THE central bank’s move to encourage foreign loans for the private sector under the monetary policy for July-December 2014 could affect the country’s financial sector, economists at a discussion meeting on Thursday observed. At the seminar, organised by Bangladesh Institute of Development Studies, they said the monetary policy was highly focused on tackling inflation which will again reduce private sector credit growth when the investment is sluggish, reported a local daily.
Bangladesh Bank officials, however, said allowing foreign loans will help to reduce the local interest rate and will also give competitive advantage to the local businessmen.
‘BB should not encourage foreign loans in private sector rather it should take initiative to lower interest rate in local market,’ former BB Governor Salehuddin Ahmed said at the meeting held at the BIDS auditorium. He said that the local banks’ profitability could face a dent if the businessmen continue taking loans from foreign sources. He said the monetary policy was highly focused on tackling inflation which hinders the private sector credit flow.
Former finance adviser to the caretaker government Mirza Azizul Islam said that in case of foreign loans to private sector, the BB should be very careful. ‘Only the export-oriented businesses could get facilities like this and the central bank should monitor those very carefully,’ he said. He said the BB can take contractionary monetary policy, but there is huge idle liquidity in the commercial banks.
‘Even having such excess liquidity the interest rates are not lowering. The monetary policy should also address the issue,’ he said. He also said that inflation target was not met because of the current depressed situation in the country caused by political uncertainty.
Previously Bangladesh Bank allowed foreign loans in the export or import sector industries which received subsidies. Allowing all private sector firms to have access to foreign loans would certainly enable them to lower their costs of borrowing. But this could come at a cost-if our currency depreciates then the rate of depreciation would be tacked onto the final cost of the loan. Our balance of payments would suffer as more money would leave the country to pay off the principal and interest amounts.
On the other hand our banks would suffer as their profits would come down-but this would not be a bad thing as they would be forced to remain competitive. They could channel the huge amount of idle money that they have into more productive sectors like SMEs which would increase the availability of easy credit to the sectors which need capital infusions. All of the above would also lead to inflationary pressure as demand pull inflation could occur.The tremendous increase in money supply would also lead to greater levels of inflation. Ultimately the final result would be completely dependent on the ability of our industrialists to properly utilize the capital which they have to get more productive returns on their investments. This would be unlikely to happen if they think that the political situation in the country was volatile.
