New monetary policy on Jan 27: Boost to private sector credit vital

Kazi Zahidul Hasan :
The central bank is going to announce the half-yearly monetary policy statement (MPS) for January-June period of the current fiscal on January 27, highlighting the government’s economic policy and nature of monetary outlook to support inclusive growth and price stability.
Former banker and financial analysts held the view that the central bank was perusing a ‘contractionary stance’ in its last three monetary policies, meaning to restrain money circulation in the market to rein in inflation at a time when investment was sluggish. It was also partly influenced by political turmoil which left investors to a period of ‘wait and see’ before putting their money to productive activities.  
But, now since the election is over and some stability is in sight in the country’s political arena, most experts hold the view that the next monetary policy should be expansionary or accommodative, breaking the earlier conservative contractionary stance, allowing free flow of funds to the market for boosting investment also consumption.
“The new monetary policy of Bangladesh Bank (BB) should be pro-poor, pro-growth and pro-equitable. Besides, a balance policy approach is needed to curb inflation and ensure maximum economic growth,” former BB governor Dr Salehuddin Ahmed told The New Nation yesterday.
He added: The nature of the next MPS should be expansionary or accommodative in order to give a boost to private sector credit.
The targeted credit growth was not achieved in the previous policy period due to unfavorable business climate in the country. No matter this was unattained, but the credit growth target should be more than the previous one. It was 18.5 per cent under the last policy period but this should be more than 20 per cent this time, suggested Dr Salehuddin Ahmed
He said, it may create inflationary pressure on the economy but it can be managed through removing supply side constrain of the commodities. “There might be an increase of inflation in food items but an intense market monitoring by the concerned ministry can arrest the food price hike,” he noted.
Moreover, the central bank should not allow excessive bank borrowing by the government which in turn will deprive adequate credit supply to the private sector investors and it will also make private sector credit costlier. It will push up the rates on bank interests.
It should also ensure available credit to the SMEs, small business and agro-sectors because their successful inclusion into mainstream economy would be the contributing factors of growth and employment generation.  
He added that access to finance still remains a major hindrance for the growth of SMEs. So, the central bank should offer a flexible lending policy for the entrepreneurs of SMEs for job creation and economic growth of the country.
“The main aim of the next monetary policy would be credit expansion to the private sector when an investment dearth is prevailing in the economy,” said former adviser of the caretaker government Dr AB Mirza Azizul Islam.
He added: The policy should be adopted in line with the present trend of the economy and political situation.
Commenting on money supply target to the private sector, he said, this target should be fixed at the previous level because the central bank has failed to meet it due to political instability and infrastructure bottleneck.
“BB should focus on reducing spread between credit and deposit to downsize the current interest rates to encourage the private sector investors, he said, adding, once the rate of interest is lowered it may create investment appetite to the investors.
Dr AB Mirza Azizul Islam mentioned that an excess liquidity of Tk 85,000 crore remains idle in the banking channel and the central bank should make a policy how this huge liquidity could be brought into the investment channel. The best way to utilize the fund is the rate cut, he noted.
“The upcoming MPS should be pro-investment. At the same time, it should be focused on to remove supply side constrain of private sector credit by reducing interest rates,” said noted economist Prof Abu Ahmed.
He added: If the central bank can successfully remove such constrain, it will encourage new investment and promote growth.
Prof Abu Ahmed suggested that the government’s economic policy makers should not formulate the monetary policy according to the suggestion of the International Monetary Fund (IMF).
“We see the central bank was preparing contractionary monetary policy, restraining private sector credit in line with the IMF’s suggestion,” he said, adding, “This should not be done again for the benefit of the national economy.
He also suggested that the next policy should set the private sector credit target above 20 per cent which may support achieving an average 7.0 per cent economic growth.  
When asked, he said, the top priority of the new monetary policy would be propping up the investment when it is flagging. Simultaneously, it would look forward to ensure credit flow to the productive sectors to achieve maximum economic growth.