BB aims to squeeze private sector credit on inflation fear

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FE Report
The central bank unveiled its first half-yearly monetary policy for the current fiscal year Monday to achieve inclusive economic growth through strengthening financial position while keeping inflationary pressure under control.
"The monetary policy will be maintained on a growth supportive stance to help promote faster economic growth with due vigil against inflationary pressures," Bangladesh Bank (BB) Governor Atiur Rahman told reporters at the central bank while releasing the monetary policy for July -December period of the fiscal 2010-11 (FY11).
The credit flow to the private sector will be squeezed by over 5.0 percentage point during this fiscal through discouraging loans to unproductive sectors to contain inflationary pressures on the economy although the BB do not advise slashing the private sector credit growth.
Under the new monetary programme, credit growth to the private sector will come down to 16 per cent in June, 2011 from estimated 21.1 per cent in June this year.
"We do not recommend reduction of credit flow to the private sector but we will discourage lending for consumption and unproductive speculative investments," Deputy Governor of the BB Ziaul Hassan Siddiqui said while replying to a query.
The central bank had set the private sector credit growth target at 18.50 per cent by the end of June 2010.
Meanwhile, private sector credit growth rose to 22.3 per cent in May this year from 20.67 per cent in April last following increased financing in productive sectors and trading.
Mr. Siddiqui also said it is a growth accommodative monetary policy which will continue to monitor the country's Consumers Price Index (CPI) inflation.
"Tight monitoring and discouragement of expansion of unproductive, speculative use of credit will continue," BB said in its monetary policy adding "proactive role of civil society and think tanks in fostering cultural attitudes favouring disposable income based consumption and adequate equity based investment will probably be of much help in discouraging wasteful consumerism and casino like mindset for speculation.
Besides, policy interest rates like repo and reserve repo, cash reserve requirement and statutory liquidity ratio will be adjusted as and when warranted by unfolding trends of growth in broad money and domestic credit, according to the monetary policy.
The central bank chief, however, promised to ensure the credit flow to all productive sectors including agriculture and medium and small enterprises for keeping the country's money and credit markets stable.
"At all events, the central bank will ensure adequate credit access for all productive economic pursuits and will take all feasible steps to ensure stability and orderly functioning of the money and credit markets," Mr. Rahman noted.
He also said the national budget projects real gross domestic product (GDP) growth of 6.70 per cent for FY11 which should be attainable subject to favourable weather conditions for agriculture, repaid recovery in export growth with diversification into new markets including the emerging economies and urgent substantial increase in power and gas supplies.
The central bank said the current double digit inflation in India remains a concern, influencing prices in Bangladesh through formal and informal trade but the Indian authorities have recently taken steps to bring down inflationary pressures.
In Bangladesh, the CPI inflation increased slightly in April this year on annual average basis but declined on point-to-point.
The rate of annual average inflation went up by 0.25 percentage point in April last over that of the previous month mainly because of increase in prices of food items.
The inflation rate moved up to 6.51 percent in April from 6.26 percent in the previous month on the annual average basis, according to the Bangladesh Bureau of Statistics (BBS) data.
The CPI inflation in Bangladesh is expected to remain moderate in FY11 within the 6.5 percent annual average level projected by the government in its budget.
On the other hand, the point-to-point inflation rate slightly eased to 8.54 percent in April last from 8.78 percent in March because of the declining prices of both food and non-food items.
The anticipated upward revisions of user prices of gas, fuel oil and power are the likely main internal influences on domestic inflation in FY11.
The high cost quick rental option needed for urgent augmentation of power generation has heightened the urgency of increase in user prices of energy, to keep budgetary subsidy burdens sustainable.
"We've recommended distributing budgetary subsidy burdens evenly after increasing prices of gas and power," BB's Senior Consultant Allah Malek Kazemi said, adding that the price adjustments would need to be selective.
Mentioning decoration of houses and community centers, he said: "You can well afford to pay more."
Senior Deputy Governor of the BB Nazrul Huda also spoke on the occasion.
The first-ever monetary policy statement was formally published in January 2006 and the central bank of Bangladesh declared that it would publish it on a half-yearly basis along with a half-yearly policy review.