Tight Credit And Inflation Cast Shadow Over Economy

Huge pressure of debt obligation, Govt is in a precarious position.

Downgrading of Bangladesh's credit rating by Moody’s and S&P cast shadow over economy. In addition, Fed's policy rate hike also contributed to raise the international lending rate. Many Bangladeshi companies borrowed heavily from international banks at market rate.

Several news reports indicate that Bangladesh has to pay $12 billion this year alone to respect its debt obligation. Govt has to pay $3 billion and the rest will be paid by the private sector. Dwindling reserves, now stand somewhere around $20 billion, gives little room for optimism that Bangladesh will overcome the debt hurdle¹.

Meanwhile, govt keeps raising the fuel price but it is unlikely to get the next tranche of IMF credit package.

Earlier Bangladesh’s repeated failures to clear energy dues had drawn media attention. Govt intervened to settle the matter. This ultimately led to downgrading of credit rating.

Bangladesh Bank removed all kinds of cap on lending and deposit rates in the midst of soaring inflation, aggravated by macroeconomic mismanagement. Consequently, SME credit rate has also increased. Being one of the crucial sectors for creating jobs and economic activities, SME sector also witnessed slow down in growth.

More recently, a series of scam in Islami Bank,one of the biggest provider of SME credit,cast shadow over SME business. One little known Nabil Group swallowed taka 9.5 billion.Apart from that upstart companies and employees took loan in the name of other people who do not know nothing about the loan. In addition, directors of the bank are also accused of corruption and money laundering.So the management board decided to curb the power of branch manger and made it mandatory to take board's prior approval in taking loan excess of taka 5 million. This will evidently lower the pace of credit to SME sector, which is getting less credit as govt and public institutions borrow heavily from the banks.

Meanwhile, harsh climatic conditions augur ill for food security. India banned export of all kinds of rice except basmati. It may also stop exporting sugar as heavy downpour cast a bad spell for sugarcane cultivation. Thailand refused to make early commitment as it anticipates further rise in price of rice.

Despite this upward pressure on price levels, many countries managed to contain the inflationary pressure. In Bangladesh ,inflation shows no sign to abate.

Since govt has huge debt obligation, there is no other option to print money. Loan gets costlier due to credit rating downgrade. So inflation may soar further,which may be ensued by further rise in interest rate. One silver lining is that a participatory election may improve the situation. But if no drastic reform program is taken, economic situation may further deteriorate. Big depreciation of taka may also happen.

Limited access to foreign credit and rising inflation may put further hurdle in economic recovery. Tougher economic policies lie ahead whatever political creed will form the govt.

Notes And References

1. ”Agami Char Mashey Baro Billion Dollar Shodh Korte Parbe Bangladesh?(Can Bangladesh Pay $12 billion In The Next Four Months?)”,BBC Bangla,August 2023. https://www.bbc.com/bengali/articles/ck7v03wz00vo