Private credit growth: Where is this money going? | The Daily Star
12:00 AM, October 15, 2017 / LAST MODIFIED: 12:56 PM, October 15, 2017

Private credit growth: Where is this money going?

Private credit growth hit a five-year high in August, giving rise to more concerns than hope. While private credit growth is instrumental to achieving seven-plus growth, its excessive growth which exceeds all anticipations of the central bank raises some valid questions: i) Is this money really going to the productive sector? ii) Is this money going out of the country through over-invoicing in the import sector? iii) Is our banking system good enough to accommodate this sudden credit surge?

Based on last May's growth figure of 16 percent, the central bank targeted a 16.3 percent private credit growth for the fiscal year 2018. Within only two months of the year, private credit growth jumped up to almost 18 percent with no sign of slowing down, raising concerns of higher inflation in the near future. Since price-dampers such as low oil price and better weather on the supply side are present, inflation may not rise immediately. However, concerns still persist as to where this money is going. A few inconsistencies in the external sector bolster the question whether a big part of this money is fuelling illicit financial transfers, which amounted to roughly USD nine billion last year. We will know how much capital was illicitly siphoned out of the country this year by the middle of next year, and the amount is expected to remain no less than USD 10 billion.

What happened five years ago? We had an abnormal 40 percent growth of both exports and imports. Since Bangladesh's exports are mainly garments-based (80 percent), any growth in export would cause similar growth in imports through back-to-back letters of credit. Not only has that pattern been lost in the last fiscal year, the picture this year too is quite dubious. While import growth in the FY-2017 was nine percent, export growth dropped to as low as two percent, suggesting some possibilities of over-invoicing for imports and under-invoicing for exports—the classical channels that enable money laundering from any country overseas. If that is even partly true, credit growth will not contribute to output growth or employment generation at an expected speed. It's like feeding delicious food to a diarrheal patient and not seeing any health improvements.

The growth of capital machinery import has drastically risen from 14 percent in FY-2016 to 37 percent in FY-2017, breeding doubts as to whether this amount of capital goods has really been added to our production process. If that amount really entered our industry, why did GDP growth barely edge up from 7.11 in FY-2016 to only 7.24 percent in FY-2017? Of course, capital goods will keep adding to output over future years. Then would we be able to see a significant rise in GDP growth in FY-2018? Probably not. The World Bank estimates that our FY-2018 growth would be even lower (6.4 percent), although their estimates are like that of a conservative grandpa. Where did these big cartons of capital machinery go? Did these boxes really contain capital goods or something else? Is it not the central bank's job to inspect the containers?

A two percent rise in exports should have made import growth to be somewhere around, say two to five percent. In addition, 15 percent negative growth in remittances in FY-2017 is supposed to dampen domestic demand and import growth to a great extent. Imports, however, has turned out to be hyperactive, contradicting all expectations and thus sparking some suspicions: where is this money going? The government should investigate who the big importers are and the purpose behind “importing” so much capital machinery. Are businessmen bringing in potato chips in the name of computer chips just to dodge import duties? If precautionary measures are not taken and the money has already been parked overseas, these powerful importers will simply fuel default loans whose ratio is still above 10 percent since June 2016.

How does over-invoicing work? You import a good with its actual value, say, USD 100, but tell your counterpart in the US or Europe to send an invoice of, say, USD 250, which our country will pay overseas from the foreign currency reserve. The American dealer will keep USD 100 for him and deposit the rest in the designated account as instructed by the Bangladeshi money launderer. Under-invoicing works in the opposite direction for money-trafficking exporters.

A Bangladeshi exporter sends, say, USD 225 worth of garments to Europe and tells the foreign counterpart to send, say, only USD 100 to Bangladesh and deposit the rest in a European account as instructed by the Bangladeshi exporter. Remittance channels too can be used to pile-up funds overseas. The recent collapse of exports plus remittances and an inconsistent rise in imports give enough ground to suspect a recent hike in illicit financial outflows from the country. The resultant collapse in the current account balance has become inevitable, slowing down the growth of foreign currency reserves.

Money has invisible wings just like the market has invisible hands. The government has to think about developing institutions to throttle capital outflow. We should be careful as to whether a big part of this credit is turning into election money. The central bank's credit growth target of 16.3 percent for the whole FY-2018 was definitely an underestimation of the economy's credit appetite under a low-inflation regime. Bangladesh Bank posed an untimely conservative stance by not lowering the policy rates as well. However, a recent spike in private growth from 15.66 percent in June to 18 percent in only 3 months is not something to celebrate either. The entire banking sector should do more homework to find out where this money is going—to consumer credit, SME, power sector, or somewhere else?

Biru Paksha Paul is associate professor of economics at the State University of New York at Cortland and former chief economist of Bangladesh Bank.


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