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Bangladesh Bank's FY22 monetary policy targets faster economic recovery

  • Published at 09:42 pm July 29th, 2021

Like the previous year, the Bangladesh Bank kept its private sector credit growth target unchanged at 14.8% — a target that economists think is too ambitious

The central bank on Thursday published its monetary policy statement (MPS) for the current 2021-22 fiscal year (FY22), with acceleration of economic recovery amid the pandemic as its main goal.

Like the previous year, the Bangladesh Bank kept its private sector credit growth target unchanged at 14.8% — a target that economists think is too ambitious. 

This is because private sector credit growth fell 6.4 percentage points short of the target last year, with the actual growth being 8.4% as of June 2021. 

Professor Mustafizur Rahman, distinguished fellow of the Centre for Policy Dialogue (CPD), said: “Currently, private sector credit growth is 8.4% and to achieve anything near 14.8%, investment demand needs to be high, which is unlikely amid the ongoing pandemic.”

Although fiscal policy coordination is required to achieve the economic targets, the implementation of the budget on the ground-level will be much more crucial, he added.

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But the central bank assumes the economy will reopen with efficient containment of the pandemic through nationwide vaccination and other health and safety programs. 

As of Thursday morning though, the Covid-19 situation showed no signs of recovery, with health authorities reporting 239 more deaths across Bangladesh in the previous 24 hours, raising the total death toll to 20,255. More than a quarter of Covid-19 deaths in Bangladesh were logged in July, making it the deadliest month of the pandemic yet.

Salehuddin Ahmed, former governor of the Bangladesh Bank, said regarding the MPS: "It is more routine, and much of it fails to address bigger issues. The banking system has to address its underlying issues on giving out loans. Excess liquidity is bad and on top of it, there has been growing deposits. The policy seems to be on preserving the status-quo."

He also pointed out policy without implementation is just big words and the budget implementation is what needs to be focused on.

Meanwhile, Bangladesh Bank has lowered the public sector credit growth target by 11.8 percentage points from last year to 32.6%, based on the forecasted government borrowing from banks as per the national budget of FY22. 

In the second half of FY21, the central bank revised down the public sector credit growth ceiling to 31.7% from the initial target of 44.4% as government borrowing from the banking sector slowed down. The pressure, instead, was on sales of savings certificates.

Furthermore, the programmed growth of broad money (M2) has been set at 15%, which is consistent with the targeted real GDP growth and CPI-based average inflation ceiling, according to the MPS. 

The central bank assumes that some additional monetary support is needed for maintaining the desired income velocity of money and accommodating nearly 17.8% domestic credit growth in FY22. 

For the 2021-22 fiscal year, the government has set the gross domestic product (GDP) growth target at 7.2% and it aims to keep inflation checked within 5.3%. 

However, there might be challenges — global price hikes, commodity price pressure, and price pressure induced by excess liquidity in the economy — that will need to be addressed, the MPS reads. 

Excess liquidity in banks stood at Tk231,000 crore as of June 30 this year.

According to Mustafizur Rahman, although the targeted inflation rate seems fair, “food inflation needs to be checked, which is more important than general inflation for the masses.”

In that regard, Bangladesh Bank has fixed agricultural loan disbursement targets for the state-owned and specialised commercial banks (SCBs) at Tk11,045 crore, and for the private and foreign commercial banks at Tk17,346 crore. 

The disbursement target is 7.98% higher than the target of Tk26,292 crore in the previous fiscal year. 

Additionally, there are some new inclusions in the current agricultural credit policies. For instance, farmers involved in rearing Sonali chicken for commercial purposes will be allowed to enjoy farm loans from this fiscal year.

The latest policy has also included credit norms for rearing Buffalo and Garol variety sheep under the livestock subsector.

This is to meet the growing demand for agricultural and rural credit, meet disbursement targets in light of the ongoing pandemic, to ensure the food security of citizens, and develop a sustainable agricultural credit system.

However, there is an uncertainty of unexpected crop loss induced by natural disasters, according to the central bank.

In regards to ensuring new entrepreneurs and employment opportunities, the Bangladesh Bank will ensure continuation of refinance policies with more focus on labour-intensive micro, small and medium enterprises (MSMEs) — such as transportation, tourism, hospitality, healthcare, and small businesses. 

The central bank is also planning to fully operationalize its credit guarantee scheme to expedite CMSME financing, particularly towards light engineering, cluster and value chain, and women entrepreneurs' development. 

Appropriate prudential measures are required to ensure proper use of the funds, preventing any sort of misappropriation, Bangladesh Bank Governor Fazle Kabir said in his written speech. 

Thus, this monetary policy will try to proactively arrest any deterioration of aggregate demand by supporting new investment and employment generation, and help create enabling conditions for the businesses to normalize production and supply chains, streamlining the proper use of the funds, he further said.

According to the statement, the central bank has also found issues on the proper use of funds availed from the stimulus packages and has ensured to monitor the disbursements.

In a primary observation, Bangladesh Bank found that low-cost loans had been invested in stocks. It also found that after stimulus loans had been given as working capital, the money was withdrawn at once in some cases, not gradually, indicating diversion of the funds.

Professor Mustafizur Rahman said the diversion of funds into the stock market has led to artificial inflation or bubbles that will have dire consequences when it bursts.

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“The artificial bubble that has been induced by the diversion of funds is neither good for the economy nor the consumer. Stocks do not reflect the health of the economy,” he said.

“The stimulus package was introduced for businesses that have been adversely impacted by the pandemic. If working capital from the package was invested in stocks, then this means those businesses did not even need it in the first place,” Rahman further said.

Rizwan Rahman, president of the Dhaka Chamber of Commerce and Industry (DCCI), said there is a lack of accountability in disbursement of stimulus funds. 

“Bangladesh Bank should have a monitoring cell independent of all others only to check with compliance of stimulus usage. Many businesses took a stimulus for wages, yet they fired their employees,” he said. 

The DCCI president suggested that once a company receives stimulus, it must give a report on how it has spent the money. 

“If proven guilty, the government can easily make an example by exposing some of those companies and fining them heavily. The rest will automatically fall in line,” he added.