Bangladesh’s private sector credit growth reached a 21-month low of 9.82 per cent this July, owing to the ongoing liquidity shortage, high amount of non-performing loans, and economic woes in the country.
Private sector credit growth was 9.44 per cent in October 2021, and this figure had stayed above 10 per cent before July this year. The data indicate a steady decline of investments in the private sector, which is directly affecting industrial production, and the country’s economy.
This in turn may cause the price of essential commodities to increase further as importers cannot afford capital machinery due to a lack of investments. Insiders say importers are acting conservatively while importing materials due to the rising rate of USD, and low demand.
Meawnhile, bankers say the private sector credit growth suffered for the last four months mainly due to a liquidity shortage in the banking sector.
It should be noted that the opening of letters of credit (LCs) declined year-on-year by 42.98 per cent this July, after the government and Bangladesh Bank restricted imports in a bid to halt the decline of foreign exchange reserves.
Bankers believe that the decline in deposit growth is one of the key reasons behind the ongoing liquidity crisis.
Banks are currently offering around 4.38 per cent interest on deposits, while Bangladesh Bureau of Statistics (BBS) data shows that the annual inflation rate was 9.69 per cent in July 2023.
Zahid Hussain, former lead economist of the World Bank Dhaka Office, said, “There are two major reasons for the decrease in private sector credit. Importers cannot import due to the USD crisis. When imports decrease, the bank's credit demand decreases automatically.
“Importers cannot import capital machinery. Another reason is the high inflation rate, which has reduced people's purchasing power. When demand is low, supply automatically decreases.”
Sometimes importers have the chance to take loans from banks, but sometimes they hold out to purchase essentials, he added.
Dhaka Chamber of Commerce and Industry President Sameer Sattar said, “Importers have not imported enough due to the global economic headwinds. Additional pressure on the foreign exchange market has had some impact in this regard.
“Quick and effective action is needed to facilitate private sector credit growth to foster competitiveness in the overall economy. Private investment rate fell to 21.25 per cent in FY21 due to the pandemic, which was the lowest in 14 years.”
The Association of Bankers, Bangladesh (ABB) and Bangladesh Foreign Exchange Dealers Association (BAFEDA) introduced a unified exchange rate last month, and banks are now offering Tk 109.50 for remittances and export proceeds.
The import bill and the interbank exchange rate is also nearly the same.
The central bank sold around $2.25 billion in July-August of FY24. Besides, the Bangladesh Bank sold around $13.54 billion to banks in FY23, which resulted in a decline in forex reserves to $29.9 billion on July 6 this year, compared to $48.6 billion in August 2021.
Restrictions on imports of luxury items and increased monitoring on imports imposed by the Bangladesh Bank have further added to the factors contributing to the reduced credit growth.
The central bank reduced the private sector credit growth target for FY23 to 14.01 per cent from 14.8 per cent of FY22 in a bid to tackle the inflationary pressure. This target was 10.9 per cent in December 2023.
