Monetary Policy Statement (Jan.-June 2014-15): A Rapid Assessment

Bangladeshi EconomyNGO News Report :: The Unnayan Onneshan (UO), an independent multidisciplinary think-tank, in its rapid assessment of recently announced monetary policy statement for the second half of the FY2014-2015 reveals that the growth in private sector credit may fall short of target in view of the observed trend of unachieved targets in previous occasions.

The UO in its January issue of Bangladesh Economic Update 2015 cautions that this trend of shortfall in targets of growth in private sector credit may further worsen the sluggish rate of private investment triggered by current political uncertainty, and cause the rate of growth in gross domestic product not to reach the target of 7.3 percent in FY2014-15.

The research organisation further elaborates that till November of FY2014-15 when the political unrest did not reach the current level, the Bangladesh Bank remained far away from its target of 14 percent growth in private sector credit set for the period of July-December of FY2014-15. The target of 15.5 percent for the January-June period of FY2014-15, therefore, seems to be unrealistic amidst the current state of severe political uncertainty since January 2015.

Referring to the gap between the targets and actual of private sector credit growth, the UO demonstrates that the rate of growth in private sector credit became 12.7 percent in November of FY2014-15 against the target of 14 percent. Similarly, the rate of private sector credit growth was calculated at 10.8 percent and 12.3 percent during FY2012-13 and FY 2013-2014 respectively against the target of 18.5 percent and 16.5 percent respectively.

The “cautiously restrained” policy may face the challenges of increasing real interest rate due to the recent discrepancies between the decrease in inflation rate and the decrease in nominal interest rate, comments the research organisation.

The think tank evinces that the point to point inflation came down to 6.21 percent in November of FY2014-15 from 7.04 percent in July of FY2014-15 representing 0.83 percentage point decrease, whereas the nominal interest rate decreased to 12.49 in November of FY2104-15 from 12.84 percent in July of FY2014-15, representing 0.35 percentage point decrease. Consequently, the real interest rate is on the rise and stood at 5.74 percent, 5.89 percent, and 6.28 percent in September, October, and November of the FY2014-15 respectively.

The UO observes that the decline in deposit rate is higher than that in lending rate causing the interest rate spread to remain high. The deposit rate and lending rate decreased to 7.40 percent and 12.49 percent respectively in October of FY2014-15 from 7.79 percent and 13.10 percent respectively in June of FY2014-15. Meanwhile, the spread, however, decreased to 5.09 percent in October of FY2014-15 from 5.31 percent in June of FY2014-15 and 5.15 percent in March of FY2014-15.

In regard to increased non performing loan vis-à-vis the total loan and availability of large amount of idle money in the banking system, the think tank finds that the non performing loan compared to the total loan increases from 10.5 percent in January-March of FY2013-14 to 10.8 percent in April-June of the same fiscal year. Meanwhile, the net non performing loan increased to 3.9 percent in June of FY2013-14 from 3.4 percent in March of FY2013-14.

Referring to persistent deterioration in the financial portfolio of the state-owned banks, the research organization shows that the government plans to allocate Tk. 6000 crore to the four state owned banks in FY2014-15, which was Tk. 4100 crore in December of FY2013-14 representing a increase of 46.34 percent.

The shortfalls in capital in the banking sector can largely be attributed to the inefficiency in the sector caused by slack surveillance, frequent incidence of scam and fraudulence, captured governance, and poor risk management, adds the UO.

Calling for a cautious harmonisation of fiscal and monetary policies that would cause both the money and fiscal multiplier to work in the economy and channel adequate resources for the expansion of productive capacities, the UO urges for an inclusive political dialogue between the political parties that would create a stable investment climate and increase the private investment by restoring business confidence and cause the national output to grow at 6.26 percent in FY2014-15, as projected by the UO.

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