Bangladesh Bank Governor Atiur Rahman yesterday expressed concern over the ongoing political turmoil and said the economy would bleed further if the unrest continues.
“Just when the country’s economy was showing signs of growth, political unrest has put a barricade on it,” he said, unveiling of the Monetary Policy Stance (MPS) for the second half of the current fiscal year at Bangladesh Bank headquarters in the capital yesterday.
The MPS keeps the targets mostly unchanged – barring inflation to bring down – and hinted not to go for neither expansionary nor contractionery policy.
But former BB governor Salehuddin Ahmed said the policy could have been a little more pro-active and pro-growth instead of emphasising the reduction of inflation.
The policy stance aims to bring down the inflation rate to 6.5% from current the 6.99% (12-month average) and to achieve an economic growth rate of between 6.5% and 6.8%.
“The central bank should concentrate on employment and growth instead of inflation,” Salehuddin said.
“The monetary policy has been kept unchanged in the second half in light of the existing political situation” Atiur said.
Salehuddin Ahmed responded to the stance, saying: “The policy was observational but not innovative.”
Salehuddin said the policy could have been a little more expansionary instead of cautious and restrained through extending the private sector credit growth ceiling.
The ceiling for private sector credit growth was kept unchanged at 15.5% for June this year, according to the policy stance.
Private sector credit growth, even during the comfortable political climate of the last six months of last year, remained at 12.7% in November – well below the target of 14% for December.
BB governor Atiur pointed out that credit inflows jumped with growing demand in the last two months of 2014 thanks to the peaceful political environment.
After that, growth rates were not able to reach projected targets as credit inflows were slow during the first four months of the first half due to a lack of confidence among entrepreneurs, the country’s central banker explained.
But he said: “The private sector credit ceiling will remain open for possible extension if demand rises.”
Salehuddin, the former BB governor, said the policy stance could have gone ahead and increased the private sector credit ceiling focusing on small and medium entrepreneurs. He said this would have signalled to banks that the BB has a flexible position on SME lending.
Atiur explained that the policy stance was cautionary because banks were already rigid in lending amid the political unrest.
Bangladesh Bank Deputy Governor SK Sur Chowdhury said even though the political situation was stable in H1, entrepreneurs were still sceptical because of political uncertainty and infrastructure bottlenecks.
He said even though credit demand began to rise during the last two months, it flattened out because of recent political unrest.
The programme targeted public sector credit growth at 25.3% for June this year, up from an earlier stance of 10.9% for December. This target is the highest in the last three fiscal years.
The high rate has been targeted at a time when government is expected to benefit from low oil import prices and increased sales of national savings certificates, both of which are expected to reduce pressure on bank borrowing by the government.
Public sector credit growth was recorded at 6.1% in November last year against a programme of 11%, according to Bangladesh Bank data.
“Government borrowing remained below the ceiling last year but we increased the space for June predicting the possible implementation of some big projects,” said Bangladesh Bank Chief Economist Biru Paksha Paul.
In response to a question, the chief economist said the target was just a parameter that had been predicted and the ceiling might be raised if the situation requires it. Atiur said Bangladesh Bank’s support of capital market stability will continue in H2 FY2014-15.
He said the central bank had a statutory responsibility to enforce the compliance of banks with legal limits on their capital market exposure.
Atiur added that Bangladesh Bank has continued liquidity support for capital market transactions in volumes permissible within its monetary programmes. At the retail level, both deposit and lending rates fell in H1 FY2014-15 and the interest spread has, on average, decreased from 5.31% in June to 5.17% in November.
Bangladesh Bank will continue its effort to reduce this spread, according to the policy stance.
