New Monetary Policy Announced To Spur Investment And To Control Inflation

"The MPS would certainly help spur investment, but with a cautious stance so inflation remains at a comfortable level," Governor Dr Atiur Rahman said while announcing the flagship policy for the first half of the current 2014-15 financial year (FY15) at a press conference at the BB's headquarters in the capital city.

The governor said the MPS would target a monetary growth path, which aims to bring average inflation down to 6.5 percent by June 2015, while ensuring that credit growth is sufficient to stimulate inclusive economic growth.

Economists earlier opined that the BB's MPS should have an effective mechanism to help the government achieve fiscal target of attracting more local and foreign investments, which is seen as the major hindrance to take the economic growth to the higher trajectory.

Against this backdrop, the central bank keeps the private sector credit growth unchanged at 16.5 percent despite the imminent risks of inflationary pressure in the next six months with inflow of a huge amount of foreign fund in the form of external credit and major infrastructure investment.

There was suggestion for increasing private sector credit growth beyond the current ceiling. In a response to this advice, Dr Atiur said the credit growth ceiling is based on an assessment of the current level of 15.7 percent including foreign borrowing.

"This level is sufficient to accommodate any substantial rise in investment and trade-finance over the next six months," he said and added that the actual private sector credit growth would be more than the BB's target with inflow of foreign investment in some big project like the Padma Bridge.

In the new MPS, the central bank candidly acknowledges that maintaining the inflation at the targeted 6.5 percent level would be a challenging job as it would go up due to global food price volatility, any shocks to domestic crop output and the knock-on impacts of any upward adjustments in public sector wages.

BB, however, will use both monetary and financial sector policy instruments to achieve these goals, the MPS said.

In the new MPS, BB expects 6.2 to 6.5 percent growth of GDP (gross domestic product) in the end of FY15 provided that there will be no disruption to the economy.

To support this economic growth, BB will continue the policy supports those are already in place besides accommodating necessary changes to the MPS after regular review. For instance, in order to promote exports, BB has recently increased the Export Development Fund from $1.2 billion to $1.5 billion.

With a view to attracting foreign investment, BB has relaxed restrictions on foreign investor borrowing from the local market and their ability to access working capital financing from their parent company.

Briefing on the monetary stance, the governor said BB would continue the efforts and accommodate any necessary policy shift to expedite inclusive growth.

In this context, the governor expects that the government borrowing from the banking sector would not exceed the fiscal target while the spending pressure would remain within Taka 312 billion borrowing limit, providing banks enough space for the lending to the private sector.

"This is likely to be possible as Ministry of Finance has an established track record of keeping within this borrowing limit," he said.

Apart from the major targets of containing inflation, spurring investment and managing credit growth, the new MPS suggested that the central bank would continue promoting interest rate flexibility by tackling asset quality issues to strengthen the financial system and improve asset quality.

Since the non-performing loans are concentrated among state-owned commercial banks (SoCBs), a stringent financial improvement plan for four SoCBs and Basic Bank is being enforced, the MPS said, adding that BB would closely monitor adherence to these guidelines, which in turn are expected to improve asset quality.

Stock market investors expected that the new MPS would have some specific directions to help increase cash flow to the capital market. Regarding this issue, the BB in the MPS said the central bank would be supportive of the capital market through on-going deeper regulatory coordination and policy support.

"BB will continue to encourage larger borrowers to access the capital market given single borrower exposure limits for banks," the MPS said.

Moreover, the MPS referred that BB begun a review of rules governing private equity along with Bangladesh Securities and Exchange Commission (BSEC) to fill the gaps in the financial landscape.

The monetary policy stance also aims to further consolidate the country's external sector stability. BB anticipates further build-up in foreign reserves in first half of the FY15.

Over the next few months BB will continue to work closely with the finance ministry to review the Foreign Exchange Regulations Act in light of the fact that the country will be increasingly integrated with global financial and product markets.

BB will continue to support a market-based exchange rate while seeking to avoid excessive foreign exchange rate volatility.

"The MPS would help reduce poverty, create more jobs and encourage development activities while keeping inflation at a comfortable level and stabilizing the stock market," the governor said.

The outcomes of the monetary policy will be reviewed in December 2014 in light of prevailing global and domestic economic conditions. In the meantime monthly Monetary Policy Committee meetings will continue in order to make necessary policy adjustments.

Deputy Governor SK Sur Chowdhury and BB Chief Economist Dr. Hassan Zaman assisted the governor in responding to various quarries from the press.

-Bangladesh Sangbad Sangstha (BSS)