMS Arefin Siddique 

Former Dhaka University vice-chancellor Dr AAMS Arefin Siddique said, “The expectations of the common people from the new government are not big. The government has to take a strong stance to stop monopoly pricing by the market syndicates. Many problems will be alleviated if the market remains normal.”

Referring to the election manifesto of the Awami League, Arefin Siddique said, “The manifesto mentions anti-corruption at the beginning. Corruption is a major cause of the internal crisis of the country's economy. If corruption is curbed, many internal economic challenges will disappear.”

Abdur Razzak, chairman of the private research institute Research and Policy Institution for Development (RAPID), said, “The main problems of Bangladesh’s economy are inflation, dollar crisis and irregularities in the financial sector. The government also knows that. The new government must address these three issues to make the country’s economy stable.”