Monetary Policy Statement: An Assessment

NGO News Report :: The Unnayan Onneshan, an independent multidisciplinary think-tank, in its current issue of the Bangladesh Economic Update on Monetary Policy Statement (MPS) states that the falling private sector credit growth will continue to suppress investment demand, resulting in decline in rate growth in gross domestic product (GDP).

Moreover, the think tank observes that reduction in investment and growth for the successive three years from those of the preceding ones, on the one hand, and the increase in inflation on the other may cause pressure on the macroeconomic stability of the country.

Urging for a new policy approach, the think-tank says: “Recent declining trend in private sector credit growth, which has factually been causing the growth of the economy to decline in the last three years in a row, can be restrained through a harmonisation of fiscal and monetary policy.”

Referring to high inflation and the pursuance of the contractionary monetary policy, the Unnayan Onneshan (UO) states: “it seems paradoxical for the central bank of the country to pursue consecutive contractionary monetary policies merely to satisfy the IMF conditions without considering its adverse impact on the economy.”

“The current inflationary pressure can be checked by the policy harmonization 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,” adds the Unnayan Onneshan.

The rate of growth of actual disbursement of credit to the private sector in July to September, 2013-14 over July to September, 2012-13 were 10.18 percent, representing a 5.32 percentage point gap.

The UO also observes that the slow demand for investment has been reflected in the credit deposit ratio. The overall credit-deposit ratio in the banking sector decreased to 70.80 percent in December 2013 from 71.91 percent in November 2013. The credit-deposit ratio was 76.59 percent in December 2012 and 80.33 percent June 2012.

Referring to the non-performing loan (NPL), the UO observes that gross NPL increased to 12.8 percent at the end of first quarter of the FY 2013-2014 from 11.9 percent at the end of last quarter of the FY 2012-13, reflecting weak surveillance system of central bank.

As regards the credit growth in real sector, the organisation states that the disbursement of industrial term loan stood at Tk. 8880.79 crore in the first quarter of the current FY 2013-14, which is the lowest among the last five quarters, whereas it was Tk. 9720.3 crore in the first quarter of the previous FY 2012-13.

Referring to the SME loan, the organisation notes that state owned banks observed a negative growth of 38.47 percent at the end of September 2013 compared to September 2012.


In the light of experiences of the previous MPSs, the UO cautions that the target might not be achieved if the present situation such as lack of physical infrastructure, high interest rate spread persists. During July -December, 2013 inflation increased to 7.35 percent while the target was 7 percent. Private sector credit growth has remained stagnant at 11.1 percent during the months of September, October and November 2013 against the target of 15.5 percent.

The central bank forecasts that the rate of growth might be within the range of 5.8 – 6.1 per cent, while the government claims that the growth in GDP for the current fiscal will be 6.3 per cent against the government’s revised target of 7.2 percent, though the budgetary target was 7.5 per cent.

The UO, however, states that the growth in GDP may fall below the decadal average of six percent due to fiscal and monetary management trap, functioned by lack of policy farsightedness and political contestations. The Unnayan Onneshan anticipates that the real rate of growth in GDP in FY 2013-14 might decline to 5.65 percent. In FY 2010-11, the GDP growth rate was 6.71 percent, which declined to 6.23 percent in FY 2011-12, and further fell to 6.03 percent in FY 2012-13.

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