Banking scams threat to growth potential: MCCI

Bangladesh's graft-ridden banking sector is probably posing the biggest challenge to the country's growth potential, a leading chamber said yesterday.

“The corruption-ridden banking sector is perhaps the biggest downside risk now, which will call for strict vigilance by the central bank to bring discipline to the sector,” the Metropolitan Chamber of Commerce and Industry, Dhaka (MCCI) said.

The oldest chamber in the country blamed the existing banking system for creating inequality in the country and called for reforms. The MCCI made the observations in its January-March review of the economic situation.

The banking sector is currently going through choppy waters because of rising loan irregularities and deteriorating corporate governance, it said.

In April, the finance ministry, under pressure from directors of private banks, undid the tight monetary stance announced in January for the second half of 2017-18, undermining the central bank's independence and credibility.

The banks' cash reserve requirement, which is a specified minimum fraction of the total deposits that banks must hold as reserves either in cash or as deposits with the central bank, was cut by one percentage point and set at 5.5 percent.

At the time, the Centre for Policy Dialogue said the decision to slash the CRR is likely to encourage the poorly performing private banks to continue with their business-as-usual practices and lend more aggressively and indiscriminately, which would also raise the risk of an increase in classified loans.

At the end of December last year, the overall non-performing loan ratio in the banking sector stood at 10.70 percent, up from 10.10 percent six months earlier.

The MCCI review said Bangladesh's economy is progressing well, but below its true potential.

Inadequate infrastructure and lack of investor confidence in the economy discourage making fresh investment and shortage of power and energy are now major impediments to the growth of the economy.

The review said there is no alternative to raising the level of investment if Bangladesh is to attain the status of a middle income country by 2021.

The seventh five-year plan targeted to achieve 7.40 percent GDP growth per annum.

In order to achieve the targeted GDP growth, the review said the private investment should be 24.4 percent and public investment should be 7.4 percent of GDP in 2017-18.

“All-out effort will be needed to mobilise investment, including foreign direct investment.”

In July-February of 2017-18, the net FDI rose by a meagre $10 million, or 0.80 percent, to $1.26 billion from $1.25 billion in the corresponding period a year ago.

According to a government estimate, the country needs to attract average annual FDI inflows of $6.7 billion to graduate to an upper middle income country by 2021.

The chamber said Bangladesh's low labour costs are generally believed to be attractive to foreign investors, but yet they hesitate to make fresh investments in the country because of underdeveloped infrastructure, the shortage of power and energy, lack of consistency in policy and regulatory framework, scarcity of industrial land and political uncertainty. “The government needs to address these impediments to attract more FDI.”

The MCCI said it is assumed that the peaceful political situation that currently prevails will continue in the coming days.

Export, import, remittances and foreign exchange reserve can be expected to increase riding on the calm political scenario. The rate of inflation can be expected to rise in April and May because of Ramadan, it said.

Power and gas shortage and weak infrastructure are the major obstacles to growth, as they disrupt industrial production and also discourage new investment.

Other downside risks stated by the review include poor implementation of public investment programmes, the growing requirement of subsidy payments by the state to different sectors, uncertain availability of foreign aid, and growing income inequalities.

“These risks will need to be carefully addressed with all seriousness.”

While significant economic growth has been achieved, the country is witnessing an alarming increase in income inequalities between the rich and the poor, the MCCI said. “The government has to develop more safety net programmes for the poor.”