Despite Lower Interest Rates on Loans, Investment Shows No Signs of Picking Up

❐ Staff Reporter

Interest rates on loans have decreased, banks have sufficient liquidity. There has also been some relaxation in import policies. Despite this, there is no sign of a recovery in private investment at the beginning of the current fiscal year. On the contrary, imports of capital equipment and industrial raw materials, which are one of the main indicators of establishing new industries and increasing the capacity of existing factories, have decreased.

According to the latest data from Bangladesh Bank for July, in July this year, the amount of letters of credit (LC) for import of capital equipment of industries was settled at $149.5 million. In the same period last year, the amount was $163.5 million. That is, the LC settlement decreased by $14 million or 8.6 percent in the space of one year.

At the same time, LC settlements for the import of industrial raw materials have also decreased. In July, LC settlements in this sector were worth $1.9377 billion, compared to $2.0817 billion in the same period last year. That is, a decrease of $144 million or 6.92 percent in one year.

Economists and businessmen say the investment slowdown cannot be explained solely by high interest rates or a financial crisis. Lack of business confidence, uncertainty about gas and electricity supplies, rising production costs, weak demand, and policy uncertainty are also discouraging entrepreneurs from making new investments.

Loan interest is decreasing

According to Bangladesh Bank data, the average interest rate on bank loans fell to 11.81 percent in July. A year ago, the rate was 12.14 percent. The interest rate on loans to large industries also fell from 12.5 percent to 12.5 percent? (12.05 percent according to the data). A year ago, the rate was 12.49 percent. The interest rate on agricultural loans also fell slightly—to 11.64 percent in July, from 11.69 percent a year ago.

In addition, the central bank cut the policy interest rate by 50 basis points to 9.50 percent in July to boost investment and economic activity. A stimulus package of Tk 60,000 crore has also been implemented to boost investment.

Still, those concerned see the decline in imports of capital equipment and industrial raw materials as a reflection of weak demand for investment.

Shams Mahmud, president of the Bangladesh-Thai Chamber of Commerce and Industry, said entrepreneurs are now not just looking at the interest rate on loans. They are also taking into account uninterrupted gas and electricity, production costs, market demand and the possibility of getting back the invested money.

Shams Mahmud said that production in various industrial areas is being disrupted due to gas shortage. Some factories are having to stop production, while others are having to use expensive alternative fuels. In this situation, many entrepreneurs are prioritizing maintaining existing businesses instead of creating new capacity.

Trust is a bigger problem than money.

Dr. Zahid Hossain, former chief economist at the World Bank’s Dhaka office, believes that increasing the money supply alone will not increase investment. Policy confidence and stability are essential for investment.

He said, “We also need to ensure affordable production costs, reliable energy, efficient infrastructure and access to new markets. Despite excess liquidity in banks, credit growth in the private sector is weak. This means that demand for credit for productive investment has also weakened.”

Economists say imports of industrial raw materials and capital equipment are usually an important predictor of future production and investment. So if July’s decline in imports continues, it could also impact private investment and industrial production.

Although there has been some relief in the banking sector in terms of both funding and loan interest rates, this has not been reflected in the investment decisions of entrepreneurs. As a result, it has become necessary to revive private investment, not only by providing financial incentives, but also by improving the business environment and policy confidence.