Even in days of high inflation, people in Bangladesh saved more

Despite the current high rate of inflation, the growth of savings deposits in banks hit the highest point in the past two and a half years in November last year, indicating that savers are cautious about spending amid economic uncertainties.

There was an 11% growth of savings deposits in November last year, up from 10% a month prior. On the other hand, current deposits, against which depositors do not receive any interest, dropped to 5.69% from nearly 8% during the same period.

Although rising deposit rates are another factor that has attracted depositors to savings, the offered interest rate is still below inflation.

The interest rate on deposits increased to a maximum of 9% in November from 7.5% in June last year after the lifting of the single-digit lending rate cap imposed in April 2020. However, reputed banks still offer a maximum of 8% interest rate, while the average inflation was 9.48% in December.

The Bangladesh Bank, in its monthly publication titled "Major Economic Indicators", attributed the rising deposit rate and a substantial fall in the currency outside banks at the end of November as the major reasons behind the increase in savings deposits.

Currency outside banks declined by Tk43,471 crore in November from July as depositors prefer to save in banks instead of holding cash amid rising inflation.

The year-on-year growth of currency outside banks registered a negative 1.79% in November, whereas it grew by 23.46% in June last year, as per central bank data.

Although the deposit rate is still below inflation, depositors are saving money due to economic uncertainty, said Syed Mahbubur Rahman, managing director of Mutual Trust Bank.

Moreover, the rising interest rate on deposits has also prompted depositors to transfer their current deposits to savings accounts, he said.

Another factor is that banks usually go for an aggressive drive to hunt for deposits at the end of a year to show a healthy balance sheet, Syed Mahbubur added.

The declining growth in current deposits reflects that people are spending less and saving more, he opined.

Total deposits in the banking sector grew by 10.33% in November last year, the highest in the past two years. The total deposit amount in the banking sector stood at Tk16.40 lakh crore at the end of November.

The saving spree indicates that depositors are consuming less, a trend also reflected in consumer financing data.

Bangladesh Bank data shows that consumer financing registered a negative 0.68% growth in July-September 2023 compared to the preceding April-June quarter when the growth was 8.67%.

The drastic fall in corporate sales – from fast-moving consumer goods to motor vehicles, mobile phone usage, apparel products, footwear, steel, cement, and ceramics, etc – is also evident of people consuming less for future savings amid challenging economic conditions in Bangladesh.

Sales of various consumer goods sectors declined by a maximum of 30% to 38% last year compared to the previous year, according to industry insiders.

Dilip Kajuri, chief financial officer of Apex Footwear, said sales of high-end shoes dropped by 30% in the last one year as inflation affected salaried individuals and average businessmen, who were looking to cut discretionary costs.

Price hike has also impacted motor vehicle sales, which went down by 38% in 2023 compared to a year ago, as per the Bangladesh Road Transport Authority. The highest negative impact was on sales of bikes and delivery vans, which are used by low-end consumers, with a decline of 39% and 64%, respectively.

Kabir Hossain, who runs a grocery shop on Dilu Road in the capital's Moghbazar, reported a 20%-25% drop in sales as people have been buying less for the past several months.

"Those who used to buy five litres of soybean oil at a time now pick up a two-litre bottle of oil," he said.

New monetary policy to tighten money supply

The Bangladesh Bank unveiled its monetary policy for the second half of the current fiscal year on 17 January, tightening money supply further to contain inflation at 7.5% by June.

This further tightening is expected to raise deposit rates soon, which will benefit depositors to get a positive return on their savings. Currently, depositors are getting a negative return when inflation is considered.

The inflow of deposits is expected to ease liquidity pressure caused by a dollar shortage. The central bank is mopping up money from the market by selling dollars to banks to meet their import payments.

As a result, despite the increase in deposits, banks are borrowing between Tk30,000 crore and Tk35,000 crore from the central bank daily amid a liquidity crunch, as informed by the Bangladesh Bank governor when unveiling the new monetary policy 10 days back.

In December last year, the overall inflation reached a new 8-month low at 9.41%, primarily driven by a decrease in food prices, according to the Bangladesh Bureau of Statistics (BBS) data.

Despite this improvement, the inflation rate has consistently remained above 9% since March 2023, with November registering at 9.49%.

A positive development is the decline in food inflation, which significantly impacts the low-income demographic. In December last year, food inflation dropped by 1.18 percentage points to 9.58%, down from 10.76% in November.

Conversely, non-food inflation increased by 36 basis points, reflecting the challenge for consumers to manage additional expenses in areas such as healthcare and transportation.

Data from the BBS reveals that non-food inflation rose to 8.52% in December, up from 8.16% the previous month.