Dhaka, Bangladesh (BBN)- Excess liquidity in the country's banking sector reached all time high at the end of June last indicating sluggish trend in investment scenario that is still persisting.
The central bank has decided to reintroduce the auction of 30-day Bangladesh Bank Bills from Monday aiming to withdraw the excess liquidity from the market, officials said.
The overall excess liquidity with the commercial banks stood at BDT 347 billion in June 2009, registering a 165 per cent growth over that of the same period of the previous calendar year, according to the Bangladesh Bank (BB).
The central bank reintroduced 30-day and 91-day Bangladesh Bank Bills in October 2006 as the monetary policy instruments following decision that the government treasury bills and the bond auctions are exclusively used for the government debt management.
However, the auction of 91-day Bangladesh Bank Bill was discontinued to avoid its duplication with 91-day Treasury bill from January 8, 2008. There was also no auction of 30-day Bangladesh Bank Bill from January 8, 2008, according to the central bank.
"We've decided to reintroduce the auction of 30-day Bangladesh Bank Bill as a monetary tool from August 10 aiming to mop up the surplus liquidity from the market," General Manager of the Debt Management Department of the BB Mijanur Rahman Joddar said.
He also said it is a temporary measure to boost up the country's money market.
Bankers and experts attribute the buildup of the excess liquidity in the banking system to poor investment situation, mainly triggered by the ongoing global meltdown.
"Currently, the banks can invest over BDT 95 billion in different sectors after maintaining reserve with the central bank to meet their foreign exchange liability," another BB senior official told BBN.
He also said the investment in government-approved securities has been increased in recent months due mainly to lower call money rate.
The call money rate, in some cases, came down to as low as 0.10 per cent in inter-bank money market Tuesday as the banks are now awash with excess liquidity.
The BB official also said some banks have invested a substantial amount in the treasury bills and bonds to minimize their cost of funds.
Bankers, however, said the excess liquidity reached record high level because of falling trend in credit flow to the private sector in recent months.
"Credit to the private sector has declined in recent months due mainly to lower import orders for capital machinery as well as falling trend of major commodities prices in the global market," Former BB chief economist and currently Director General of the Bangladesh Institute of Development Studies (BIDS) Mustafa K Mujeri said.
Import orders for capital machinery plummeted by nearly 30 per cent in the fiscal year ended on June 30, 2009 as the global economic crisis created a climate of uncertainty in the country's industrial expansion.
Letter of credits worth US$1.23 billion were opened to import machinery for factories in the 2008-09 financial year against $1.753 billion in the previous fiscal, according the central bank statistics.
He also said cost of credit should be reduced further to increase the demand of fresh fund in the market that would also help to withdraw the surplus liquidity from the banking system.
"Major bottlenecks like gas and power must be solved immediately to encourage the private entrepreneurs to invest more funds in different sectors," Mr. Mujeri, adding that interest rate spread will be slashed further to minimize the cost of credit.
The amount of excess liquidity in June included both marketable and non-marketable government securities and excess reserve, generally known as loan-able fund, of the banks.
The government sometimes issues non-marketable securities against liabilities of different state-owned enterprises that are traded in the secondary market.
The value of total non-marketable securities stands at BDT 73.225 billion. The government issued these securities against the liabilities of Bangladesh Petroleum Corporation (BPC).
The government had earlier provided the bonds to the state-owned Sonali Bank Limited and Janata Bank Limited amounting to BDT 55 billion and BDT 18.22 billion respectively to clear BPC’s fuel oil import related liabilities.
Besides, the government issued Bangladesh Telecommunications Company Limited and Shipping Corporation bonds to meet the liabilities of the two SOEs, the BB official confirmed.
BBN/SS/SI/AD-05August09-11:41 am (BST)