BB forecasts higher economic growth, lower inflation

The central bank has targeted higher economic growth but lower inflation for fiscal 2016-17 as it unveiled its cautious monetary policy for the next six months yesterday.

“In one word, the monetary policy is cautious but accommodative,” Bangladesh Bank Governor Fazle Kabir told reporters at his office after unveiling the Monetary Policy Statement for July-December. 

In his first MPS since his appointment in March, Kabir forecast economic growth at 7.1 percent to 7.3 percent and inflation at 5.5 percent this fiscal year.

The central bank will rely on low global commodity prices in the international market and proactive management of market liquidity to achieve the inflation target.

Finance Minister AMA Muhith has set a GDP target of 7.2 percent and inflation at 5.8 percent for the current fiscal year.

The higher growth in GDP and declining inflation in the last fiscal year might have encouraged the BB to set the higher economic growth and lower inflation targets. 

The government's increasing investment in giant infrastructure projects, healthy exports and a large wage increase in the public sector helped Bangladesh achieve 7.05 percent growth in fiscal 2015-16.

Inflation stood at 5.92 percent on average last fiscal year -- the lowest in 12 years, largely thanks to satisfactory agricultural production, reduction of commodity prices in the international market, prudent macroeconomic management and smooth flow in the supply of goods.

The 12-month average inflation in Bangladesh has shown a declining trend for the last couple of years.

Inflation, which was 7.28 percent in July 2014, gradually fell to 5.92 percent in June 2016.

But a further decline in inflation owing to lower fuel and commodity prices may not be strongly ascertained.

“However, the inflation rate is now in a safe zone,” said the MPS.

It added the central bank would remain watchful about inflation and will adjust monetary growth and policy rates if and when necessary.

Domestic credit would grow 16.4 percent year-on-year in fiscal 2016-17.

“It seems that the projected domestic credit flow target is supportive to attaining the 7.2 percent GDP growth,” said the governor.

Private sector credit growth has been set at 16.5 percent and public sector credit growth at 15.9 percent.

The BB would enhance its monitoring so that the credits are not used in unproductive and risky sectors, Kabir said. It would also ensure that they go to domestic and export-oriented sectors instead.

As in the past, the central bank would ensure the availability of loans for the farming sector in order to ensure food security, said the governor.

The supervision would be tighter so that the small and medium manufacturing sectors receive low-cost financing, he said.   

The declining trend for interest rates will be sustained by strengthened supervisory oversight on efforts to bring down nonperforming loans, according to the statement.

Kabir said non-performing loans or NPLs in banks in Bangladesh are higher compared to those in neighbouring countries.   As a result, the rate of reduction of interest rate, as demanded by the business community, is slow.

“But only proper risk management and timely loan repayment can cut the nonperforming loans and thus the interest rate.”

The ongoing remedial efforts will be intensified during fiscal 2016-17 in the backdrop of a pick-up in lending activities, according to the MPS.

The BB has kept policy interest rates unchanged, with the repo rate held at 6.75 percent and the reverse repo rate at 4.75 percent.

The repo rate is the rate at which the central bank lends money to commercial banks, while the reverse repo rate is the rate at which the central bank borrows money from commercial banks.

Both rates help the central bank control money supply, thus keeping inflation under control.

Kabir also said the MPS aims to keep the consumer price index at tolerable level while achieving GDP and employment growth in line with the government.

The low-interest-rate option of foreign borrowing by industrial undertakings exerted downward pressure on domestic lending rates as well deposit rates.

About anomalies in the banking sector, there is some systemic incongruity, which also existed in the past.

“We are taking steps on the issue. We have taken steps a few days ago,” Kabir said, without elaboration.

Late last month, the central bank fired Syed Abdul Hamid, managing director of Agrani Bank, for violating rules and irregularities.

“If we get evidence and documents, we will take any issue seriously. There is no doubt about that because it is part of governance,” Kabir said.

BB Deputy Governor Abu Hena Mohd Razee Hassan said the recent rise of militant activities in Bangladesh is part of a global problem.

“No central bank in the world formulates its monetary policy keeping this [the extremism] in mind. We hope the militant attacks would not affect Bangladesh's economy and also would not stand in the way of implementing the monetary policy.”

Hassan said the country's law-enforcement agencies are working against the violent activities of the militant groups.

“The central bank has directed all banks so that the militants can't use the banking channel to fund their destructive activities,” he said, adding that banks are looking at the banking record of the people whose names were published in the media as suspected militants.

By October all banks would submit reports to the central bank on the militants' banking records, he added.  

SK Sur Chowdhury, another deputy governor, said the central bank has taken up a liberalised policy in consumer loans in order to prop up sectors such as housing. “This may boost credit growth as there is no liquidity crunch at banks,” he added.

BB Chief Economist Biru Paksha Paul said in the last one year credit growth went up but not inflation.

“Even if the credit growth accelerates in the coming months, inflation will remain downward because of favourable conditions.”

The MPS said providing electricity, gas and infrastructure to businesses is the priority to ensure slightly upward growth in a sustained fashion.

Faster implementation of the annual development programme will be helpful in promoting the revenue and growth potentials.

Allah Malik Kazemi, change management adviser of the BB; Faisal Ahmed, senior economic adviser; and Md Akhtaruzzaman, economic adviser, were also present.