Excess liquidity a big threat to banking sector

23 January 2021

REPORT in a national daily on Friday said Bangladesh Bank is in a quagmire sitting on huge excess liquidity from escalating remittance along with implementation of over Tk 2 trillion stimulus packages in one hand while private sector credit demand is quite for lack of investment and lower import bills on the other. Growing reserves at central bank and surplus liquidity in banks are poising a big challenge and only highly a productive monetary policy and big private investment drives can help tide over the situation. But the pandemic situation is slowing it as well.
As per reports excess liquidity in the banks escalated 95 per cent year-on-year to Tk 204,700 crore in last December and were so far invested in bonds and treasury bills. We believe this is right time to encourage investment in real estate and stocks when people's deposits have no reason to be laying in banks at 4 to 5 per cent interest. Such investments in stocks however need to be protected.
It appears that remittance is growing fast as it was all-time high at $21.74 billion last year posting 18.59 per cent growth and indications show it may be yet higher this year. As unused funds are spilling in banks some experts may be right to suggest that big inflow need to be tamed by withdrawing the 2 percent incentive exchange rate. But this is not a good option and what is needed is to stimulate productive sector use of the fund without leaving it unused.
The central bank may mop up excess funds from banks but it can't be an option yet. But if excess liquidity continues to build up remedial measures need to be evolved. Need mention that the central bank was forced to purchase a record high $5.49 billion from market in the first half of the current fiscal year to stop it from falling in the hands of currency traffickers. But building unused reserves can't be an option as well.
We would say the situation can only be addressed by a far sighted leadership with an expansionary private sector investment plans. But we need a competent corruption free government that we have not in place.  The economic recovery is not picking up and we fear it may add to the crisis.

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