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UO says BB monetary policy falls short of inflation

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Staff reporter

Unnayan Onneshan (UO), anon-government organization, in its Bangladesh Economic Update on the recently announced Bangladesh Bank monetary policy statements said that the statements have been falling short of target set for inflation and private sector credit growth, implying crisis of credibility in effectiveness.

The policies of higher cash reserve requirement (CRR) to absorb the part of liquidity available in the banking system and higher policy rate may not be efficacious in containing inflationary pressure on the one hand, and may adversely affect the growth of private sector credit on the other, observes the research organization.

“As a result, funds are becoming costly for the private investors resulting in the continuation of decline in private investment on the one hand, and the government expends the funds on financing budget deficits and non-development expenditure causing inflationary pressure in the economy on the other.”

Besides, the debt-instrument-based deficit financing of the budget results in inflation and high policy rate along with high interest rates on government savings stifle investment demand, causing the rate of growth in gross domestic product (GDP) to decelerate, cautioned the think tank.

A review of the previous monetary policy statements indicates that the targets set for inflation and private sector credit growth were not achieved.

Actual inflation was calculated at 7.35 percent, 7.35 percent and 8.05 percent against the target of below 7 percent, 7 percent and 7.5 percent in H2FY14, H1FY14 and H2FY13 respectively, whereas the actual private sector credit growth was 15.7 percent, 11.1 percent and 11.4 percent against the target of 16.5 percent, 15.5 percent and 18.3 percent during the corresponding periods, found the Unnayan Onneshan.

Given the historical track record, it said that the current monetary policy may fail to achieve the targets of bringing down inflation to 6.5 percent and ensuring the private sector credit growth of 16.5 percent, set for the first half of FY2014-15.

The research organization evince that the CRR has been raised by 50 basis points in order to address the increased reverse repo operations with consequent costs to central bank, while the interest rates on national savings certificates and bonds are between 12.6 percent and 13.5 percent causing the sales of national savings certificates and bonds to increase by 4.21 percent in the FY14 over the FY13 and cashing of savings tools to decline by 44.12 percent during the corresponding period.

Meanwhile, the interest rate spreads have on an average increased from 4.99 percent in January 2014 to 5.22 percent in May 2014, implying that the deposit rates have fallen faster than the lending rates, said the Unnayan Onneshan.

The formulation of monetary policies in recent periods by the central bank keeping the policy rate higher in order to contain inflationary pressure has not been effective in ensuring sufficient growth in private sector credit causing the private investment to decline from 22.50 percent of GDP in FY2011-12 to 21.75 percent in FY2012-13 and then to 21.39 percent in FY2013-14, showed the research organization.

The think tank further finds that while the private investment has taken a declining trend in recent periods, the government has increasingly been borrowing from domestic sources in order to finance budget deficits.

In FY2011-12, the government borrowed Tk. 20822.11 crore to finance the budget deficit, while government borrowing amounted to Tk. 24549.10 crore and Tk. 13173.10 crore in FY2012-13 and FY2013-14 (July-February) respectively, stifling the investment demand in the economy.

In addition to poor risk management, fraudulence driven by captured governance in the banking system resulting in lower profit to the stakeholders, the adoption of contractionary monetary policy characterized by higher CRR, high policy rate and higher interest rates on government savings tools along with declining growth in disbursement of credit to private sector cause the country’s banking sector to get caught up in trap, says the research organization.

“The risk of inflationary pressure and insignificant growth of private sector credit from domestic sources can be checked by a farsighted and creative harmonization of both fiscal and monetary policies since increased private investment and employment creation will ensure the use of money in productive sectors and cause both the money and fiscal multiplier effects to work in the economy,” the Unnayan Onneshan added.