Dr Mustafa Kamal Mujeri is the executive director of the Institute for Inclusive Finance and Development (InM). He had served as chief economist of Bangladesh Bank. He has taught at Rajshahi University, was an expert at the planning commission and also was a UNDP consultant for the government of Cambodia. In an interview with Prothom Alo's Monoj Dey, he speaks about the banking sector, default loans, the dollar crisis, inflation, Bangladesh joining BRICS and other aspects of the economy.
Q :
The tenure of bank directors has been raised from 9 years to 12. In 2018 it has been raised from 6 years to 9. If one company of a group defaults in loan repayment, other companies of the group can still avail loans. This scope was not there in the past. What impact will this have?
Our banking sector has weakened steadily. For some time now we have been seeing the outward manifestation of the crisis that has been building up in the banking sector. Many banks were running well, but various problems have cropped up in those too. And in recent times, it has been noticed the bank directors too are responsible for the weaknesses in the banking sector. If we want to make the banking structure strong and healthy, it is imperative to take necessary measures to address the existing problems. Extending the tenure of the directors and allowing a company of a group to avail loans even though another company of the same group is in default, will not serve to resolve these problems. There is evidence that the directors are directly responsible for the present predicament of the banking sector. They should have been given a strong message. But these measures will give quite an opposite message.
There has been rampant cronyism behind taking decisions. Such decisions go completely against public interests and national interests. The process in which the tenure of bank directors has been increased is very questionable. When the bill was first placed in the national parliament, the matter of extending the directors' tenure hadn't been included. The parliamentary committee hadn't given any amendments in this regard either. This was passed in the national parliament with literally no discussion or debate. The manner in which the amendment of such an important law as the Bank Company Act was passed, was hardly a democratic or transparent procedure at all.
Q :
The dollar crisis has been on for over a year now. Many banks, the Islamic banks in particularly, are suffering from a liquidity crisis. There is the taka crisis along with the dollar crisis too. Why is the crisis continuing for so long?
The dollar crisis and liquidity crisis of today hasn't cropped up all of a sudden. No attention was paid to the problem when it was still not that acute. It was nurtured. When the problem exploded, then it more or less went out of our control. The gap between supply and demand of the dollar that has been created, is hardly likely to be resolved any time soon. Our economy is import-dependent. Food, raw materials for the industries and everything has to be imported. If this import-dependence could have been somehow decreased, the crisis would have been less acute. But decreasing the import-dependence on fuel, industrial raw materials and food is a long-term process. That is why there is no possibility of lessening the demand for dollars in the import sector any time soon.
The problem of dollar supply remains. Export revenue and remittance are the two major sources of our dollars. I see no possibility of any sudden increase in this area. If export revenue is to be increased, exports must be diversified, markets must be increased. Remittance is gradually on the rise, but this will not increase very rapidly due to various constraints. We will have to suffer from the dollar crisis, the foreign exchange crisis, not quite some time more.
We have taken up many mega projects. We are having to pay the installments on those. These will steadily pile up. IMF loans or loans from any other institution may provide temporary relief. We have to stand on our own strength. We have to look at both supply and demand so we can be more self-reliant.
The liquidity crisis in the banking sector is not an isolated matter. The liquidity crisis is an outward manifestation of the problems in our macro economy. Concerted efforts are required to overcome this.
Q :
Default loans are on the rise and yet concessions were made on loan repayment. Many see this as an additional perk for the businessmen before the election.
Giving concessions to loan defaulters is nothing new. Various governments at various times offer such concessions to loan defaulters out of their ulterior motives. It has become a tradition to give concessions to loan defaulters. In the case of the big loan defaulters, we have always facilitated them to pay a fraction of their loans and then drop them from the default list.
The existing default culture has been intentionally created here. In the name of facilitating unintentional defaulters, the intentional defaulters are being provided with these facilities. But the more these intentional loan defaulters get facilities, the more they will default. They see that the more they default, more they benefit. Whether it is because of the election or any other circumstance, default loans have entered the control of a corrupt coterie.
We will not be able to break away from the grasp of default loans without political commitment. It is cronyism that makes it impossible to break away from the default loans cycle. When the loan defaulters become partners in power, then it is very difficult to emerge from this unscrupulous circle.
By protecting crony interests in all spheres, we are going against national interests. But this cronyism is creating long-term danger for our nation and our development.
Q :
Moody's has downgraded Bangladesh's rating. This credit rating agency has also downgraded the rating of certain banks. What impact will this downgrading have at a time of the dollar crisis?
Our international trade and transactions terms and conditions are determined on the basis of the ratings of Moody's and other rating agencies. Financial institutions, the private sector, the currency market, the international companies in the share market, can all assess the strength and capacity of our economy on the basis of these ratings. It is based on this that loans are provided, L/Cs are opened and so on.
Moody's downgraded our credit rating because of our prevailing economic condition and weaknesses in the banking sector. As a result, when we go to transact in the international sphere, their confidence in us will fall. Conditions for transactions and loans will become tougher than before. This downgrading of the credit rating by Moody's has already pitched the banks into a problem regarding L/Cs.
Q :
The central bank governor has said it makes no difference to Bangladesh that Moody's has downgraded our credit rating. What is your opinion in this regard?
The ratings of these international credit rating agencies serve as proof of how strong our financial sector is. When we take loans from the private share market or carry out transactions, this is done on the basis of these ratings. So you can't just dismiss it by saying it makes no difference. We are not isolated from the global financial market.
Q :
Inflation has been high for over a year in the country. It is said to be a silent killer. Why are we failing to take effective measures to curb inflation?
There is a difference between inflation here and inflation in developed countries. Currency polices are used there to control inflation. They reduce currency supply in an effort to rein in inflation. This is often successful. But inflation in our country is multidimensional. Over here it is not just surplus supply of currency alone that creates inflation.
The global increase of fuel, raw material and food prices also plays a role in increasing inflation here. But the prices of these commodities have been on a downward trend for quite some time now. India has managed to bring its inflation under control. But our inflation is still over 9. I feel we are unable to control our inflation because we have no coordination in our policies.
A monetary policy was recently announced. But in our country, the role of the monetary policy in decreasing inflation is very narrow. Our revenue policy does not help in controlling inflation. We came up with a record big budget this time. We will have to take a record amount of loans from foreign and local sources. This is a loan-dependent budget. We do not see any revenue policy that is compatible to the inflation. This lack of coordination between the monetary policy and the revenue policy has kept inflation uncontrolled.
Q :
Our market management is extremely ineffective. There are syndicates everywhere. Is this weakness in the market instigating inflation?
Weaknesses in market management has exacerbated inflation. A few days ago, the prices of onion shot up in an uncontrolled manner. Such uncontrolled spiral of prices is not in keeping with production of market stats. Only after the government was forced to permit imports, did the price of onions fall by nearly fifty per cent. This is an example of our skewed market system. It indicates that our market is not functioning properly.
Certain individuals are able to manipulate the market. It is not just about onions. These persons take every opportunity to manipulate the market. These groups have direct link with the powers that be. It is necessary to dispel these institutional weaknesses in the market and free from the clutches of these groups. If inflation is to be decreased, coordinated steps must be taken in the three areas of monetary policy, revenue policy and market management. Disparate measures will not make a difference.
Q :
Bangladesh Bank has now taken up a policy to reduce the flow of loan in the private sector in order to decrease inflation. On the whole, how effective will this be?
If the government sector takes more loans, naturally the share of loans for the private sector shrinks. From production to employment, everything is dependent on the private sector here. The liquidity crisis, the weaknesses in the banking system, have all restricted the credit flow of our banks. If the credit flow in the private sector shrinks, or if they cannot avail the loans as required, this will have an impact on import and exports, employment and the overall economy.
As our share market is not strong, a large chunk of domestic investment comes from bank loans. With an interest in government sector loans, Bangladesh Bank must be on a look out for the crowding-out effect which has a negative impact on the private sector.
Q :
After three years, Bangladesh is finally moving away from the 9 per cent interest rate ceiling on loans. The new interest rate will be determined with the treasury bills. What impact will this have?
We have not fully moved away from the interest rate ceiling, just relaxed it a bit. In one sense it is an astute decision. In the prevailing circumstances of the interest rate is fully removed, interest rates on loans may increase excessively. Interest rates are not a big factor in business or investment, there are many other bigger factors in this regard. We need to move towards market-driven interest rates for the sake of sustainable investment. We eventually will have to go that way.
Q :
The banking sector is on a steady decline. What do you say?
The banking sector in our country is the main financial sector. The banking sector plays a big role in our overall development. But the bigger our economy gets, the more integrated it will be with the global economy. But the weaknesses that presently prevail in our banking sector will usher in a disaster. The global financial sector is becoming stronger, while our banking sector is afflicted with all sorts of ailments.
Strong, prudent and consecutive measures must be taken to free our banking sector from these ailments. Random measures are taken from time to time in our banking sector. Different messages are being given out at different times. The stakeholders are not getting any message from this. It is not clear to anyone where we want to go or what we want. Vested quarters are taking advantage of this murky situation.
Q :
Bangladesh is joining BRICS. What are the possibilities here and what are the challenges?
BRICS is a new initiative, still restricted to a few countries. BRICS can be viewed an alternative system in the prevailing global financial systems. But this is a challenging matter. After all, despite trying hard, the BRICS countries have still failed to emerge as a bit and strong group. BRICS will be able to meet very little of our requirements.
We must give much thought to what we want from BRICS, how much we want from it. We must consider what message we are giving by joining BRICS. The main question is, are we joining BRICS to challenge the existing global financial order or as a complement? It would be a mistake to join BRICS with a competitive mindset.