When the country is in private sector investment thrust, Bangladesh Bank cut room to supply credit to the sector, creating more space for the government to borrow from banking system.
The central bank announced its latest monetary policy for fiscal year 2019-20 with “cautious” stance, slashing private sector credit growth to 14.8 percent from the previous target of 16.5 percent set for FY19.
While the public sector will enjoy 24.3 percent ceiling for credit supply, far higher than the previous target of 10.9 percent.
The new programme projected multiple near term domestic risk factors that may put pressure on inflation hampering government’s growth target.
The risks are - increase in inflationary pressure amid crop loss in flood and VAT law implementation and high non-performing loan that keeps lending rate upward and deposit growth downward.
Bangladesh Bank Governor Fazle Kabir on Wednesday announced the new monetary programme at a press conference at its headquarters.
Private sector credit growth target has been lowered to rationalise with the real growth, which has been hovering between 11-12 percent, said the governor.
The private sector credit growth was 11.30 percent in June, which was far below the target of 16.5 percent, he said.
“As we have achieved 8.13 percent GDP growth with 11.30 percent private sector credit growth, so 14.8 percent credit growth is well enough to achieve the projected 8.20 percent economic growth for the current fiscal year,” he said.
He said it is true that the economic growth was led by the public sector and that is why the credit ceiling for the public sector has been enhanced.
The public sector credit growth was 21.1 percent in June this year, which was negative 2.4 percent in the same period last year, according to the central bank data.
The governor termed the monetary policy “employment oriented and growth supportive.”
However, the monetary programme did not give clear instruction that how it will boost the private sector investment to generate employment.
The governor said the country’s growth is led by labour intensive sectors such as readymade garments and textile.
The service sector, which has 34 percent contribution to the economy, is still fully labour dependent because robotic technology did not flourish yet.
So it is not correct that the growth is not generating employment, he said.
“There is lack of communication and understanding that there is a gap between employment and GDP growth. Employment is going according to the growth,” he said.
Bangladesh Bank is concerned about rising inflationary pressure in coming days.
Though general inflation remains stable, core inflation like non-food and non-energy kept rising steadily with 5.48 percent in June 2019, indicating rising inflationary pressure, the monetary policy statement said.
“There is also risk of some crop loss driven further increase in inflationary pressure in FY20 if the monsoon floods prolong,” the governor said in the statement.
Moreover, he said, the recent upward revision of gas prices and new VAT law implementation have already fuelled prices. The lingering effect over the coming month remains to be seen, he apprehended.
High NPL (non-performing loan) has been identified as another risk factor for attaining monetary programme, as it is a reason for downward stickiness of lending interest rates.
Citing example of India, Bangladesh Bank suggested the government to emphasise on enforcing the bankruptcy act to bring down NPL.
The interest rate of deposit is hovering in the negative territory in terms of real return in recent years, which is unattractive to savers, causing downward in deposit growth. Slow deposit growth also caused fall in credit growth, according to the monetary statement.
The interest rate on deposit after adjustment with inflation stood at negative 0.09 percent, shows the monetary statement data.
The deposit growth was below 10 percent in May, the central bank data shows.
However, the governor expressed satisfaction over the comfortable position of both money market and foreign exchange market.
He said low credit to the private sector is not due to supply shortage and termed it “qualitative growth.”
Fazle Kabir said the banking sector has excess liquidity of Tk85,000 crore as of June 2019.
This figure does not indicate that all banks have equal excess liquidity position.
There are some mismatches in liquidity position - some banks retain high excess liquidity while others have liquidity crunch.
There is call money market to bring balance in this mismatch where interest rate is stable hovering around 4 percent.
Foreign exchange market with the current exchange rate of Tk84.50 against dollar is also in a comfortable position, he said.
Moreover, the government’s imitative to provide cash incentive to exporters and remitters made the market balanced. So, depreciation is required only for importers. In this situation, the central bank does not prefer to depreciate taka to support importers, he said.
As of now, both taka and interbank foreign exchange are at ease, with banks no longer asking for day-to-day BB intervention, said Allah Malik Kazemi, change management advisor to the central bank.
“With the market in a comfortable balance and the economy running at full steam at sustainable high growth rates, no easing in policy rates is necessary,” he said.
The governor also announced that from now on Bangladesh Bank will give monetary policy for full financial year instead of a half yearly basis.
Though the programme is set for a year, it is announced twice in a year just as a ritual, he explained.
“We decided to change the ritual just for the betterment,” he said.