The Bangladesh Bank is perusing a contractionary monetary policy as per the prescription of International Monetary Fund which is reducing the capacity to fight economic challenges, said local think-tank Unnayan Onneshan on its latest issue of economic updates.
It said the country’s economy is facing major challenges like declining gross domestic product, slump in investment, negative growth of import in intermediate goods, industrial raw materials and capital machineries, high interest rate spread, huge subsidy for quick rental power plants, higher government borrowing and lesser private sector credit etc.
The monetary policy taken by the central bank previously failed to meet the target in most of the aspects.
‘The economic policymaking has been going through a self-conflicting way. The budget remains expansionary to placate the ruling party stalwarts in an election year while the central bank has adopted contractionary monetary policy,’ said UO.
The UO said most of the targets set by the monetary policy failed to achieve their goals because of policy mismatch.
In the last monetary policy the target of average inflation rate was keeping the rate below 7 per cent but in reality the inflation reached 7.70 per cent in July 2013.
The private sector credit growth was set to 15.5 per cent in December 2013 but the rate of growth declined to 8.89 per cent in July-May 2012-13 from targeted 18.5 in the previous monetary policy.
The previous monetary policy announced limited rate of interest spreads for the banking sector but the spread rate on deposits and advances in foreign and private banks was 8.59 and 5.34 respectively in July 2013.
The target growth of broad money and reserve money also failed to achieve the target of the monetary policy set by the Bangladesh Bank.
The growth of broad money was 14.46 per cent in July-May 2012-13 against the target of 17.7 per cent. The reserve money rose by 14.25 per cent up to July to May 2013 against the target of 16.1 per cent.
The contractionary stance which reduced private sector credit growth rate from 6.71 per cent in financial year 2010-11 to 6.03 per cent in FY 2012-13, said the UO.
It said the growth of private sector credit witnessed a nosedive to 11.4 per cent in May of FY 2012-13, from 14.8 in January of FY 2012-13 per cent against the target of 18.5 per cent in monetary policy.
The targeted growth of private sector credit in the current MP is set at 15.5 per cent, which is a three percentage point lower than previous monetary policy, it said.
Referring to the failure of the central bank in keeping a check on the increased government borrowing, the UO said: ‘This upward trend of borrowing has exerted pressure on the loanable funds
of these banks which in turn crowds out private investment.’
It said the increased borrowing also led to debt payment emerging as a major expenditure and lessened fiscal space. ‘Interest payment has risen from Tk 23,630 crore in FY 2008-09 to Tk 38,627 crore in FY 2012-13, representing an increase of 38.83 per cent,’ it said.
The foreign exchange reserve of USD 15,000 million is residual and not a sign of healthy economic dispensation, considering that the central bank has purchased a huge amount of dollar to stablise the exchange rate, said the UO.
The adjustment of exchange rate reduced the export earnings and imports failed to take the advantage from such exchange rate due to lower credit availability to the private sector.
In FY 2012-13 (up to March), the Bangladesh Bank has purchased USD 5,114 million, compared to mere USD 157 million in FY 2011-12 and USD 316.50 million in FY 2010-11, said the report.
-With New Age input
