THE shortage of the dollar that has persisted for more than two years has severely constrained the economy, with a deleterious impact especially on trade. Now, it is the shortage of the taka, or liquidity crisis, in banks that is said to be further constraining the economy. The situation has left the government in a tight spot. It is struggling to secure funds, on the one hand, from the banking system for development activities. The government has set a target of borrowing Tk 1,323.95 billion from the banking system in the 2025 financial year. The challenges the economy faces would intensify if the government continued to borrow from commercial banks. And, it cannot, on the other hand, increase the supply by printing money because it would make it hard for the government to contain inflation, which is now reported to be hovering around 10 per cent but the government plans to bring it down to 6.5 per cent through a fiscal policy of contraction, with no meaningful measures having been put in place though. Soaring inflation and the central bank鈥檚 warning of forced mergers of failing banks, which has eroded depositor鈥檚 confidence, have forced people to hold cash outside the banking system. Both banks and high net-worth individuals have, rather, preferred to make investments in treasury bills, which offer high interest rates. Added to this is a growing amount of non-performing loans.
While all this together has put the economy in a tight corner, banks continue to increasingly rely on borrowing from the central bank to keep themselves in operation. The central bank is reported to have sold about $34 billion from its foreign exchange reserve to banks over three years that has effectively drained out more than Tk 3,500 billion, with a dollar averaging Tk 103, from the banking sector. Many banks in this situation are unable to maintain adequate cash reserve ratio and statutory liquidity ratio. Private sector credit flow has consequently plummeted to 9.9 per cent in April this year from 11.28 per cent in the corresponding time in 2023. Economists and experts largely blame corruption, especially in large-scale projects, irregularities in loan disbursement, illicit financial flows and regulatory and oversight failures for the situation the economy has been pushed into. Experts believe that a curb on corruption could resolve much of the challenges that the banking sector now faces. The government has, therefore, a horde of issues to effectively attend to. The government needs to stop corruption. It needs to stop irregularities in loan disbursement. It needs to strengthen regulatory affairs and oversight. The government needs to stop meddling with powers of the central bank, which at times appears not able to exercise its authority. It needs to stop illicit financial flows and put in efforts to repatriate the money smuggled out. It also needs to strengthen its plan for the recovery of non-performing loans and stop giving concessions to wilful defaulters.
But, the government must, first, need to have the will in place to attend to all such issues to save the economy from declining further. The situation has already been bad enough. It is time the government acted in earnest.