Liquidity fears grow after new deposits declined nearly 30% last fiscal year
DHAKA — Bangladesh’s record-high inflation is forcing citizens to dip into their savings and stop putting money away, raising concerns about bank liquidity flows and hammering sales of national savings certificates.
Recently released data for the fiscal year ended June shows that new bank deposits fell 29.14% to 1.202 trillion taka ($11.87 billion). In contrast, the previous fiscal year’s figure of 1.697 trillion taka had reflected a 46% increase in deposits.
Bankers say the present situation is worse than 2020, when the COVID-19 pandemic damaged lives and livelihoods as it slammed the economy. Total deposits in the banking sector stood at 14.71 trillion taka at the end of June and fell to 14.65 trillion taka in July. August brought a slight increase to 14.68 trillion taka, but there is concern that the amount fell again in September.
“There is no option for poor people now [but] to spend from their previous savings and that is impacting bank deposits,” said Hossain Zillur Rahman, executive chairman of the Power and Participation Research Centre (PPRC) think tank.
The situation is fueling worries about a liquidity crisis and the future of the economy. Bangladesh is being buffeted by similar pressures that have severely hit neighbors Sri Lanka and Pakistan, including depletion of foreign reserves after the war in Ukraine pushed up the cost of importing fuel and commodities.
At the same time, the government’s net sales of savings certificates plunged in August, when subscriptions totaled only 80 million taka versus 36.28 billion taka in August last year. July’s sales this year were also sharply lower when compared with the same month in 2021.
These instruments are managed by the Finance Ministry and are the most attractive savings tools in Bangladesh, offering interest rates up to 11.76% compared with 6% at best on bank deposits.
But recently, saving is simply not an option for many.
The inflation rate hit a record 9.86% in August and remained at 9.10% in September, reflecting the more than 50% increase in fuel oil prices in August. Even in July, the rate had already neared 7.5%.
Food inflation has hit double digits with no signs of a quick return to manageable levels. Data from the Trading Corporation of Bangladesh shows that rice prices were up as much as 12% in the first week of October, while flour was up 60%, edible oil 26%, potatoes 53% and sugar 17%.
“Everything has become pricier in recent months,” said Ismail Mia, who runs a small shop in Dhaka. “I am unable to meet the costs as they’ve gone beyond the tolerable limit.”
Bangladesh is an import-dependent country, generally bringing in commodities and goods worth $6 billion a month while exports hover below $4 billion, leaving a trade deficit of over $2 billion. In September, exports fell for the first time in 14 months, by 6.25%, as demand for merchandise declined in Western countries while remittance earnings also decreased by 10.84% to a seven-month low.
Exports and remittances are the two main sources of foreign earnings for Bangladesh. So the slump is squeezing the country’s foreign currency reserves, which stood at $36.5 billion as of Oct. 4 versus $48 billion in August 2021.
Economists and bankers say all these factors are intertwined and foresee gloomy months to come.
Selim R.F. Hussain, chairman of the Association of Bankers Bangladesh, cited higher inflation as a reason behind the shrinking bank deposits. Another reason for the liquidity crunch is that the central bank sold around $8 billion to banks and forex dealers over the last fiscal year to stabilize the exchange rate, withdrawing taka from the market.
“There is no doubt that the banking sector is facing overall pressure,” said Hussain, adding, “The banks will experience big problems in attaining expected growth.”
He said that as a consequence, call money rates — interest rates on short-term loans banks extend to other banks/financial institutionsn– will continue to rise. The rate hit 5.79% on Oct. 4, up from 2.22% a year earlier. At the same time, the repo rate hikes by the central bank will also raise the banks’ cost of doing business.
The PPRC’s Rahman, who is also the chairman of the country’s largest microfinancer Brac, listed three factors contributing to the savings depletion. One is inflation, but he also pointed to a sluggish recovery from COVID-19, especially in poorer segments of the economy. The third reason, he said, is a lack of an adequate social safety net.
Former central bank Gov. Salehuddin Ahmed said there is a liquidity crisis in the banking sector as institutions are being hit by loan defaults, causing many to pull back from offering new loans.
“I don’t support the repo rate increase by the central bank as it will make getting funds costly for banks,” he said, arguing that raising the benchmark will not contain inflation.
Instead, Ahmed suggested taking measures to raise production of consumer goods to enhance supply and curb prices.