Private sector credit growth in Bangladesh accelerated to a four-year high of 13.66 per cent last fiscal year from what was in the preceding year. The propellants were the need to finance rising imports and demand for SME and retail loans as the economy regained its pace in growth from the pandemic’s fallout. The data comes at a time when Bangladesh Bank is aiming to reduce credit to private business.
The regulator not only seeks to contain inflation but also bring back stability in the economy which is facing spiraling current account deficits, pressure on foreign exchange reserves and subsequent volatility in the exchange rates. As the credit growth has remained high, two economists have opined that the Bangladesh Bank contain credit growth to curb excess demand to contain inflation which hit a nine-year high in June. The credit growth, however, remains below the Bangladesh Bank’s target of 14.80 per cent for fiscal 2021-22.
The BB, however, has already taken several initiatives to contain money supply to the market by reducing its credit growth to the private sector. It set a credit growth of 14.1 per cent for this fiscal year. In addition, the central bank also hiked its policy rate twice within a month for the first time since its introduction in 2003. The BB raised it by 25 basis points on May 29 this year and by 50 basis points on Thursday.
When credit grows, consumers can borrow and spend more, and enterprises can borrow and invest more. A rise of consumption and investments creates jobs and leads to a growth of both income and profit. Furthermore, the expansion of credit influences also the price of assets, thereby increasing their net value. An increase in the rate makes loans more costly. The country achieved the latest credit growth due to vibrancy in economic activities following the economic slowdown. When the government asks for austerity, credit growth in the private sector pushes more consumption and more import that will raise import payment. Economists and policymakers should set a balance in credit growth.
