Moody’s rating not appropriate: Bangladesh Bank

Bangladesh Bank (BB) on Friday said said recent ratings by international rating agency Moody’s didn’t appropriately reflect the positive changes that happened in the political and economic areas following the mass uprising and installation of an interim government led by Nobel laureate Professor Muhammad Yunus.

In a statement, the Bangladesh central bank mentioned that the change of sovereign ratings by Moody's is tantamount to "looking through the rearview mirror" while the car is moving forward.

On 19 November, Moody's has downgraded the ratings for Bangladesh from B1 to B2 and affirmed the short-term issuer rating as Not Prime. The rating agency’s outlook has also been changed to negative from stable. In explaining the downgrade, Moody’s mentioned about heightened political risks and the possibilities for lower economic growth.

At the statement, the central bank said that Bangladesh in July 2024 underwent a historic political transformation, driven by a student-led uprising and widespread public support.

The new Interim Government formed in August 2024 with the backing of student-led mass movement and support from all major political parties has initiated fundamental reforms in key areas, including the economy, law and order, anticorruption measures, democratic/election processes and public administration.

To tackle economic and financial challenges, Bangladesh Bank has implemented a comprehensive set of measures, it said.

The measures include- constitution of three task forces with a view to undertaking and implementing a comprehensive asset quality review of bank assets leading to a comprehensive banking sector reform programme; strengthening and refocusing the operations of the BB and pursuing stolen asset recovery at home and abroad, the BB statement said.

Simultaneously, the government established a national task force to re-strategize the economy and mobilize resources for equitable and sustainable development. These task forces have already commenced activities, engaging in extensive consultations with relevant stakeholders, it added.

The central bank said the Interim Government inherited significant challenges in the macroeconomic front characterized by large imbalances in the balance of payments, rapidly declining foreign exchange reserves and a sharply depreciating exchange rate of the domestic currency. The inflation rate also accelerated, causing hardships for citizens. Notable success has been achieved in stabilizing the external sector indicators over the last four months.

Bangladesh Bank said, since August 2024, the exchange rate has remained stable at around Taka 120 per USD, supported by an ongoing surge in remittances and export earnings. During the first four months (July-October), the external current account has improved from a large deficit to a virtual balance, the financial account also strengthened from a net position of large outflows to a net position of sizable inflows, and the overall balance improved by more than one billion dollars.

The statement said, BB has refrained from selling dollars and foreign exchange reserves have stabilized around US$19 billion (based on the BPM6) during this period. It’s also required to mention that the outstanding payments arrears of $2.5 billion as of mid-August- accumulated over the last two years by the previous government-have been reduced to about $450 million over the three-month period.

Bangladesh Bank’s statement said that these positive outcomes indicate that external sector vulnerabilities have been addressed and further improvements are expected with continued strong remittance inflows and sustained export earnings, backed by BB’s prudent policies.

The financial sector has been burdened with the legacy of serious mismanagement and state sponsored siphoning of bank deposits by certain families or groups with support from the previous administration, it said.

The statement said Bangladesh Bank acted decisively by replacing the boards of directors in 11 banks. Operational activities, liquidity management and performance of these banks are now being monitored daily, leading to early signs of stabilization in these banks. BB has provided guarantees to cash surplus banks, enabling them to extend liquidity support to liquidity-shortage banks. This has positively impacted liquidity management of weaker banks, eliminating the need for BB to inject high-powered money.

The BB statement noted that country’s largest bank Islami Bank Bangladesh PLC has already earned the confidence of its customers and registering sizable positive cash-flow and remittance growth, and thus it is not likely to require further liquidity support from other banks. Some other banks are also moving in that direction with restoring customer confidence.

The central bank said, it’s fully committed to resolving the liquidity problem in a few other banks and is working on a comprehensive bank resolution strategy being developed with support from the IMF, World Bank and the US Treasury.

It said, Bangladesh’s central bank firmly believes that there is no systemic risk to the banking system and there will be no contagion effect. The risk of a banking sector crisis- which emerged under the previous government- has been largely mitigated.

Though the banking sector indicators do not show noticeable improvement yet, BB expects a positive turnaround in the near future, the statement hoped.

Bangladesh Bank statement said, the taskforce on banking reforms, supported by the Asian Development Bank (ADB) and the World Bank (WB), will conduct an asset quality review (AQR) of problematic banks which will commence in the first week of December 2024. The taskforce will also work on developing a recovery and resolution framework for banks, along with relevant guidelines and policy measures.

The central bank said, controlling inflation remains a top priority for policymakers. Substantive policy measures are already in place on both demand and supply sides to bring down inflation in the coming months.

On the demand side, BB has tightened the monetary policy stance through abandoning the policy of fixing the interest rates and letting them be determined freely by market forces, contributing to a sharp increase in the whole interest rate structure; refraining from printing new money to finance the fiscal deficit; increasing the Policy Rate in three equal monthly steps from 8.5 percent to 10 percent in October; and undertaking credible measures to cut significantly the fiscal deficit and domestic borrowing requirements for budget financing, the central bank said.

Pointing out the steps taken on the supply side, the statement said, a number of important steps have been taken to reduce price levels and contain price pressures. These measures include- the stocks of various fertilizers have been fully replenished by clearing all payment backlogs and by fulfilling additional demand for foreign exchange to ensure an uninterrupted supply of agricultural inputs; taxes and import duties on various essential products have been cut significantly or eliminated completely to help increase supplies at reduced landed cost; all LC margins on non-luxury items have been eliminated and banks have been urged to give priority to opening of LCs for essential consumer goods; and by addressing the domestic supply chain-related distortions.

The statement said the food inflation still remains high and volatile due to flood related massive loss of crops and vegetables and disruptions in supply chain. However, the less volatile nonfood inflation declined for three months in a row through October, despite price pressures on the food side.

It said the government believes that all necessary demand and supply side measures are currently in place, and everyone must allow the necessary time for the transmission mechanisms to work and bring down inflation in a sustainable manner to the target range of 5-6 percent.

the central bank noted that the economy of Bangladesh is undergoing a major transformation and it will take more time for the positive impacts of various government actions to fully materialize.

Domestic political support for financial sector reforms and strong support from international partners underpin the prospects for further momentum to economic recovery, it added.

BB, however, hoped that Moody’s will soon undertake a more comprehensive assessment of Bangladesh economy after visiting Bangladesh and get first-hand experience by consulting with the relevant stakeholders and experienced economic observers.

Only then it should be able to make a proper and objective assessment of the policies adopted, developments already recorded and the economic outlook likely to unfold in the near future, the BB statement said.