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Higher default loans to impede investment pickup

MCCI says in its quarterly economic review


FE Report | Published: February 26, 2019 09:28:00 | Updated: March 04, 2019 09:42:00


Picture used for illustrative purpose only — Collected

The Metropolitan Chamber of Commerce and Industry (MCCI), Dhaka, Monday cautioned that if left unaddressed, the problem of high-level non-performing loans in the banking sector could impede a pickup in investment in the country.

The Dhaka-based leading trade body also said in addition to the bulging non-performing loans (NPLs), poor governance and corruption in administration, among others, remain major obstacles to country's sustained trade and economic growth.

Besides, stalling or reversal of policy reforms could see significantly lower investment and economic growth, said the MCCI.

The trade body made the observations in its 'Review of Economic Situation in Bangladesh for October-December 2018 (Q2 of FY19).

"Policymakers should take careful note of significant downside risks, both domestic and external, to a sustained revival of the country's investment and growth prospects in the medium term," said the MCCI.

Among others, it pinpointed the domestic risks in relation to the government's poor ability to prevent both current and planned reforms from going off-track and maintain fiscal discipline.

Domestic challenges that could complicate the situation further are fiscal slippages and rising inflation as well as delays in structural reforms to address balance sheet issues in the banking and non-financial corporate sectors, said the MCCI.

"High levels of non-performing loans in the banking sector could impede a pickup in investment, if left unaddressed," it said.

According to the MCCI, large fiscal deficits, inability to maintain fiscal discipline, low tax-GDP (gross domestic product) ratio, and weak capital spending remained some of the key risks that a developing country like Bangladesh can hardly ignore.

Mentioning that the financing of public private partnerships also remains a challenge, it said the problems of poor governance, corruption in administration, labour indiscipline, and high cost of credit are downsides that impede investment and growth in Bangladesh.

There are also other challenges such as rising geo-political tensions and the Rohingya refugee crisis that will need to be addressed, it added.

The MCCI, however, said the overall economic situation in the country was positive in the quarter under review (Q2 of FY19) as indicated by steady improvements in the major economic indicators.

The economy is progressing well, despite the presence of some risk factors, including marginal growth in remittances, slower growth in export receipts, and a lower rate of investment, especially foreign direct investment (FDI), the chamber noted.

Inflation was under control, the exchange rate remained stable, and foreign exchange reserves rose to a comfortable level, it mentioned.

During July-December of FY19, the agriculture sector performed well, but continuous government support with inputs and finance will be needed to sustain the sector's growth, according to the trade body.

Infrastructure deficits and gas and power supply problems were undermining the performance of the manufacturing sector, it said, adding the government should, therefore, need to adopt suitable measures to remove these bottlenecks in order to support the growth of the country.

In addition, the government should also take measures to improve the country's road and rail infrastructure, develop port facilities, increase power and gas production, and remove other infrastructure bottlenecks and such impediments as the delay in the execution of development projects, lack of skilled manpower and insufficiency of industrial land, it mentioned.

It also suggested that the government should need to accelerate the rate of economic growth to about 10 per cent from the present 7.86 per cent, expand exports, and stimulate investment to help achieve the target of transforming the country into a middle-income country (MIC) by 2021.

In its review, the MCCI said the broad money (M2) growth dropped to 9.41 per cent at the end of December 2018 from 10.69 per cent recorded at the end of December 2017.

Domestic credit, on the other hand, grew by 13.41 per cent at the end of December 2018, while a higher rate of growth of 14.48 per cent was recorded at the end of December 2017.

Besides, the credit growth in December 2018 is also below the credit growth target of 15.80 per cent set in the monetary policy for the first half of the fiscal year.

On the other hand, the interest rate spread in the banking sector slightly widened to 4.23 per cent at the end of December 2018 from 4.20 per cent in the immediate previous month (November 2018), it mentioned.

The weighted average interest rate on deposits fell to 5.26 per cent in December 2018 from 5.30 per cent in November 2018, and the interest rate on lending also decreased to 9.49 per cent from 9.50 per cent.

About power sector, it said though the supply of electricity improved in the quarter under review but the demand for power shot up, too.

"Total installed capacity rose to 17,965 mw in January 2019 and present capacity rose to 17,422 mw, but production remained low because of gas shortage and also because of shutting of some power stations for maintenance," it said.

The net foreign direct investment (FDI) in Bangladesh fell by US$29 million or 4.47 per cent to US$620 million in the first five months of the current fiscal from US$649 million in the corresponding five months of last fiscal, it said.

On the other hand, the gross inflow of FDI during the period under review increased by US$79 million or 6.90 per cent to US$1.224 billion from US$1.145 billion in the corresponding five months of FY18, it added.

However, the MCCI has also projected that the country's export earnings, import payment and inward remittances would increase in the coming months.

The country's export receipts might go up to US$ 3580 million at the end of February and $3630 million at the end of March, 2019 while the import payments might rise to $ 5280 million and $5360 million at the end February and March, 2019 respectively.

Besides, the country's inward remittances were expected to reach $1590 million and $1720 million at the end of February and March, 2019 respectively, the MCCI projected.

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