The Bangladesh Bank has revised up monetary target for the public sector credit growth for the current fiscal year amid a rising government borrowing from the banking system.
The new ceiling for the public sector credit growth has been set at 37.7 percent for the fiscal year ending in June, up from the previous target of 24.3 percent.
The decision was announced yesterday following a meeting of the monetary policy committee of the central bank on January 16.
However, the target for the private sector credit growth remains unchanged at 14.8 percent although the actual private credit grew very low at 9.83 percent in November, the lowest in recent history.
The central bank also decided to increase the broad money circulation growth by 0.5 percentage points to 13 percent. Broad money is a category for measuring the amount of money circulating in an economy.
Central banks tend to keep broad money growth under control to manage inflation.
"The ceiling for the broad money growth has been increased aiming to raise the money supply to the stock market and the private sector," said the central bank in a statement yesterday.
However, economists say more credit to the public sector will have a crowding-out effect on the private sector.
"Aggressive government borrowing from the banking system will cause crowding-out impact on the private sector," said Dr Zahid Hussain, former lead economist at the World Bank's Dhaka office.
He said banks are getting above 9 percent interest rate for investing in long- term government instruments.
"On the other hand, the government is going to cap lending rate at 9 percent. So why will the banks lend to the risky private sector instead of investing in the risk-free government instruments?" he questioned.
Credit to the public sector in November has grown at double the rate set in the monetary policy, squeezing the space for the private sector.
In the first six months of the current fiscal year, government borrowing from the banks has crossed its entire fiscal year's target.
When money supply has been rising through the government borrowing, the central bank sees challenges to keep the inflation within the expected level.
"Though it will be challenging to keep inflation at the targeted 5.5 percent amid rising edible oil prices on the international market and other necessary goods on the local market, increased supply of goods would help the central bank bring inflation down at the end of the year," said the statement.
Inflation has been rising in recent months and already reached an average of 5.59 percent in December, 2019, crossing the monetary target, according to the Bangladesh Bureau of Statistics (BBS).
Zahid Hussain apprehends that heavy bank dependency of the government will put pressure on inflation in the coming days.
Explaining the situation, he said the people have money in their hands due to low tax collection. On the other hand, the government's borrowing is channeling additional money in the market that will cause inflationary pressure.
Meantime, the Bangladesh Bank in its statement said although export-import growth remains down, strong inflow of remittance on the back of the government's 2 percent cash incentive for remitters will keep the overall trade balance at a surplus of $410 million at the end of this fiscal year.
In the first five months of the current fiscal year, the overall trade balance remained negative at $307 million, according to the Bangladesh Bank data.