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https://dailyasianage.com/news/191324/mps---private-sector-deprived-of-required-finance
Published: 12:11 AM, 18 August 2019

MPS - private sector deprived of required finance

M S Siddiqui

Monetary policy is the macroeconomic policy laid down by the central bank. It involves management of money supply and interest rate and is the
demand side economic policy used by the government of a country to achieve macroeconomic objectives like inflation, consumption, growth and
liquidity.

The monetary policy acts through open market operations, bank rate policy, reserve system, credit control policy, moral persuasion and through many
other instruments. Using any of these instruments will lead to changes in the interest rate, or the money supply in the economy.

Bangladesh Bank on 31st August, 2019 unveiled a monetary policy statement (MPS) for the fiscal year of 2019-20 keeping most of the previous
policies and rates unchanged.

The policy rates, including CRR (cash reserve requirement), SLR (statutory liquidity ratio), Repo, and Reverse Repo, remained unchanged for the
current fiscal year.

The policy claimed that banking sector has excess liquidity of Tk 85,616 crore despite some banks are experiencing liquidity crisis and the liquidity
crisis in the country's banking sector, private sector credit growth dropped to six-year low at 11.29 per cent in June this year against last MPS forecast
for achieving 16.5 per cent growth in the second half of FY19.

The MPS set the private sector credit growth target at 13.2 per cent for the first half (July-December) of FY20 and 14.8 per cent for the full year against
the 16.5 per cent growth target set for the previous fiscal year (FY 2018-19). The overall domestic credit growth was projected at 15.9 percent while the
public sector credit from the banking system was set at 24.3 percent and the private sector credit growth at 14.80 percent with a view to contain
inflation within 5.5 per cent and support the 8.2 per cent GDP growth target.
It has set the lower private sector credit growth target which will affect the industrial production and employment generation in the country. Global
Economic Forum (GEF) reportedly expressed their concern for lower private sector credit growth target as private sector is playing pivotal role for
attaining a sustainable economy of Bangladesh.

Such a reduction of the private sector credit growth target may affect in achieving 8.20 percent GDP growth for the ongoing fiscal 2019-20. Although,
BB claimed to achieve the GDP growth could be above 8.2 per cent in FY20 considering the attainment of 8.13 per cent economic growth in FY19 with
just 11.29 per cent private sector credit growth.

The MPS will also facilitate the government's budgetary target to keep inflation within 5.5 per cent. Experts have reservation about the projected
achievement of growth of economy with the low credit to the private sector.

According to Global Economist Forum (GEF), Bangladesh needs higher industrial production and bumper food production by 2030 to attain a mid-level
status country. In another report of the forum, the country needs to ensure zero rates of unemployment and poverty for achieving such status.

Policy Research Institute executive director Dr Ahsan H Mansur said that the private sector credit growth projection by the central bank was the
reflection of the reality in the banking sector. No doubt his oblique reference is to the liquidity in commercial banks. The periling liquidity crisis in a
number of banks surfaced due to serious mismatch between assets and liquidity.

BB has claimed that the private sector credit growth had dropped due to the central bank's emphasis on issuance of quality credit and prevention of
aggressive lending and hardly admits the current liquidity crisis in commercial banks.

Governor said the MPS focuses on reducing the non-performing loans (NPLs). He hope that banks will achieved a very insignificant intermediation
efficiency gain as the difference between deposit rates and lending rates did not decrease by much mainly due to increase in Non-Performing Loan
(NPL). BB proposes bankruptcy proceedings for effectively curb down the rate of NPL.

Governor claimed that although the private sector credit growth looks to be lower, its actual size is 7.3 percent bigger than the public sector credit. On
the other hand, public sector credit growth rose to 19.15 per cent in June against the projection for 10.9 per cent during the January-June period amid
government increased dependency on bank borrowing to meet up deficit financing for budget implementation.

The Parliament has approved Tk 5,23,190 crore budget for financial year 2019-20 with about 27.78 per cent in deficit. For financing the Tk 1,45,380
crore deficit, the government would take loan of Tk 63,848 crore from foreign sources and Tk 77,363 crore local sources like banks and saving
certificates. The targeted loan from saving certificate will shrink the deposit of bank and have impact on loan for private sector.

Bangladesh Bank is going to open market operation activities at an interest rate from the current monetary aggregate based monetary policy. This will
have a direct impact on interest rates by giving or raising liquidity to banks and will increase the effectiveness of the monetary policy. In contrast, the
Finance Minister recently declared that BB is going to issue policy to cap the interest rate of 6% on deposit and 9% on bank loan. It is just contrary to
declared monetary policy.

BB find no reason for any depreciation of Dollar as the government has been promoting export and remittance inflow with cash incentives as already
there's an automatic depreciation of local currency as Taka is being traded against US dollar at Tk 84.5 in open market. BB decided not to intervene in
the next fiscal year and believe BDT may be depreciated slightly from its current level.

The central bank Governor Fazle Kabir termed it "cautiously accommodative" like the previously ones. The policy kept most of the policies unchanged
for accommodating adequate credits to achieve the 8.2 percent GDP growth keeping the inflation rate within 5.50 percent.
He also claimed that due to measures taken by Bangladesh Bank to lower the advance deposit ratio (ADR) to 5.5 percent from 6.5 percent, increased
deposit of public fund to private banks, increased remittance, rise in foreign direct investment and growth in export have led to stability in the inter-bank
currency market.

He said there are some risks and uncertainties over the implementation of the new MPS due to some local and international factors, including the
introduction of new VAT law, loss of crops for floods, trade war between the US and China and the Brexit issue. "There might be some opportunities to
get benefits out of the international trade conflicts as well".

Bangladesh Bank has proposed to provide immediate 2 per cent incentive if any expatriate sends one thousand dollars or remittance. If the income
exceed more than one thousand dollar, the documents will be scrutinized. Bangladesh Bank has already sent such a proposal to the finance ministry
regarding this matter.

BB claimed the MPS is cautiously accommodative, however, the private sector is leading vital role to generate employment as well as to reduce
poverty from the country. In this context, reducing the private sector credit growth is not rational.

BB finally admits that banks are facing deposit crisis due to the high rate of interest on Savings Instruments and don't want to intervene in foreign
exchange market despite uptrend in foreign currency. BB proposes to bring the informal economic activities into formal sector through introduction of
the ICT based transaction.

BB may evaluate the promotion of credit growth to the private sector on priority basis in the context of declining credit growth and demand of money in
the private sector. The exchange rate should make flexible and market oriented.

Traditionally, the Bangladesh Bank has long been in practice to announce two MPS -- one in January and another in July -- every fiscal year. From
now on the MPS will be announced once a year instead of twice as BB find no justification of the half-year basis MPS as the situation doesn't support
any major change in the policy. This may need a further careful evaluation.

The writer is a legal Economist.

E-mail: mssiddiqui2035@gmail.com