Burdened with rising bad loans and lack of governance, the banking sector of Bangladesh has become a growing malignancy for the economy, according to the Centre for Policy Dialogue (CPD).

“If the current trend of mammoth non-performing loans, inefficiency and lack of governance continues, the banking sector can cripple a flourishing economy instead of contributing,” CPD Research Fellow Towfiqul Islam Khan said yesterday while unveiling its interim review of Bangladesh economy for the 2016-17 fiscal year.

Moderated by CPD Executive Director Fahmida Khatun, the organisation's distinguished fellows Debapriya Bhattacharya and Mustafizur Rahman also spoke at the programme in the city's Brac Centre Inn.

The independent think-tank said Bangladesh's economy would post a respectable growth in the current fiscal year, but termed the persistent weakness in the banking sector, falling remittance inflow and sluggish export growth “disquieting signals”.

The CPD said the banking sector burgeoned over the years in terms of number of banks, volume of assets and contribution to the economy.  Despite achieving a significant growth, the sector is currently faced with some serious challenges.

“The overall performance of banks, particularly of the state-owned commercial banks, is far from satisfactory,” said the CPD, adding that the sector was struggling to recover from the setbacks of large financial scams in some public and private banks unearthed in recent years.

“Most of the indicators reveal a poor health and lack of discipline in several banks,” said the CPD in its review.

It suggested that the VAT rate should be 12 percent under the new VAT law.

The VAT rate should be lowered in phases, if not possible at a time. Otherwise, the new VAT law would put increased pressure on producers and consumers, said the organisation.

The CPD said non-performing loans (NPL) rose to Tk 73,409 crore during January-March of 2016-17 fiscal year from Tk 62,170 crore in the preceding quarter. The toxic loan rose to 10.5 percent of total loans in March this year from 9.2 percent in the previous year.

The total amount of NPL in six public banks went up to Tk 35,717 crore from Tk 31,026 crore in the previous quarter.

The think-tank said the flexible loan rescheduling policy adopted by Bangladesh Bank in December 2013 didn't bring positive outcomes as expected.

According to the organisation, Sri Lanka and India has a much lower NPL than Bangladesh. However, Pakistan has seen a poorer performance in terms of NPL.

“Increased non-performing loans in Bangladesh were the result of relaxed recovery efforts, financial fraudulences, lack of governance and political influence,” it added.

The CPD questioned the regular recapitalisation of state banks with taxpayers' money.

“In a resource-constrained country, the opportunity cost of such a large amount is high. The fund could be used for social sectors where budgetary allocation falls short of requirement,” said Towfiqul.

The CPD demanded formation of a financial sector commission to look into the challenges facing the sector.

Implementation of the new VAT law, possible depreciation of Taka, rise in rice prices and another round of increase in the prices of electricity and gas might cause a rise in production costs, said the organisation.

About putting the provisional GDP growth at 7.24 percent for the 2016-17 fiscal by Bangladesh Bureau of Statistics, the CPD said growth would decline at the final count as the latest estimate was made based on limited available information and without considering the recent trends in the key economic sectors.

It observed that projection was made based on data of the manufacturing sector for five-six months which could not capture the falling growth rate of export earnings in the latter months.

The growth of agricultural GDP was shown higher than last year's although floods in the country's haor areas, blast attacks in some districts and heavy rainfall caused losses of around 16 lakh tonnes of rice, according to Towfiqul.

Replying to a question on the issue, Debapriya said discussions should focus on transformational changes of the economy instead of growth.

“Our perception is that the economy is growing, but jobs are not being created proportionately. It appears that a capital intensive growth is taking place.”

About the sluggish private sector investment, the economist said despite efforts in the last few years, the private sector didn't see a breakthrough.

“The growth of the economy is being driven by the state at the moment, not by the private sector,” he said.

Three symptoms were signaling at the stagnant private sector investment, he said citing illicit flow of money out of the country. “The CPD's past analysis suggests that capital flight goes up significantly as elections get closer.”

Debapriya said Bangladeshi entrepreneurs were considering many African countries as attractive investment destinations instead of investing in the country. “Entrepreneurs are willing to export capital from a capital starved country where investment is not picking up. It sends out a big signal about the prevailing situation.”

Another major change was the move towards consumption compared to investment, added the economist, citing Bangladesh becoming the fifth largest market for BMW in Asia as an example. 

Referring to the sluggish growth of export and decline in remittances, he said, “There is a crack in the wall. But the most important change is that we have not seen proactive macroeconomic management.”

Prof Mustafizur said it was important to look into the source of growth, job creation and whether it was helping the country boost its competitiveness.

“We have to ensure quality education, introduce a universal health insurance scheme, and transition towards social security from social safety net. These have to be implemented in phases, not in a single year.” 

About the cost escalation of projects, he said discipline was not maintained during procurements when a project's implementation time overruns, creating scope for lack of governance and corruption.

The CPD recommended formation of a public expenditure review commission to ensure quality of public investment.