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Private sector credit growth in Bangladesh accelerated to 12.94 percent in May, the highest in more than three years, but rising inflation and deepening volatility in the exchange rate have paled the attainment.
The credit growth in the first 11 months of the current fiscal year is, however, below the Bangladesh Bank's ceiling of 14.80 percent for the entire year.
Economists say both the government and the central bank should focus on containing inflation, instead of GDP growth, restoring discipline in the foreign exchange market, and tightening the private sector credit growth until the macroeconomy returns to its former self.
The BB will revise the target on June 30 when it is due to unveil its monetary policy statement for the coming fiscal year of 2022-23.
Contacted, Md Habibur Rahman, chief economist of the BB, said that monetary programs might be designed in a way that tightens the credit flow to the private sector.
It was time to contain inflation and ensure stability in the foreign exchange market, he said, adding that the next Monetary Policy Statement (MPS) will highlight the issues with utmost importance.
The MPS would come at a time when inflation shows no signs of abating.
Inflation surged to an eight-year high of 7.42 percent in May, driven by a hike in food costs amid significant spikes in global commodity prices.
"But we will definitely take plenty of measures to supply adequate funds to the productive sector such that expected jobs are generated,"
Rahman said.
The central bank might consider withdrawing the lending rate cap or making it flexible such that the money supply gets tightened, said a BB official, wishing not to be named.
The central bank has maintained a 9-percent cap on loans since April 2020.
In addition, the monetary authority may hike the key interest rate to make funds costlier, said the central banker.
Central banks usually hike the key interest rate, also known as the repurchase agreement (repo) in Bangladesh, so as to rein in the price pressures since the move reduces the money supply.
Amid a sharp increase in price pressures, the central bank of Bangladesh too raised its key interest rate for the first time in a decade on May 29 as it raised the repo rate by 25 basis points to 5 percent.
But it may have to increase the policy rate once again in keeping with a revision of the lending rate cap. The central bank will keep the private sector credit growth unchanged for FY23, the BB official said.
The credit growth in the private sector accelerated in recent months due to a strong recovery of the economy from the pandemic-induced slowdown, said Mashrur Arefin, managing director of The City Bank.
The recovery has fueled the post-import financing as many businesses have taken up loans to settle import bills. In addition, demand for almost all goods has skyrocketed, leaving a positive impact on credit growth, he said.
However, higher-than-expected import payments have strained the balance of payments in Bangladesh.
Between July and April, imports went up by 41 percent to $68.66 billion, while exports grew 35 percent to $41 billion. This resulted in a record trade deficit of $27.56 billion, up 53 percent year on year.
As a result, the local currency has suffered a major depreciation in recent weeks.
Yesterday, the taka traded at Tk 92.95 per USD on the interbank platform in contrast to Tk 84.80 a year ago.
Higher import costs brought the reserves down to $41.38 billion on June 15, way lower than $46.15 billion on December 31.
"This is not the right time to target a higher GDP growth. Rather, we should ensure a price and exchange rate stability,"
said Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh.
"Slowing down the credit growth will not be harmful to the economy at the moment."
"Once the economy returns to normalcy, importance can be given to boost the credit growth,"
The former official of the International Monetary Fund proposed the central bank adopt a contractionary monetary policy to defuse the ongoing crises.
he said.
"The liquidity position in the banking sector is still good and the central bank should take required measures to keep funds available in the banking sector."
Emranul Huq, managing director of Dhaka Bank, said banks were still doing good in terms of providing funds to the private sector.
He reckons that revising the lending rate cap upwards would not hurt the banking sector as the genuine businesses will still borrow to expand against all odds.
Mustafizur Rahman, a distinguished fellow at the Centre for Policy Dialogue, thinks generating jobs is the most important task to ensure inclusive growth.
"So, the monetary policy should ensure adequate funds for the productive sector," he said. - thedailystar
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