Pandemic to cause an economic whiplash: BB | The Daily Star
12:00 AM, July 02, 2020 / LAST MODIFIED: 01:27 AM, July 02, 2020

Pandemic to cause an economic whiplash: BB

All major economic segments of the country will face deep trouble this year due to the ongoing economic fallout brought on by the coronavirus pandemic, according to a central bank report.

Although the government had set a GDP growth target of 8.20 per cent for this fiscal year citing a V-shaped recovery, the central bank's projections have given an indication the economy may face deep trouble in the days ahead.

"Undoubtedly, the year 2020 would be critical and challenging for all of us. The stimulus packages alone may not suffice to address all sorts of damages made by COVID-19 on our economy," said Fazle Kabir, governor of the central bank.

He came up with the remark at the central bank's annual "Financial Stability Report" for 2019, which was released on Tuesday.

Kabir went on to urge all the stakeholders of the macro-financial system to extend their concerted effort to the fullest extent.

The government has so far announced several stimulus packages worth Tk 103,117 crore, which is nearly 3.7 per cent of the country's gross domestic product, to cushion the possible economic shocks from the global coronavirus pandemic.

The economic whiplash by the rogue virus across the globe is likely to affect the domestic economy considerably in the coming days.

However, a considerable level of stability and resilience was observed in the financial sector of Bangladesh with a few exceptions.

In the wake of the pandemic, the vulnerabilities and uncertainties that have hit the global macro-financial landscape may pose some unconventional challenges for the Bangladesh economy in the days ahead as well.

A low level of external debt and low and stable inflation was favourable from a financial stability point of view.

Despite the depreciation of the taka to some extent and a moderate output gap, the overall domestic component appeared to be quite stable with apparently no threat for the financial system.

The stable scenario might be altered, especially if the real economy is severely affected by the coronavirus attack resulting in lower output growth and rising inflation.

Besides, the economy may face some challenges due to the implementation of mega projects.

Over the last couple of years, the government has emphasised the implementation of mega projects including that of the Padma bridge, Ruppoor nuclear power plant and metro rail to foster economic growth to the next level.

A significant part of the financing for such projects has, however, come in the form of foreign currency-denominated loans from the development partners and multilateral organisations.

As a result, there is a gradual accumulation of foreign debts that need to be repaid in instalments from the near future.

While the number and size of these projects are increasing, there is a probability that such short and long-term debts may pose some pressure on the balance of payments if remittance inflow experiences slow growth due to coronavirus.

Higher growth of remittance inflow due to cash incentives declared by the government, the decline in oil price and the overall slow growth of import helped improve the external sector balance in 2019, the report said.

However, a constant fall in oil price could be a possible source of stability threat for Bangladesh as it might shrink remittance inflow from the oil-exporting countries.

Trading peer nations' real GDP growth, inflation in import partners and unemployment in top inward remittance partners worsened last year compared with 2018.

The external economy scenario is likely to be worse this year due to the pandemic, which might slow down export earnings and remittance inflow as most of the trading and remittance partner countries have severely been affected too. 

Despite recent improvements, proper monitoring of rescheduled loans amid the pandemic remains a critical challenge for the banking industry.

Most of the banking sector indicators might be affected due to the impact of the pandemic.

However, the bulk amount of the government's stimulus credit package augmented by the central bank's refinancing schemes should help the banking sector in combating the ill effects.

Allowing a higher proportion of institutional government funds to be deposited in private commercial banks might have caused the change as these deposits were shifted mostly from the state lenders to them.

This recent stance improved the overall liquidity situation in the private commercial banks. The higher liquid asset holding should enable the banks to better manage their future liquidity issues amid the pandemic.

Default loans in banks stood at 9.3 per cent of the outstanding loans in 2019, down from 10.3 per cent in 2018.

The amount of classified loans increased Tk 420 crore year-on-year to Tk 94,330 last year.

The decline in the default loan ratio last year could partially be attributed to stringent supervision by the central bank, improved monitoring from banks and restructuring of loans under a new policy aimed at reducing debt servicing burden of good borrowers.

Despite the recent improvement, proper monitoring of rescheduled loans amid the pandemic will be a critical challenge for the banking industry.

Banks rescheduled defaulted loans amounting to Tk 52,770 crore last year, up from 127.35 per cent a year earlier.

The ongoing economic meltdown could severely affect the debt-servicing capacity of the borrowers and the performance of the rescheduled as well as regular loans might be hampered.

The BB has already extended necessary policy support to help the borrowers and banks and minimise the impact of the ongoing coronavirus outbreak. 

Deposit growth in banks stood at 11.3 per cent last year, up from 10.5 per cent a year earlier.

The deposit growth in the banking sector, however, might decline soon due to the impact of the coronavirus outbreak.

This might happen due to weaker economic activities accompanied by lower demand for labour in the remittance-originating countries.

Bedsides, demand for holding excess cash may also increase due to uncertainty associated with the pandemic.

The stress testing carried out by the BB revealed that the banking sector would be resilient to different shock simulations.

But the significant amount of loans concentrated among a few borrowers and a considerable level of default loans in some banks and non-bank financial institutions could pose a risk to the overall financial stability.

Strict compliance with the guidelines on large loans and single borrower exposure would help reduce risks on banks' exposure to large corporates or a specific group, sector or region.

 

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