Private think-tank Unnayan Onneshan said that the inflation and private sector credit growth targets set in the latest monetary policy statement of Bangladesh Bank might not be achieved given the historical track record of the statements.
In its Bangladesh Economic Update for August, the UO observed that the BB monetary policy statements had been falling short of targets set for inflation and private sector credit growth, implying crisis of credibility in effectiveness on recently announced MPS.
It said that the higher cash reserve requirement and policy rates might not be efficacious in containing inflationary pressure on the one hand, and might adversely affect the growth of private sector credit on the other.
‘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.’
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 per cent, 7.35 per cent and 8.05 per cent against the target of below 7 per cent, 7 per cent and 7.5 per cent in H2FY14, H1FY14 and H2FY13 respectively.
Whereas the actual private sector credit growth was 15.7 per cent, 11.1 per cent and 11.4 per cent against the target of 16.5 per cent, 15.5 per cent and 18.3 per cent during the periods, observed the UO.
‘Given the historical track record, the current monetary policy may fail to achieve the targets of bringing down inflation to 6.5 per cent and ensuring the private sector credit growth of 16.5 per cent, set for the first half of FY 2014-15,’ it said.
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 per cent of GDP in the FY 2011-12 to 21.75 per cent in the FY 2012-13 and then to 21.39 per cent in the FY 2013-14, showed the research organisation.
‘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 characterised 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,’ it said.
The risk of inflationary pressure and insignificant growth of private sector credit from domestic sources can be checked by a farsighted and creative harmonisation 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, it added.
-With New Age input
