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Stopping the plunder of public resources

Sadiq Ahmed
IN January 2003,1 published a paper with co-authors Marilou Uy and S Ramachandaran entitled “South Asian banking and finance: Growth with festering problems" (South Asia region internal discussion paper IDP-186, The World Bank: Washington DC). We reviewed the progress in the banking sector of the five large South Asian countries -- Bangladesh, India, Nepal, Pakistan and Sri Lanka -- and reached the following main conclusions about the downside risks.
1 .“Despite some encouraging developments, the overall picture remains worrying. .. Banks have grown big but not efficient, and the government owns the larger banks with the worst loan portfolios in each of the
five countries.”
2 .“The inflow of deposits has averted serious liquidity problems that usually presage banking failure; but cannot continue forever. A banking crisis would undo the countries' many achievements.”
3 . “Banking deposits have grown to approach half of GDP, and if the governments were to protect depositors against losses -- as it may be forced to in a banking crisis -- the fiscal implications are worrying in an environment of already serious fiscal problems of all South Asian countries.”
4 . "The current reform approach in all South Asian economies calls for banks to lend more prudently and to strengthen banking supervision. This prescription is sound in theory but could be difficult to
implement in substance. For example, supervisors may not be able to rein state-owned or politically well-connected banks. Similarly, laws empowering regulators are easier to pass than to effectively enforce, frustrating reformers in government. It is difficult to get the major state-owned banks to improve their lending so long as they are under state ownership."
Looking at the current banking situation in Bangladesh, after over nine years since I published the report that was widely shared with all South Asian governments, it is remarkable how fresh and relevant that diagnostic remains.
The despicable Sonali Bank scam involving some Tk 36 billion or so (equivalent to nearly 10 percent of the 2012 actual Annual Development Programme) is a timely reminder of how little has changed in the area of public banking and how state banks remain a major instrument for plundering scare public resources.
It is especially hurting public interest at the present time when resource constraints are reducing the ability of the government to implement major public investments in critical infrastructure.
Quite apart from the adverse implications for public resources, this event unless quickly offset poses serious downside risks associated with moral hazard that could threaten the stability of the banking sector. The stakes are large and the government must take swift actions not only to reestablish the rule of law through enforcement of anti-corruption measures but more importantly to eliminate the root cause of the problem facing public sector banking in Bangladesh.
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