Navigating H2 MPS during difficult times

Barring a few high expectations and some ambitious projections, the monetary policy statement (MPS) for the January-June (H2) period of the current fiscal year (FY), unveiled last Monday, is pragmatic. It has rightly focussed on meeting what is now needed most. It intends to keep monetary growth-driven inflationary pressure in check, concentrating more on quality and productive lending. The central bank has avoided the use of policy interest rates to attain its prime objective — reining in, what it has said, the undue exuberance in domestic credit expansion through macro-prudential policies. Its intensive surveillance on adherence to the prescribed Asset-Liability Management (ALM) and Forex Risk Management guidelines, in tandem with its incoming move for the banks to follow strictly their Advance/Deposit Ratios (ADRs), are the notable features of the new MPS.

The H2 MPS, notwithstanding its stated measures to restrict credit, is hopeful about maintaining the economy's growth momentum. Worries over the possibilities of inflation and balance of payments (BOP) situation getting worse in the near-term have also been expressed in explicit terms. Most of the inflation-related concerns of the central bank relate to higher-than-projected growth of private sector credit — 18.1 per cent as against the targeted 16.2 per cent — in the HI of the current fiscal when the economy was experiencing high food price-led inflationary pressure.

The MPS has admitted that the recent 'sharp' upturns in imports and credits to private sector that do otherwise bid well for 'growth going forward', are now posing near-term challenges. The high import growth during July-November period of this fiscal's H1 — by 27 per cent over that of the previous half of the last fiscal against about 7.0 per cent growth of exports during the first half of the FY 18 — does, however, provide some reasons to suspect, on real or perceived ground, that capital flight might have partly been responsible for the surge in imports in value terms. The prevailing environment warrants a pro-active stance on the part of the central bank to help achieve its intended moderation of the external imbalance from 'credit-fuelled high import growth'. This has duly been noted in the MPS for the second half of the current fiscal.

In the first half of this fiscal, the high demand for credit from the private sector was met from the previous fiscal's excess liquidity in the banking sector. But the situation has markedly changed now. Both banks and non-banking financial institutions have lately been facing liquidity-related strains - a situation further exacerbated by the growing burden of non-performing loans (NPLs). The rising call money market rate substantiates this. There is now a mismatch between deposit growth rate and that of credit expansion, defying, what economic theory says, credits create deposits. Also, growing inflationary pressures have been acting as a disincentive to the depositors to keep their savings with financial institutions. This situation is in no way unnatural when inflation-adjusted deposit rate tends to become negative. Here, the growth of "mattress" money is a possibility for deposit growth trailing markedly behind credit expansion.

With the liquidity situation now coming under strains, the banks and non-banking financial institutions are compelled by circumstances to offer higher deposit rate to attract savings or retain funds with them. On this count, the new MPS lays greater emphasis on mobilisation of resources through issuance of corporate bonds, instead of remaining dependent on bank credits. There is hardly any novelty in it. But the stark reality is that the country's bond market has remained very much underdeveloped and unattractive. Meanwhile, imports now have also become more expensive than before, because of depreciation of taka in recent months.

The major objectives of the latest half-yearly MPS — facilitating sustained, inclusive economic growth within a framework of price stability - are incontestable. But achieving them during the months ahead of national elections, would present a daunting challenge, in consideration of possible troubled polity. Besides, there are other factors — higher than anticipated government borrowing from the banking system to meet demands coming from different pressure groups and entry of unaccounted for money in the market ahead of general elections — that might unsettle some of the MPS projections. So, the central bank is likely to encounter a troubled time in the coming months. It will need to be pro-active enough about making appropriate and timely adjustments of its policy-actions to ward off possible undesirable circumstances that may adversely impact the economy, both at macro- and micro-levels.