Economist Mahtab Uddin, an Assistant Professor of Economics at the University of Dhaka and Research Director at the South Asian Network on Economic Modeling (SANEM), spoke to the Industry Insider about the country’s current economic situation, including the banking sector, investment, inflation, and renewable energy, and how the economy can be uplifted from the bad patch. Shafiqul Islam conducted the interview.  

In the past three months, non-performing loans (NPLs) in the banking sector have increased significantly. What are the primary factors contributing to this? What potential impact could this have on the overall economy? 

The current state of non-performing loans is nothing new. For years, prominent business conglomerates closely tied to the ruling political parties have been defaulting on their loans. Over the past 15 years, those close to the inner power circles have become the major loan defaulters. They have stolen ample amounts of money and acquired assets abroad. This wealth was not amassed overnight but accumulated over many years. Following the July-August revolution this year, a substantial portion of this group has either fled the country or is on the run. Consequently, there will undoubtedly be a significant impact. The economy may face challenges over the next year and a half, as recently indicated by the Governor of the Bangladesh Bank.

In my point of view, rising non-performing loans can exacerbate two primary problems. Firstly, a surge in NPLs will diminish the supply of loanable funds. The money banks disbursed is not being returned, effectively draining a significant amount of liquidity from the economy. 

As a result, the supply of loanable funds would decrease. It would make credit access more difficult for businesses, especially SMEs, that may require loans. The lack of getting necessary loans from banks can lead to a surge in borrowing from informal sources at exorbitant interest rates. SMEs and women entrepreneurs will be disproportionately affected. 

The second issue is that, under such circumstances, the economy faces a liquidity crisis. The central bank is sometimes compelled to print money. That would increase inflationary pressure, compounding the existing problem.  

Depositors in Bangladesh have traditionally been reluctant to save, with deposit growth stagnating below 10 percent. Given rising concerns over the safety of their deposits, depositor confidence has further eroded. What measures should be implemented to effectively restore confidence among depositors?   

The financial sector is a speculative market. Typically, when interest rates rise, people tend to save more. This is because they anticipate earning higher returns on their deposits. However, they would not deposit or may even withdraw their money from banks if any doubts arise about this expectation. 

Given the current circumstances, efforts should be made to support weaker banks. The liquidity situation must be monitored regularly to prevent any panic or rumors from spreading. It is crucial to reassure customers that their deposits are safe and that they can withdraw their money when needed. 

Efforts should be made to control NPLs. The public should be informed about the actions being taken against defaulters. There should be a ‘name and shame’ policy for defaulters by publicly disclosing their identities. 

Also, the deposit insurance coverage could be increased. This would boost the confidence among the depositors, particularly the small depositors who constitute the majority of customers. Professional management should be introduced in weaker banks. Historically, the Bangladesh Bank has not always been able to operate independently. This needs to be ensured. 

The government has initiated reforms in the banking sector. In your opinion, are these reforms progressing in the right direction? 

The Bangladesh Bank has introduced changes to the management boards of some banks, which is a positive step. One of the biggest challenges facing the country’s banks is the lack of robust credit risk assessment. In many cases, loans are disbursed without adequate due diligence or on political considerations. This needs to be changed and strengthened. 

Independent oversight is required to assess each bank’s risk assessment level before granting loans. The Basel III and IV standards must be implemented under the guidance of the Bangladesh Bank. Earlier, we saw licensing new banks under political considerations; there should be strong rules forbidding that practice. Bank licenses should be granted based on competitive factors. During the Awami League regime, there were numerous changes in the banking policy and regulations. There should be an independent review of those changes followed by required modifications. 

The Whitepaper committee and the Executive Director of Transparency International Bangladesh (TIB) recently stated that an estimated 12-16 billion USD was laundered annually during the previous Awami League government. Is it feasible to recover such a vast amount of illicitly transferred funds? Do you believe the government’s current initiatives are sufficient to repatriate this laundered capital? 

Repatriating illicit funds is indeed a challenging task. The Bangladesh Bank has a dedicated unit for this purpose, the Bangladesh Financial Intelligence Unit (BFIU). A crucial first step is to bolster the BFIU’s capacities. The capacity can be enhanced by recruiting skilled experts and advisors with forensic audit experience. A significant portion of stolen funds is often laundered through techniques like over-invoicing and under-invoicing. Forensic audits can be instrumental in pinpointing the tentative amount of money illicitly transferred by individuals or groups. 

Another important measure should be establishing Mutual Legal Assistance Treaties (MLATs) with various countries, particularly those within the United Nations Convention against Corruption (UNCAC) and The Financial Action Task Force (FATF) frameworks. Since Bangladesh is not currently a member of the FATF, joining such international organizations and seeking their support would be advantageous. 

Also, the government might already know about major money laundering destination countries. Requests can be made to these countries to freeze the laundered funds or assets derived from them. Establishing diplomatic bilateral agreements with these nations is crucial. It is important to remember that laundered money has been integrated into the economies of these countries. Therefore, they could be reluctant to return these funds without any incentives.

The government could consider offering incentives for voluntary repatriation. For example, individuals who return illicit funds within a set timeframe could receive benefits like waived penalties or reduced tax liabilities. In any case, strong legal measures should be taken against all money launderers. 

Investment activities in the country have been downward for several years, with a notable decline in recent months. What immediate policy interventions should the government consider to mitigate this crisis?  

The current investment slowdown is a continuation of past trends, worsened by recent interest rate increases and economic uncertainty. The silence of major domestic conglomerates close to the past regime, who were once significant investors, has further hindered investment. 

Also, the country’s private investment growth rate had always remained sluggish at around 10-14%, and it never took off over 22-23% of GDP. Think about the East Asian countries. They experienced a significant investment boom in the 1970s, with private investment growing at more than 25-30% annually. During those decades, their private investment to GDP ratio was over 30%. Our economy also requires a similar 10-15-year period of accelerated investment like East Asia. 

What needs to be done to increase the private investment in Bangladesh? It has been well-documented in many policy documents. There are detailed sectoral studies available as well. Given that the issues plaguing each sector and the required reforms are well-documented, what is now needed is strong and visible actions. 

In this regard, the Special Economic Zones (SEZs) could be a game-changer. The examples of Hong Kong, China, and Vietnam implementing plug-and-play systems within their SEZs could be a path we should pursue. 

Another crucial factor for foreign investment that is not often considered important is the country’s image regarding labor rights issues. Recent political uncertainties, labor issues, and minority issues must be strongly addressed to assure international investors about the stability and security of their investments. 

Inflation remains one of the country’s most pressing issues, with rising prices severely affecting the general population’s purchasing power. Do you consider the government’s current anti-inflationary measures adequate? 

The root cause of the country’s current inflationary situation is a supply-side shock. Policies aimed at boosting product supply are crucial to address this. While reducing import duties on certain products is a step in the right direction, its impact may be limited without corresponding regulatory reforms. 

For example, logistics infrastructure remains a major and longstanding challenge. While reducing import duties is a step forward, it’s insufficient without parallel improvements in logistics facilities. 

One recent example is that although the government has permitted egg imports by lowering tariffs, these eggs often get stuck at land ports because there is no testing facility. The time-consuming process of transporting eggs to Dhaka for inspection, certification, and other paperwork increases business costs, thus hindering imports. In the short term, these processes could be expedited by establishing mobile testing laboratories. Additionally, the import process is burdened by excessive and largely manual documentation. Streamlining this documentation process is crucial for efficient trade. 

Bangladesh’s tariffs are among the highest in the world. Given the nation’s food security concerns, the primary focus should be ensuring affordable food, not revenue generation. Reducing tariffs on essential food items is crucial. The cartels dominating the feed industry must be dismantled. Lowering feed prices would reduce the prices of beef, eggs, poultry, and fish. The government should also monitor the market regularly. 

We must remember that monetary policy is ineffective in an open economy under a fixed exchange rate regime. So, I am not hopeful about its effectiveness. What we need and what will work are supply-side policies.  

In light of the shifting political landscape in the United States and changing dynamics with neighboring countries, what policies and strategies should be adopted to ensure stability and resilience in foreign trade?

You can’t choose your neighbors. With this reality in mind, our trade policy must be formulated accordingly. The best approach is to pursue a policy of diplomatic friendship with all, especially by fostering regional cooperation. In this context, associations like the South Asian Association for Regional Cooperation (SAARC) and the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) can play crucial stepping stones. Diplomatic engagement is imperative for this. 

On the other hand, the newly elected US president’s business-driven foreign policy should not significantly affect our diplomatic ties. 

As Bangladesh’s annual debt repayments continue to rise, what essential considerations should the government take into account?

The country’s export earnings are increasing, and remittances from our expatriates are also showing a positive flow. If these trends continue and we can curb capital flight, our foreign exchange reserves will remain stable. 

The government has taken significant foreign debt in the past few years, especially for infrastructure development, including several lavish projects. We need to avoid such extravagance. Also, loans should be secured as soft loans from donor agencies. New foreign-funded projects must be implemented effectively and timely. The Anti-Corruption Commission (ACC) should be more vigilant in overseeing these projects to curb corruption.

What policies are needed to ensure stability in the power and energy sector? 

The lack of modernization of the national grid remains a significant challenge for our country’s power sector. Approximately 33% of the electricity generated is wasted, resulting in nearly $247 million in annual losses. Again, numerous power plants have been established under the past regime, often motivated by rent-seeking behavior rather than a long-term focus on economically viable power generation. 

However, in some cases, renewable energy is considered significantly more cost-effective. Bangladesh enjoys the geographical advantage of being situated within the tropics, allowing for prolonged sunlight hours, making it ideal for solar energy. Other options, such as biogas technology, have undergone significant modernization. 

We can offer tax breaks and other incentives to encourage the installation of solar panels and other renewable sources. The construction of nuclear power plants is underway. We must ensure that these plants become fully operational once completed.