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The country’s overall economic situation started showing some signs of improvement from the last fiscal year despite the ongoing pandemic but subdued growth in private investment and excess liquidity in banks still remain a major concern.
Demand for loans has sunk remarkably amid the third wave of the Corona pandemic because of the slowing private investment, creating excess liquidity in the banking system and leading to a slum in interest rates.
“Banks may attempt to offset their losses from holding excess liquidity by giving out risky loans which may lead to a higher volume of NPLs, higher inflation and the creation of asset bubbles,” Dr Fahmida Khatun, Executive Director of Centre for Policy Dialogue (CPD) said.
The amount of excess liquidity in banks hit an all-time high at Tk 2,314.62 billion at the end of June with commercial bank’s total Cash Reserve Ratio (CRR) money reaching Tk 625 billion at the central bank.
“Excess liquidity is also a sign that the demand for loans is low, which is likely since the real economy is still experiencing the impact of the Covid-19 shock,’ Dr Fahmida added.
People are still dependent on the banking system for their savings, but the average interest rate on bank deposits stood at 4.13 per cent in June whereas the rate was between 9 to 12 per cent a few years back.
This interest rate was even lower than June’s 5.56 per cent inflation rate. The slump in interest rates was mainly caused by the excess liquidity in banks. Another reason for that was the government’s implementation of a 9-6 per cent interest rate.
The country’s GDP growth bounced back to 5.47 per cent in the last fiscal year which plummeted to 3.51 per cent a year earlier, suggest the provisional data of the Bangladesh Bureau of Statistics (BBS).
Private investment slipped to GDP’s 21.25 per cent in the 2020-2021 fiscal year from 22.06 per cent in FY2019-20 fiscal year.
Meanwhile, overall private sector credit growth in the last fiscal year was 8.62 per cent, far from the central bank’s monetary target of 14.8 per cent.
When the overall import started to rebound in the last fiscal year, the import of capital machinery, a major indicator of the private investment situation, did not pick up, according to Bangladesh Bank.
Economic analysts fear that inflation may shoot up if the excess liquidity cannot be used in the productive sector. They also fear that excess liquidity is being utilized in the capital market, which may eventually create an asset bubble in the country.
In the last two weeks, the market capitalization of the Dhaka Stock Exchange (DSE) increased by more than Tk 60 billion. DSE’s total market capital soared to Tk 5.48 trillion on Thursday with single-day transactions rising even to Tk 30 billion.
Besides, people are finding it lucrative to invest in government’s savings certificates compared to parking money in commercial banks where interest rates have hit the bottom.
In the 2020-21 fiscal year, total sales of saving certificates stood at Tk 1,121.88 billion and net sales stood at Tk 419.60 billion which was nearly three times higher than the previous fiscal’s net sales of Tk 144.28 billion.
This fiscal, the government targets to borrow Tk 320 billion from the costly saving certificates sale to meet over Tk 2.11 trillion budget deficit. But the target is expected largely overshot at the end of the year in the line with the trend in recent years.
(DS)
