• Thursday, October 23, 2014

Cautious, conventional

Economists analyse policy stance

Rejaul Karim Byron and Md Fazlur Rahman

The central bank's monetary policy statement for the second half of the fiscal year is largely conventional and has maintained consistency on priorities, economists said yesterday.
Ahsan H Mansur, executive director of Policy Research Institute, said the new statement, which was unveiled yesterday, is fine, given the current situation, as it has maintained the strong efforts to contain inflation.
"Although the central bank has not succeeded completely in tackling inflation, this effort is necessary as inflationary pressures are arising internally due to a recent rise in wages and higher food prices and externally."
Bangladesh Bank should have been more ambitious with the inflation target, as it is not lagging far behind the goal, he said. "It should have aimed for 6 percent now and 5 percent two years later.”
The former International Monetary Fund official also said the central bank is signalling that the interest rates will not be cut now.
“It is fine as cheap funds normally flow to speculative sectors such as stockmarket and land. At the same time, it is advising banks about ensuring adequate credit for good borrowers."

He said the emphasis on good credit is very time-befitting, as credit quality has fallen in the last four to five years.
"The credit quality is now at a worse stage, and it may go down further. So, we have to come out of this and we have to give emphasis on inspection and supervision and banks will have to be cautious."
About non-performing loans, he said the current situation is very high, as it was about 6 percent even a couple of years ago.
The current scenario does not reflect the true picture, as it does not include the losses incurred by investors in the stockmarket among others. "We are only getting the partial picture," he added.
Mansur said the economic activities are now at a standstill not because of higher interest rates but because of political uncertainty and safety concerns. "The government will have to address it by going beyond the monetary policy," he told The Daily Star.
Zahid Hussain, lead economist of the World Bank's Dhaka office, termed the statement cautious, responsible and constructive.
"It is cautious because there is a risk that inflation might go up. So, there was a pressure to cut interest rates to increase investment."
But, interest rates are not the main barrier to reviving investment, he said. "Rather, it is uncertainty. Plus, there is also a lack of confidence."
If the central bank had given an expansionary monetary policy there was a risk of rising inflation, he said. “It would have made loans cheaper, and they would have flown to the unproductive sectors."
Hussain said the statement is responsible from a sense that there is adequate liquidity in the banking system.
"The regulator could have given a signal to increase the public sector borrowing. But the central bank has not done so. Rather, it has given emphasis on keeping public sector borrowing within the budgetary target."
It is constructive as it has kept policy space in case the demand for credit in the private sector goes up.
Towfiqul Islam Khan, a research fellow of the Centre for Policy Dialogue, said the think-tank had hoped for an accommodative monetary policy.
"Rather, it is consistent and has not brought in major changes to the central bank's stance. We could have been more innovative to stimulate growth."
He, however, lauded the central bank's role in keeping the exchange rates stable.
About the central bank's indication that it would extend benefits to businesses and sectors affected by the recent disruptions, he said: "Many incentives are already in place, so there is nothing new."
Khan said they had hoped more specific incentives and dedicated funds for the small and medium enterprises and the agro-based industries hit hard by the unrest.
"The central bank has acknowledged the problems faced by the SMEs and asked banks to reschedule their loans case-by-case, if needed. But we have to keep in mind that SMEs are normally small clients and thus can't bargain with a strong voice with the banks."
The CPD researcher also said the central bank needs to be cautious about allowing private companies to obtain external loans so the funds go to export-oriented industries and tradable goods.
He said he does not think that there would be any major uptick in private sector credit growth given the current political circumstances, adding that the target of 16.5 percent for the fiscal year is “too ambitious”.
"Although there are some improvements in the political arena the condition for wooing investment is yet to be there."
About the target on gross domestic product, Khan said the economy would expand between 5.6 percent and 5.8 percent in the course of the fiscal year.  
The economist also said it is not clear how the central bank would bring down the net foreign assets to 10 percent from over 30 percent when the statement says that it would target to further consolidate the external sector stability and anticipates further build-up in foreign reserves.

Published: 12:00 am Tuesday, January 28, 2014

Last modified: 4:19 pm Tuesday, January 28, 2014

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