Liquidity crisis holding back investment in pvt sector

Fresh investment in the private sector has declined owing to liquidity crisis in the banks.

In the past one year, bank credit for investment in the private sector has fallen by a third.

According to private think tank Centre for Policy Dialogue (CPD), the investment scenario during this period has worsened due to liquidity crisis and discrepancies in interest rates between banks and government savings tools, rising default loans and the fall in bank deposits.

CPD apprehends decreasing investments might have a big negative impact on industrial growth and employment generation in the country.

Referring to Bangladesh Bank’s January-June 2019 Monetary Policy Statement (MPS), the CPD on Tuesday told a press conference that the banking sector has been suffering a liquidity crunch for the last several years due to increasing bad loans and ebbing deposits.

The crisis has deepened even further in the last one year, it viewed.

CPD organised the press conference titled “Review of National Economy and Ensuing Budget” at CIRDAP auditorium in the capital.

The press conference was told that credit flow from the banks to the private sector in the last one year fell by over five percentage points.

At the end of March this year, it was 12.42 per cent while it was 17.98 during the corresponding period last year.
CPD Distinguished Fellow Dr Debapriya Bhattacharya said depositors are afraid of the future of banks due to rising defaulted loans.

“As a result, banks are not getting fresh deposits. Besides, as the rates of interest on bank deposits are low, people are investing in savings instruments, which in turn has reduced the banks’ capacity to disburse loans,” he added.

As per BB’s latest MPS, private sector credit flow decreased most in the industrial sector.

In March 2014, the credit flow was 26 percent, which fell to 16 percent in March 2019.

The second highest fall in credit flow was in agriculture. In 2018, credit flow in the sector was 14.8 percent, which now stands at 7 percent.

The economists held defaulted loans responsible for the fall in the credit flow.

As per BB report, till March 2019, the amount of bad loans stood at over Tk 1,10,000 crore. One year back, the amount was Tk 73,000 crore. So the banks are unable to give loans owing to liquidity crisis.

CPD Senior Research Fellow Towfiqul Islam Khan said the banks cannot give fresh loans as a great part of their credit has soured.

The central bank has been selling dollars to meet import deficit but this will create pressure on the economy, he added.

As credit flow decreased, the investment has not been increasing in line with GDP. The private sector investment has been hovering at around 23.4 percent in the last few years.

Credit flow to small and medium industries is also decreasing.

The investment in small and medium industries has fallen from 31 percent to 14 percent in six years, according to Bangladesh Bureau of Statistics (BBS).

As a result of lack of investment, the private sector is also not being able to create employment opportunities at an expected level.

Over the last several years, the target of generating 20 lakh employment annually could not be met.
According to BBS, 13 lakh employment was created in 2018 while the amount was 14 lakh in 2017.