Bangladesh Bank yesterday set targets to contain inflation and maintain growth momentum in the face of a possible rise in expenditure and political unrest ahead of parliamentary election.
The inflation target for fiscal 2013-14 is 7 percent -- down from 7.7 percent recorded last year -- while BB's growth outlook for the current fiscal year is 6.2 percent, the average of last ten years' growth figures.
"If you are a mountain, think like a mountain," BB Governor Atiur Rahman said, while unveiling the monetary policy for the first half of fiscal 2013-14. "We will have to keep the circumstances in mind, and we have done exactly that while formulating the monetary policy."
“Setting monetary targets is not an exact science -- we consider many factors including a range of economic growth and inflation forecasts, the current levels of credit growth and the general investment climate for the next 6-12 months,” said Hassan Zaman, chief economist of BB.
Zaman said there are several deterrents to achieving the inflation target, which is 7 percent using the 1995-96 base and 6.0-6.5 percent using the 2005-06 base.
“The impending wage increases in the public and private sectors, the likelihood of supply disruptions due to prolonged nationwide strikes in the lead-up to parliamentary elections, bad weather and the rising inflation in India, pose as risks. Long-run data shows inflation in India and Bangladesh inflation move in the same direction.”
BB, therefore, plans to target a monetary growth path in the July-December period that assists in achieving the inflation target, “while ensuring that credit growth is sufficient to stimulate inclusive economic growth”.
Specifically, the central bank aims to contain reserve money growth to 15.5 percent and broad money growth to 17.2 percent by December 2013.
“The broad money growth figure should be interpreted more as a ceiling beyond which inflation risks will escalate. And likewise, if the actual private credit growth figure is below its ceiling it reflects the current appetite to borrow in the economy, which, in turn, is affected by many factors,” said Zaman.
About the private sector credit growth, which has been lacklustre in recent months, the central bank has set the target of 15.5 percent for December 2013 and 16.5 percent for June 2014.
BB set 18.3 percent as private sector credit growth target for the second half of fiscal 2012-13; as per latest data, which is of May 2013, it stood at 11.43 percent.
The slowdown is due to sluggish investment demand in the lead-up to national elections, tighter lending practices by banks and the provision of two new channels through which entrepreneurs can access overseas lenders.
The same factors pose as risks to achieving the private growth for the first half of fiscal 2013-14.
Allah Malik Kazmi, senior adviser to the central bank, said the monetary policy would ensure money supply that fosters real economic growth.
"The private sector credit growth target is very much in line with that," he said, adding that various mechanisms are now in place so money supply does not increase during the election, due early next year.
The monetary stance also assumes that government borrowing from the banking sector will remain around the fiscal 2013-14 budgetary figures of Tk 26,000 crore.
BB has also decided to keep the repo rates and reserve requirement ratios unchanged following the 50 basis-point cut in January 2013. The growing inflationary pressures and the mounting liquidity in the banking sector have made the easing of reserve requirement ratios “unnecessary”, it said.
“Effective transmission of monetary policy, however, requires strengthening credit and debt markets, and this will remain a key focus in the first half of fiscal 2013-14. Overall, there is a greater focus on improving corporate governance in banks as well as using automation and capacity building to strengthen BB supervision,” the central bank said.
Specific actions within performance agreements for state-owned commercial banks (SCBs) and specialised banks including BASIC Bank include ceilings on loan growth and the need to provide regular reporting to BB on a number of issues including large loan approvals, single borrower exposure, off-balance sheet items.
“Clear progress on these benchmarks will be important before any recapitalisation of these banks.”
The statement further said that a 'special diagnostic exam' on the SCBs was completed in June 2013 and on that basis the performance plans will further be amended in the July-December period.
Shitangshu Kumar Sur Chowdhury, a deputy governor, said that the monetary policy is a part of the central bank supervision.
“Some financial irregularities took place at BASIC Bank, which prompted the central bank to sign a memorandum of understanding with the bank so that irregularities lessen.”
The monetary policy stance also aims to preserve the country's external sector stability.
“BB will continue to support a market-based exchange rate, while seeking to avoid excessive foreign exchange rate volatility.”