Bank sector collapse, share market crash orchestrated by the same group

Let's start with the latest decision of Bangladesh Bank. Even if a company of any business group is a loan defaulter, any other company of the same group will still be able to take loans. How do you view this decision? How consistent is it with the government's roadmap to resolve the banking sector crisis?

Mustafa Kamal Mujeri: This decision does not reflect any effort to emerge from the culture of default that has developed here. If a company of any business group is a loan defaulter, any other company of the same group will still be able to take loans -- this decision will encourage loan defaulters. This will certainly weaken our endeavour to break away from the default culture. This will facilitate the loan defaults in a way. We needed to take stern measures to recover the dues from the loan defaulters.

This decision isn't quite consistent with the policy declared by Bangladesh Bank or the government to resolve the banking sector crisis. A loan defaulter is a defaulter by definition. Action should be taken against him with no matter what. On principle, it is not acceptable to be able to take a loan from one company, when another company of the same group is in default.

The process of merging banks has begun. Padma has been merged with Exim Bank. Other mergers are heard to be in the pipeline. For example, Rajshahi Krishi Unnayan Bank is being merged with Bangladesh Krishi Bank, BDBL with Sonali Bank. Will this decision to merge banks retrieve the banking sector from the existing crisis?

Mustafa Kamal Mujeri: It is not correct that the weaknesses in the banking sector will be eliminated if weak banks are merged with strong banks. There are specific reasons behind banks becoming weak. Simply merging weak banks with strong banks without eradicating those reasons is not the answer. One of the major reasons behind a bank falling weak is the lack of good governance. It is because there is no good governance that the default loans have accumulated and reached this extreme level. Our banks have been rendered weak because of the lack of good governance and also because of default loans.

There is talk of merging the government sector banks -- Sonali Bank with BDBL, Rajshahi Krishi Unnayan Bank with Bangladesh Krishi Bank. It is being said that the bad loans of these banks will be handed over to an asset management firm. On paper it may then seem that the bad loans have decreased, but these banks loans will simply continue to increase unless good governance can be established. Bad loans have accumulated down the years in our banks.

The thing is, those with bad loans are mostly willful loan defaulters. The weaknesses in our banks will not be fixed by merely merging the weak ones with the stronger banks. If the banks are merged without ensuring good governance, in the coming days it will be seen that the bad loans have simply piled up all over again. Certain groups are using the banks in their own interests. Unless we can strongly smash the culture of cronyism at the roots, the problems will not be solved either by mergers or by handing over the bad loans to asset management companies. The problems will simply intensify in the future.

The strong banks are under a sort of pressure...

Mustafa Kamal Mujeri: If the weak banks are merged with strong banks, they will face fresh challenges. Handing over the bad loans to the asset management companies will be another state-owned initiative which will run on government subsidy. This will create yet another burden for the government. Whether it remains with the banks or the asset management company, the bad loans must be recovered. If there is no effort to recover the bad loans, no matter what solutions we may devise, the problems will not be resolved.

We have seen a serious crash in the share market. The investors have lost a trillion taka (one lakh crore taka) in one and a half months. Why have we failed to establish a sturdy and stable share market even after so many years?

Mustafa Kamal Mujeri: The share market crash is nothing new over here. Such crashes occur after regular intervals. That means the share market is still not on firm footing. There are many reasons behind this. People have lost confidence in the share market. A share market in which no one has confidence can never be conducive to our development. The manner in which the share market manipulations take place, it is the common investors who bear the brunt. Many of the common investors in the share market have lost everything. These are foreboding signs.

The share market has played a significant role in our economic development. If the share market is run properly, it will accelerate our economic development. But the results will be quite the opposite if there is one crash after the other and the common investors lose everything. The one trillion taka losses faced by the common investors in a matter of month, has certain benefitted a certain vested group. They have manipulated the market and made money by illegitimate means.

Price fluctuation in the share market is very natural. However, a line has to be drawn somewhere. There have to be valid reasons. What is happening here is nothing but manipulations. The question is, who are the manipulators? The powerful quarters who are capable of controlling the share market are the ones who are carrying out the manipulations. Just as a powerful group is weakening the banking sector and pushing it to the brink of destruction, similarly a vested group is manipulating the share market to make huge profits and to send the market to the brink of collapse. This group is destroying all the institutions that can play a role in our economic development.

The government fixed the price of 29 items during Ramadan, but this was not effective. There are attempts to fix the price of rice. How realistic is this in an open market economy?

Mustafa Kamal Mujeri: Market economy exists in almost all countries of the world now. In the past, socialist economy was in place in many countries, but not anymore. It is the market that determines the price of any commodity. A market-based economy is in place in Bangladesh. The government fixed the price of 29 items, but it couldn't provide those items to the people at that price. That is natural. If the government is to ensure that the people get the commodities at fixed price, they will have to sell the products to the people. They won't be able to rely on the market system. Fixing the price of commodities is a decision not consistent with the market system. It will not be possible to enforce this.

The prices of various commodities in the market fluctuate abnormally. Today the price of potatoes may shoot up and tomorrow the price of eggs may spiral. The government thinks they can solve this by fixing the prices. This is not a solution in market economy. We must first determine the reason behind the price hike. If that can be addressed, the prices will stablise. The main problem lies in the market's value chain. There are many players between the producer, the importer and the consumer. Certain players in the value chain take advantage of the weaknesses in the market system and hike the prices up abnormally. We must pinpoint the weaknesses in the value chain. If we can eliminate those weaknesses and make the value chain competitive and functional, then the syndicates will not get the scope to abnormally inflate prices. But instead, the government is fixing prices. This is not effective at all.

In a previous interview you had said that the economy cannot be right if politics is not right. What is the state of politics now? Do you see any indications of politics being fixed? Do you see politics behind the share market crash?

Mustafa Kamal Mujeri: In developing countries like ours, politics, economy and social policy are all interlinked and cannot be isolated from each other. These are all intricately interconnected. If politics runs well, if a democratic environment exists, this has a positive impact on the economy. If the economy is on the right track, politics will benefit. While there are global reasons behind our present economic crisis, there are domestic reasons too. Politics is particularly a reason.

Our politics is not healthy. The economy has fallen into a crisis because of sick politics. We have not overcome this crisis as yet. We have failed to overcome high inflation and restore macroeconomic stability to get back on the development track. The question is whether we have been able to emerge from out of the political crisis after the election. The election was not acceptable to all. As a result, after the election we do not see a stable situation that is conducive to the growth of our economy. There are no signs of this in coming days either.

We have been somewhat derailed from the track along which our economy was to proceed. Our grown rate has dropped. Where our growth should have been 7, 8 or 9 per cent, the World Bank predicts a 5.6 per cent growth rate. After Covid, we have not been able to return to the correct roadmap for growth. We have not been able to return to our previous state whether in the financial sector, foreign exchange reserves and other areas. The stable political environment required for us to reach our aspired goal, has not be achieved.

The finance minister has said that any dilemma over the improvement of our economic system has been cleared. As an economist, what is your assessment?

Mustafa Kamal Mujeri: It is a matter of mindset. It is an important matter of consideration as to what we will call a problem and what we won't call a problem. The statement that there is no problem in the economy, indicates that certain important areas of the economy are not being paid due attention. There were certain problems in our economy that took on alarming proportions over the past few years. Have those been overcome? If we consider inflation, we will see that we have not been able to overcome high inflation over the past two years. Our inflation is much higher than was projected. Have we been able to emerge out of our banking sector weaknesses? Have we been able to overcome our share market scams? Have we been able to increase our foreign exchange reserves?

There is no economy in the world free of problems. There are problems in the US economy, China's economy, Russia's economy, all economies. That is true. Given this reality, these problems must be acknowledged and efforts made to solve them. If we do not acknowledge these problems, then we will not be able to take our economy, our development, to the right track. We must identify the problems. We must fix our priorities. Denying the problems is not a very positive mindset.

Do you think the foreign exchange reserves are at risk? Do you see any solution in the offing?

Mustafa Kamal Mujeri: Where our foreign exchange reserves used to be USD 48 billion, in a short span of time it plummeted to USD 20 billion. There are many reasons behind this. We have had to take many austerity measures in order to maintain the reserves at USD 20 billion. Imports are being controlled to an extent. Imports contribute to our economic development. We import almost everything from raw materials to spare parts for manufacturing. We import a large part of our fuel. We even have to import food.

We have artificially kept imports in control so as to ensure our foreign exchange reserves do not fall further. This can be a temporary measure, but if this policy remains in place for long, it will have an adverse impact on development. If the foreign exchange reserves are to be increased, then holistic measures must be taken involving the foreign currency exchange rate, imports and exports, revenue policy and so no. If we cannot restore macroeconomic stability, then pressure on foreign exchange reserves will remain.

Remittance is an important sector for increasing reserves, but remittance is not increasing.

Mustafa Kamal Mujeri: Exchange rates play a strong role behind the failure for remittance to increase. Generally speaking, alongside the formal channels, remittance comes here through informal channels or hundi. If it is more profitable to send remittance through the illegal channels or hundi, then remittance will inevitably come in through that channel. If we compare the volume of our people going overseas over the past two or three years, then the remittance flow should be much higher. Most of the people who have gone overseas are workers. Most of them have taken loans to go abroad. They are having to repay that money. They are having to send money to their families too. They must send that money and they are doing so. But that is not coming through formal channels and therein lies the problem. The exchange rates must be competitive if the remittance is to come through formal channels. But we have held on to the exchange rate. We have not been able to leave the exchange rate to the market. Now the scope to send remittance through legal channels has increased a lot. There are the banks and remittance is also being sent through digital means. If the exchange rate could be market based, then remittance through formal channels would largely increase.

Our foreign debt has increased significantly. This pressure will increase further in the days ahead. How will we face this pressure?

Mustafa Kamal Mujeri: ERD records show that the volume of our debt repayment is increasing abnormally over the next two or three years. That is because we have undertaken many mega projects. Rather than taking these loans from multilateral agencies like the World Bank and ADB, we have taken the loans from bilateral sources. The deadline for repayment of such loans is short. The volume of repaying these debts will steadily increase in the days ahead.

A lot of pressure will be created on the reserves. That means forex reserves must be increased. The two sources of our reserves are export revenue and remittance. The main weakness in our export sector is that it is basically dependent on readymade garments. That market is not very extensive.

The initiative taken to diversify exports has not been successful. The policies and efforts were inadequate. There are limitations in the area of remittance too. Most of our migrant workers are unskilled.

Sri Lanka's economy had gone to the brink of collapse, but how did the country turn around? Can we take any lessons from them?

Mustafa Kamal Mujeri: Sri Lanka's economy was on the brink of collapse, but it has recovered rapidly from that situation. Sri Lanka's economy had been strong and durable among the South Asian countries. They are ahead in many indicators. Sri Lanka had adopted some mistaken policies. They revised those and rapidly retrieved their economy. The lesson we can learn from Sri Lanka is to acknowledge the problems. The problems will not go away if they are not acknowledged.

Our weakness is that we take up good policies in many areas, but cannot implement these properly. A certain quarter acts as an obstruction. When they see a policy is not going in their favour, they reject it or obstruct it. Bad loans are an example. Bangladesh Bank talks about lessening the bad loans, but if they try to do so, that quarter's interests are harmed. There is no justified reason for the price of onions and potatoes to shoot up. We cannot implement many polices for these vested interest groups. If we really want to stimulate our overall economy, these weaknesses must be overcome.

Thank you.

Mustafa Kamal Mujeri: Thank you too.