Banking governance needs immediate remedy

Hard reforms and tough actions are a must-do now to ensure good governance in Bangladesh's banking sector, an eminent economist says while reviewing the country's latest economic situation.
"We have to find immediate solution to decayed governance for the country's banking sector," Dr Zaidi Sattar opined in an interview with the FE on the upcoming national budget and state of the economy.
The Financial Express Editor, Shamsul Huq Zahid, interviewed the noted economist for the first episode of the 'FE Talk'.
Dr Sattar feels reforms in the banking sector are much needed as 90 per cent of investment still coming from banks.
He says as the capital market isn't capable of providing funds for investment, governance system in the banks should be stabilized.
And reform in the banks "isn't very difficult".
"We carried out massive reforms in the 90s and many good rules, regulations and guidelines were adopted at the time," he said.
Thereafter began the rot -- some political decisions, including the licensing of an excessive number of new banks, worsened the governance.
Terming banking and financial system heart of the economy, he says if political interventions get involved on the way, the system gets harmed.
If heart of the economy is not healthy and functioning well, the economy weakens.
However, the economist thinks Bangladesh hasn't reached that stage and it needs to be fixed.
Turning to the other side of finance capital, Dr Sattar also notes that too much intervention in the capital market can't let it develop properly.
"Independent and competent people with strong integrity on the capital market will help bring it back on track," he said in his implicit suggestion for management streamlining.
Terming the current drives on forced mergers he said it would not resolve capital shortfall in some banks and mounting non-performing loans or NPLs.
"No bank will merge with these willfully," he said, adding that these banks will be huge liability for some banks getting merged with.
He finds the country's trade policy dualistic: one for readymade garments and another for all other sectors.
He terms the given benefits to RMG necessary and says other sectors also need similar benefits for export diversification.
He notes that tariff protection and restrictive export aren't helping increase exports.
"No manufacturers will export if goods are more profitable in domestic market," he viewed, indicating a marketing quandary that has implications for high consumer prices in Bangladesh.
Dr Zaidi Sattar suggests that budget deficit in the upcoming fiscal should not exceed 4.0 per cent. And fiscal strategy should be complementary to monetary policy if to hold inflation by the horns.
The economist says investment-driven growth is needed to be supported in the budget.
He blames highly restrictive trade policy for mere one-percent FDI of GDP.
He urges the policymakers to be more open in trade policy. "Free-trade agreement can't be signed due to a very restrictive policy."
The economist also points out that Bangladesh missed out on value-chain integration for policy pitfalls.
He feels it is time for second-phase trade liberalization after the first in the 90s.
The economy is navigating some challenges, but not broken entirely. "The economy of the country has bent but not broken," he says.
In his view, there were some mistakes in responding to the crisis but the economy was now overcoming the challenges gradually.
In last three to six months policymakers took some correct decisions, including controlling inflation, and stabilizing foreign-exchange reserves and balance of payments.
"These are all interlinked -- single measures for one challenge will not bring effective results. There is needed a coordinated strategy for all the challenges together," he says.
He feels Bangladesh needs to go back into stability that has been maintained 20 to 25 years towards the path of growth. The growth has alleviated significant portion from poverty in Bangladesh in last two three decades.
The economist notes there were 60 per cent of the people used to live below poverty live in 1990 which stood down at 18.7 per cent in 2020. "The World Bank also found alleviation of 25 million people in 25 years as inspiring story."
He asserts that the foundations of the economy achieved over the last 40 years wouldn't easily be broke.
The economist underpins his view with the fact that the RMG industry has more export potential and can expand more and it wouldn't end so soon. Remittance earning of the country is a kind of export which is actually an export of factor services.
Another important pillar of country's economy, he mentions, is agriculture that has multiplied production over the years.
Admitting that inequality sometimes comes with growth, the economist says progressive taxation should be maintained so that increasing amount of public expenditure could be spent on social-safety net, health, education and welfare programmes to narrow income inequality.
He, citing study, notes that there are some problems in the targeting of social-safety-net programmes.
The waste and mis-targeting in social-safety-net programmes need to be evaluated objectively failing which inequality will remain a big issue.
"We have larger allocations now but targeted people are not getting it."
He holds the hope that the flexible exchange rate through crawling peg will stabilize the foreign-currency reserves.
The eminent economist finds debt-service capacity very good and in a comfortable situation. "Many multilateral and international institutions recognized Bangladesh's debt-servicing capacity as very good," he observes.
He terms around 36-percent taka depreciation a shock for private-sector external debt, but it is manageable.
He strikes a note of optimisms that over next 3 to 9 months export and remittances both will increase and stabilize reserves.

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