Bangladesh Bank wants ‘effective’ supervision of stimulus funds

Bangladesh Bank has recommended “effective” supervision of the coronavirus stimulus packages to stop defaulters from borrowing the funds.

In its January-March report, the central bank also said the implementation of the packages combined with monetary and fiscal policies may mitigate the downside risks of growth outlook and macro stability.  

“However, effective supervision is needed so that loans under the stimulus package might go to eligible entrepreneurs only,” Bangladesh Bank said in the quarterly report.

The government has announced 19 stimulus packages worth more than Tk 1 trillion to counter the economic slowdown created by the pandemic. These packages are planned for industry owners as loans from banks. The government will pay half the interests.

The central bank has also taken steps to ensure that the banks do not face liquidity crisis. But a slow rate of implementing the packages left businesses frustrated. The Federation of Bangladesh Chambers of Commerce and Industry urged the banks to disburse the loans quickly.  

Bangladesh Bank had also asked the banks to distribute these packages within a fixed timeframe following a meeting between the chief executives of all banks and Governor Fazle Kabir on Jul 2. It wants the banks to disburse majority of the funds in July and wrap the work by August.

Bangladeshi garment workers make protective suit at a factory amid concerns over the spread of the coronavirus disease (COVID-19) in Dhaka, Bangladesh, March 31, 2020. Reuters

“The implementation of the stimulus package does not reflect the enthusiasm with which it was announced. That’s why the central bank has reminded the banks repeatedly,” said Khondkar Ibrahim Khaled, former deputy governor.

A lack of the banks’ willingness in disbursing loans to small and medium enterprises or SMEs also worries Khaled. “But they are the ones who suffered more losses during the pandemic. We need to make sure the banks provide loans to SMEs,” he added.

Ahsan H Mansur, executive director of Policy Research Institute, said: “The banking sector was not doing too well, and the COVID-19 pandemic has made their situation worse. Most of the banks will not be able to make profits this year, and it will be minimal for some banks which do.”

Businesses have defaulted on loans of trillions of takas, Mansur said. “If the stimulus package loans suffer defaults, the banks will be in trouble.”

“So the stimulus packages must be implemented under strict supervision,” he added

MIXED PICTURE

Economic activities portrayed a mixed picture in the third quarter of FY20 amid global supply disruptions and looming economic recession originating from the global outbreak of the COVID-19, Bangladesh Bank said.

As reflected in several indicators, activities in the agriculture and industry sectors remained “firm” in the quarter, while activities in the service sector appeared “somewhat moderated”.

On the demand side, weak private credit growth, which was 8.9 percent, falling import demand, which dropped by 8.8 percent, and decelerating remittance inflows with 0.2 percent growth together also pointed to “some moderation” of economic activities in this quarter.

Substantial government borrowings from banks, along with a decline in deposit growth, caused partly by the lower interest rate on deposits and partly by weak remittance inflows, resulted in some liquidity tightening in the banking system.

“Consequently, interbank money market rates manifested an upward movement, although the interest rates on deposit and lending kept falling,” the central bank said.

The current account balance deficit widened to $871 million from $774 million in the previous quarter, mainly because of a decline in remittance inflows and export earnings inflicted by the pandemic-driven impaired external demand.

Import payment fell by 6.74 percent year on year with a broader base due partly to export slowdown and partly to interruption of production in China - a significant source of imports.

On the fiscal side, faster government expenditure with 21.9 percent growth against a moderate revenue collection with 6.87 percent growth led to a higher budget deficit, rising to Tk 353 billion in the third quarter from Tk 318 billion in the second quarter. Of this deficit, about 55 percent was met from foreign sources in the third quarter.

Domestic economic activities are “likely to moderate” due to a nationwide shutdown in the April-May period, along with the slowdown in export and import growth.

The sharp contraction of global economic growth owing to the COVID-19 pandemic, uncertainty in the recovery of growth in major economies, continued supply chain disruptions, and sluggish global commodity prices are likely to dampen the growth outlook in FY20.

The banking sector is expected to play a greater role to channel funds to the economy to maintain growth momentum in coming quarters.

To ensure adequate liquidity in the banking system, Bangladesh Bank undertook several initiatives. It is likely that banks have to face many challenges, such as maintaining asset quality, implementation of 9 percent interest rate cap and recovery loan amid the fallout of the COVID-19 pandemic.

To ensure adequate liquidity in the banking system, Bangladesh Bank reduced CRR and scaled up refinance for CMSME, large industrial units and agriculture.