Bangladesh Bank has fallen in a quagmire tackling an escalation of excess liquidity trending in banks, emerging from slow credit growth and implementation of stimulus packages and an upward trend in receiving remittance.
Excess liquidity in the banking sector escalated 95 per cent year-on-year to Tk 204,700 crore in December last year, which have largely been invested in treasury bills and bonds, showed data from the central bank.
There is no scope to mop up liquidity from banks at this moment as the excess fund has not had any impact on inflation because of suppressed demand among consumers and investors due to the economic hardship brought on by the coronavirus pandemic.
But the surplus liquidity has brought woes for depositors to a great extent as the real interest rate has already entered into a negative territory.
General inflation stood at 5.52 per cent in November whereas a majority of banks offered interest rates from 3 per cent to 4 per cent on fixed deposit receipts (FDRs).
This means the real interest rate is in a negative 2 per cent to 3 per cent.
But on the contrary, a section of people have started investing their funds heavily in the capital market and housing zones.
Such a phenomenon may create an asset bubble in the days ahead, said Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh.
An asset bubble arises when the price of an asset, such as stocks, bonds, real estate, or commodities, rises at a rapid pace without the underlying fundamentals, such as equally fast-rising demand, to justify the price spike.
If the asset bubble starts to grow, the central bank should consider mopping up funds from the market.
The central bank recently thought of doing so but later backtracked from the stance, said a number of Bangladesh Bank officials, who are directly involved in monitoring the liquidity situation in the market.
If the central bank commenced withdrawing funds at this moment, it will beyond doubt give a bad signal to the market, they said.
The majority of clients are still shying away from availing loans, which means the excess fund was hardly playing any role in fuelling inflation.
Excess cash with the central bank also increased 323 per cent year-on-year to Tk 44,800 crore in December last year.
The excess cash is calculated on deducting the cash reserve ratio (CRR) of banks, which have to be deposited with the central bank.
The CRR is the portion of customer deposits that commercial banks must keep as a reserve with the central bank authority.
The government has so far rolled out 23 bailout packages at different times since March last year to absorb the economic shocks arising from the pandemic.
The total amount of financial assistance now stands at Tk 124,053 crore, 4.44 per cent of the country’s GDP.
This has contributed to the growth of excess liquidity in the banking sector as well.
Banks are also cautious in sanctioning loans to borrowers given the business slowdowns, contributing a pile up of excess liquidity in their balance sheets.
Lenders will prefer the central bank’s tools such as Bangladesh Bank bill or reverse repo, which are usually used to mop up funds from market, in an aggressive manner if the surplus fund is to be withdrawn.
The tools used for mopping up funds are more secure for banks rather than through disbursement of loans to clients in times of crisis, said the central bankers.
Mansur echoed the same, saying that the time is yet to come to mop up funds. The central bank was now in a tight spot when it comes to tackling the excess liquidity, he said.
He warned that the excess liquidity would further widen until the economic recovery gains momentum.
“Although the government has claimed that the economy is recovering at a faster pace, the piling up of excess liquidity has given an indication that the recovery is not on track,” he said.
But the major question is: how will depositors’ interests be protected from the pressure of surplus liquidity in the banking sector?
The central bank has to monitor the issue very cautiously such that the ongoing business slowdown will not create another financial crisis in the days ahead.
The central bank may intervene in the money market when the nominal interest rate on FDRs declines to 2 per cent, said Mansur, also a former official of International Monetary Fund.
The nominal interest rate is that before inflation is taken into account.
Besides, the central bank should start withdrawing funds from the market if non-food inflation takes on an upward trend. The price of non-food is still deflated.
Three bank managing directors, however, opined that mopping up funds from the market was not the ultimate solution as the central bank was injecting money by way of purchasing US dollars from lenders.
In recent months, imports have declined while remittance continued to maintain an upward trend.
This has forced the central bank to purchase the dollar from banks on a regular basis, they said.
The central bank purchased greenback worth a record $5.49 billion in the first half of the current fiscal year to keep stable the exchange rate of the local currency.
The previous highest was recorded in 2013-14 when Bangladesh Bank bought $5.15 billion from local banks.
If the economic recovery does not pick up at the optimum level from coming June, the government should think of doing something about the ongoing remittance inflow, said the three MDs wishing not to be named given the sensitivity of the matter.
Mansur said remittance has already helped the foreign exchange reserve to surpass $43 billion, but it is time for the authority concerned to rethink the issue.
“The remittance, which are now being sent, is not actual remittance. Rather, a large amount of remittance is flowing into the country in the form of portfolio investment by expatriate Bangladeshis,” he said.
A portfolio investment is ownership of a stock, bond, or other financial asset with the expectation that it will earn a return or grow in value over time, or both.
The majority of developed nations are in a deadlock of zero per cent interest rate due to the financial meltdown and it will take them a couple of years to get back from the zero per cent rate.
“The expatriate Bangladeshis are now getting a better interest rate on the deposits kept in the local banks than from the lenders in places they live in,” Mansur said.
Remittance hit an all-time high of $21.74 billion last year, posting a magnificent year-on-year growth of 18.59 per cent.
The government may think of reducing the 2 per cent cash subsidy against funds remitted by expatriate Bangladeshis, if the excess liquidity cannot be managed in time, Mansur said.
Shah Md Ahsan Habib, a professor at the Bangladesh Institute of Bank Management, said the central bank should not mop up the excess liquidity from the central bank until the economic recovery gains the full-fledged momentum.
“Both the government and the central bank should give their utmost importance to boost credit demand, which will reduce the pressure from the excess liquidity,” he said.
The year-on-year credit growth stood at 8.21 per cent in November, down 8.61 per cent from that a month earlier.
The credit growth in November is the lowest since 2008 at least. Bangladesh Bank’s data goes as far back as 2008.
Monzur Hossain, research director of the Bangladesh Institute of Development Studies, said the central bank should mop up the excess liquidity from banks right now in the interest of depositors.
He argues that the economy would face trouble if money does not circulate properly.