The central bank has unveiled Thursday its half-yearly monetary policy which envisaged higher economic growth through continued expansion of credit to the productive sectors while keeping inflationary pressures under control.
The Bangladesh Bank (BB) also sees several downside risks for implementation of the monetary policy that might be a challenging task.
Major downside risks are socio-political instability, power shortages, infrastructure bottlenecks, unfavourable near-term global outlook and higher prices of oil and other commodities in the world market.
The credit growth to the private sector posted a 24.53 per cent increase in May this year over that of the same period last year.
BB Governor Salehuddin Ahmed announced the half-yearly (July-December) policy without any projection for inflation during the period.
The policy aims at ensuring price stability of essentials to sustain high economic growth, providing the economy a cushion against global price hike, financial turbulences and downside risks, and tapping new opportunities.
"The monetary policy aims at ensuring reasonable price stability and providing support to sustainable and high growth as adopted in the macro framework of the current fiscal," the central bank chief said while announcing the sixth monetary policy.
The central bank chief declared the monetary policy for the first half of fiscal 2008-09 (FY09) at the BB headquarters in Dhaka that targets a real gross domestic product (GDP) at 6.5 per cent and an average inflation rate at around 9.0 per cent in FY09.
"The policy announcement is intended to anchor inflation expectations on realistic near-term assessment of growth and price developments," BB governor noted.
Regarding the downside risks, the central bank chief said the productive growth of the economy is crucial but it has been suffering from continuous power shortages, other infrastructure bottlenecks and socio-political disruptions.
He also said it would be important to strengthen the infrastructure and other support services and ensure congenial business climate especially prior to the general election in December 2008.
"Failure to do so would widen the gap between rising aggregate demand and domestic production creating a new challenge for the monetary policy to restrain aggregate demand," the central bank governor observed.
BB governor added that it would be important to take precautions against any unexpected natural calamites along with ensuring timely supply of inputs to the farmers and take measures to minimise domestic vulnerabilities and risks.
The near-term global outlook is bleak and that could create an adverse impact on the country's exports, he said, adding that Bangladesh needs to remain alert regarding its competitiveness of exports particularly in price-sensitive readymade garments (RMG).
Regarding government borrowing from banking system, Mr. Ahmed said reducing the government's dependence on bank borrowing still remains an unsettled issue.
"Alongside promoting government savings instruments especially targeted toward non resident Bangladeshi, adopting fiscal responsibility and debt limitation law by the government to restrict the extent of debt monetisation would contribute toward enhancing the effectiveness of the monetary policy instruments," he noted.
He also said bringing appropriate changes in the government's debt management strategy would be important to improve the balance between short and long term borrowing since any shift in the borrowing pattern has implications for conduction of the monetary policy.
The monetary authorities need to monitor several recent developments such as stock market over-valuation, spike in real estate prices, sharp increase in import letters of credit (L/Cs) for motor cars and high growth in currency in circulation as pointers to strayed use of monetary expansion for which effective measures would be needed to avoid undue build-up of demand pressure, the BB governor added.
The monetary policy will continue the credit flow to private sector to facilitate the country's productive sectors including agriculture and small and medium enterprises (SMEs).
"For supporting growth promoting polices, the policy stance would give priority to unhindered flow of private sector credit to the economy's productive sectors with agriculture, SMEs and the rural economy being the prime targets," BB governor added.
In order to avoid the build up of excessive demand pressure, special attention would be given to channeling credit to its intended productive and supply augmenting uses alongside discouraging loan flows to non essential unproductive and speculative uses.
"The growth in private sector credit would be watched carefully and if the situation warrants necessary policy adjustments would be introduced after careful consideration of the causative factors underlying private sector credit growth and its likely consequences," Mr. Ahmed said.
Besides, the central bank may consider new refinancing support lines along with the existing refinancing support for agriculture, SMEs and housing sector aiming to create employment opportunities across the country.
"The existing refinancing support for agriculture, SMEs and housing loans would be continued and new refinancing would be considered for socially desirable and emerging activities such as shipbuilding, renewable energy, effluent treatment in manufacturing establishments and similar other areas," the BB governor added.
Responding to a question, the central bank chief said that the downside risks would be comparatively higher if the BB adopts tight monetary policy, as suggested by the International Monetary Fund (IMF) just two days back.
"We will not take any policy that will hamper the credit flow to the private sector. The credit flow has contributed in achieving 6.2 per cent GDP growth in the last fiscal," he said.
While monetary tightening can bring down inflation, it has unacceptably high cost in terms of foregone output and employment which Bangladesh can ill afford at present in view of its growth-and poverty-reduction imperatives, the BB governor noted.
"This, however, does not negate the importance of avoiding excessive monetary laxity which would harm macroeconomic stability and hence growth and poverty-reduction efforts," he added.
When asked about inflation projection of the monetary policy, BB governor said that the central bank did not have enough data right now to make a projection about the inflation during the period.
"We will consider the matter in the second half yearly policy for January-June period of this fiscal," he added.
He also said the central bank is laying emphasis on the productive sector to minimise the inflationary pressures on the economy to reduce suffering of the people.
According to BB's statistics, the growth of broad money (M2) was 17.5 per cent in May last down from 18.3 per cent in May 2007 while credit to the private sector increased by 24.53 per cent on year-on-year basis in May 2008 compared to 15.6 per cent over the same period in the previous year.
