Financial World: The financial sector is a vital part of any economy, providing employment to millions of people and contributing billions to the GDP.

Financial World

In addition, it also has a significant impact on overall economic growth through its multiplier effects. These include increased spending power, savings, investment, credit availability, and foreign exchange reserves. However, the sector’s performance in Bangladesh has been negatively affected by various factors including recent global macroeconomic developments, geopolitical tensions, volatile oil prices, and ongoing political uncertainty. The current situation highlights an impending crisis in our country’s financial system which needs urgent attention. It may take several years before this crisis is resolved. In recent times, most developing countries have witnessed massive inflows into their banks which are largely driven by high-risk loans. According to official data released by the National Bank of Bangladesh (NBBS), the total advances from NBBS’ loan portfolio rose to Tk 16 trillion from Tk 7.2 trillion in 2019, while deposits from other commercial banks grew by almost 20 percent year-on-year in 2021. As a result, large banks received substantial amounts of new money, leading them to become more exposed to risk. This led to unprecedented withdrawals from local banks, causing further instability in the banking sector.

However, despite these challenges, the industry continued to grow by 1.5% annually in 2020 to achieve a record annual gross domestic product (GDP) of Tk 7.2 trillion, according to the Ministry of Finance’s latest budget statement tabled in Parliament on March 13. Moreover, for fiscal year 2022/23, the Government will continue to maintain the same pace of disbursements and increase the target to be disbursed at least Tk 8-9 trillion by FY24, except for short-term government bonds. Overall, however, we see that there is currently a slowdown in demand for long-term securities. Interest rates are being raised by Central Banks as well as local banks. For instance, NBFSA raised its interest rates for all retail and corporate bond issuers by 0.25 percentage points, up from 0.25 percentage points to 0.5 percentage points, between July 19th and 22nd, respectively. While such increases have had little impact on market sentiment and investors’ confidence, they can still have a severe effect on the ability of many companies to raise capital. At the moment, the average cost of new lending has risen over time in Bangladesh. On January 18th, the NBFSA issued a circular on how it plans to adjust its policy rates for each category of new bond issuance during the period 2022-2024. This means that even if the actual rate of interest on newly issued bills falls below the prescribed limit, the NBFSA intends to adjust the rate accordingly. Currently, the maximum applicable rate for unsecured retail and corporate bonds is fixed at 6% per annum, whereas for secured retail and corporate bonds, the rate is fixed at 5.25%. Meanwhile, banks have seen no change in their minimum net interest margins. Furthermore, they continue to charge higher interest than the required margin. Thus, these developments will only exacerbate the already existing downward spiral in the debt market, thereby threatening the viability of long-term financing mechanisms and exacerbating the economic slowdown. Similarly, NBFSA expects to revise its monetary policy rates in two successive rounds. One round will begin on June 17th and end on August 31st, whereas the second round will begin on September 2nd and conclude on October 3rd, depending on the performance of the Bangko Sentral’s Monetary Board. With this, the central bank is preparing itself to respond quickly to any shocks it may witness due to external events.

The implications of rising inflation and rising interest rates will undoubtedly affect both consumer behavior and business operations in Bangladesh. Consumers will be forced to spend less and businesses will suffer from tighter supply chains and rising raw material costs. Both sectors, particularly the real estate sectors, have experienced huge losses due to the deteriorating condition of the construction industry. Therefore, it is likely that the sector will be one of the first to experience negative repercussions from the worsening economic conditions. Likewise, businesses are likely to bear the brunt of rising interest rates in the medium term. They will face slower access to funding, higher borrowing costs, and reduced productivity, especially in cases where they lack adequate collateral for loans. This could lead to layoffs, reduced sales, decreased profit margins, and a decline in customer loyalty levels. Such changes have been observed in numerous industries worldwide, with China being a case in point. Over the past few years, Chinese consumers have been experiencing major price hikes for goods and services, primarily due to increasing commodity prices. Many analysts believe that this trend will continue in the coming months and could ultimately prove detrimental to the growth of the residential housing market in China. Consequently, the impacts of rising inflation and rising interest rates will be felt not only by households but also by businesses across the globe.

• By Faisal Mahmood and Aisha Khademi, Contributors