Strong financial sector key to sustainable growth

BANGLADESH should put emphasis on building a strong financial sector in order to ensure macroeconomic stability, increase efficiency and liquidity of markets, draw investment and deepen economic integration, the Asian Development Bank’s Bangladesh chief said.   

“A strong financial sector helps in regional and international market integration, attracting long-term investments, public private partnerships, and deepening and broadening economic integrations,” said Manmohan Parkash, country director of ADB.

Domestically, it helps to improve financial sector stability, increase the efficiency and liquidity of markets, and strengthen the regulatory environment, he told The Daily Star in an interview in Dhaka recently.

Bangladesh has been a member of the Manila-based lender since 1973. Since then, the ADB has approved around $25 billion in loans, technical assistance and grants as of June 30 this year.

The ADB’s active portfolio in Bangladesh is more than $10 billion with 54 projects. The transport and energy sectors constitute about 55 percent of the portfolio amount.

Last year, Bangladesh topped the list of countries in terms of commitments and approvals for funds, including co-financing, from the lender.

The ADB had a record lending for Bangladesh and approved $5 billion worth of programmes in 2018, of which $2.5 billion came from its own coffer and another $2.5 billion in co-financing.

“It’s the largest amongst all our countries. For us, Bangladesh is very important. And over the years our assistance has grown for many reasons. This is one of the top five countries for us,” Parkash, who took the helm of the Manila-based lender’s Bangladesh country office in November 2017.

He said the global economic outlook is challenging and a moderate growth is expected across most of developing Asia at 5.7 percent in 2019 and 5.6 percent in 2020. However, South Asia will buck this trend growing at 6.8 percent in 2019 and 6.9 percent in 2020, he said.

“Bangladesh will stand out by growing at record 8 percent in 2019 and 2020, making it the fastest growing economy in Asia-Pacific. Today Bangladesh is seen as a model for growth even in this difficult global economic outlook,” he said.

ADB’s priority areas for support in Bangladesh include energy, transport, urban infrastructure and water supply and sanitation, education, agriculture and natural resources and financial sectors.

Around 68 percent of the portfolio is in infrastructure and 32 percent is in social sectors.

Parkash, an Indian national with more than 34 years of professional experience, talked about the financial sector.

He said a 10-year roadmap for financial sector development can be devised based on three pillars -- financial integration, fiscal transparency and financial resilience -- to help further catalyse Bangladesh economy and financial markets.

“It will also protect the economy against external shocks.”

The advice comes because the financial markets are getting more complex and rapidly changing and there is advent of digital financial services, such as e-payment platforms, blockchain technology or use of artificial intelligence for asset management and more frequent cross-border financial transactions.

“The financial sector is still developing and is at the stage where there is good opportunity. So, if Bangladesh can have a mature financial services industry, it could actually add a significant part to the economy, in addition to the industry and trade and remittances.”

Parkash is aware about the challenges the financial sector in Bangladesh faces. He said if the country did not have any of the problems, the market would be absolutely ideal.

“It is still a developing country. These are the pains of growing up. When you develop, there will be few of these irritants that come in. The important thing for us is to manage them well. Here again I am quite happy to see that the government has taken proactive actions.”

The ADB is involved in the capital market development and is helping in strengthening the capital markets to better support the real economy and build much-needed infrastructure. It has so far approved $630 million for capital market development.

The ongoing Third Capital Market Development Programme seeks to strengthen enforcement capacity of the Bangladesh Securities and Exchange Commission and the Insurance Development and Regulatory Authority and ensure quality financial reporting by public companies as per international standard.

The programme also targets to facilitate demutualisation of the two stock exchanges and recapitalisation of intermediaries, develop market infrastructure, introduce new regulations for Sukuk (Sharia-compliant bonds) and derivatives and develop more liquid government securities market.

“In any country, a good capital market is a prerequisite for a well-developed economy.”

“The programme is very important because it will not only help the capital markets but also the financial sector in general because more financially literate people can invest domestically and in some international markets. They will be helping to develop a stronger financial market too.”

Under the programme, the demutualisation of the two stock exchanges was done and the Financial Reporting Council has been established. Removal of tax distortion and introduction of more streamlined securities issuance procedures are considered as game changers.

“The markets have got more stabilised and actions have been taken for broadening and deepening the markets,” he said.

Another element of the capital market and the financial sector development is also about creating new wealth.

“If the stock market goes up and foreign investors come in, the country can have a booming economy.”

“This is how Singapore and Hong Kong developed. They built this financial architecture to attract the investors.”

“So, creating this new wealth is also a possibility if you have a good capital market. For that, of course macroeconomic policy is very important.”

 “I think to be fair to the government, it has made good effort in getting the stock exchange and the securities market going. There is a very clear message from the government that they want a strong capital market to prosper in the country.”

The ADB is also going to help the government develop a bond market.

Parkash, who joined the ADB in 2002, said the capital and bond markets can provide cheaper and long-term financing, compared to banks and non-bank financial institutions.

“People will only buy bonds when the country has good ratings. Currently, if you look at the ratings, they are not investment-grade and that is where the ADB can help.”

“We are going to provide consultants to the financial institutions division so that there is a clearer understanding about how these bonds can be issued and subscribed. The process has started and hopefully in the next few months or one year you should see some good bond initiatives coming into the market.”

According to Parkash, three things are important for Bangladesh. First, there has to be more investment in human capital. Second, there is a need for the export diversification to happen so that the country has more trade. Third, there has to be much more emphasis on the infrastructure side.

“This is simply because if you want to attract investment what you need is an enabling environment.”

The ADB is also helping the country develop the skills of its growing youth population.

He said things are well within control for Bangladesh. “Your inflation is in control; remittances are growing and domestic consumption has been good. The fundamentals are actually good.”

“Going forward, the main aspect of the Bangladesh economy is going to be making sure that the outlook remains stable and the country remains politically calm. Good weather is also important.”

Speaking about the future, Parkash said the bank’s programme will move into new areas where more value can be added.

“I can only say that our assistance will grow in the coming years.”