MCCI for strategy to entice banks to voluntarily cut lending interest rates

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FE Report
The Metropolitan Chamber of Commerce & Industry (MCCI), one of the country's leading trade promotion bodies, stated Thursday that that maintenance of administered ceilings on interest rates for too long might lead to deprivation on the part of the so-called priority sectors of credits as "banks are likely to be tempted to direct loans to non-priority sectors for earning higher interest incomes".
About such ceilings on interest rates on loans for some priority sectors as was imposed under the earlier monetary policy statement (MPS), the MCCI noted that such practices never worked well anywhere. Such measures, it said, should be essentially temporary. "A comprehensive strategy will be needed to encourage banks to voluntarily slash their lending interest rates for all borrowers", it added.
In its reaction to the Bangladesh Bank's MPS for the second half of fiscal 2009-10, the MCCI said the policy announced on January 19, "promises to continue the prevailing monetary policy support in pursuit of attaining sustained high broad-based economic growth, while containing inflation within tolerable levels."
The chamber appreciated the plan of the Bangladesh Bank (BB) "to raise investment in the productive sectors and to contain inflation. To attain these twin goals, credit growth to the public sector will be cut, which will allow increased flow of credit to the private sector."
According to the MPS, the overall outlook for real gross domestic product (GDP) growth in fiscal year (FY)10 remains much the same as the 5.5-6.0% growth projected in the earlier MPS, but it may be higher if the budgetary outlays in the Annual Development Programme (ADP) for various projects are fully and timely used, the MCCI noted.
"The MPS expresses some concern about the inflation rate, which has shown an upward trend in the recent months following a rise in global prices, and may be creeping up in second half (H2) of FY10 but remaining within the 6.5% ceiling projected earlier in the MPS for the first half of the current fiscal," it added.
Welcoming the BB's monetary policy aim of maintaining price stability while permitting monetary expansion needed to support output growth at sustained high rate, the chamber said: "We appreciate that although overall domestic credit growth slowed down in the first half of the present fiscal, credit growth to the private sector was kept high, which grew from 15.42 per cent to 16.73 percent.
"In the BB's new monetary programme, of course, the private sector credit is set to increase by a lower rate of 16.70 per cent in the second half, compared to 16.73 per cent of the first half of the fiscal but still it will be much higher than the public sector credit growth. Nevertheless, we feel that in line with BB's pledge to provide strong monetary policy support for faster output growth in the manufacturing sector, a much higher target for the private sector credit growth would be appropriate", it said.
The MCCI appreciated the BB's recognition that a supportive monetary policy, combined with a stimulatory fiscal policy, is needed to restore investor confidence in the economy and to contain the build-up of inflationary pressure.
It added: "Lower government borrowing from the banking system in the first half of the fiscal, made possible by greater access to foreign financing and the national savings schemes, was welcomed by the business community because it curbs the crowding-out effect of government investment. The BB's new monetary programme, however, shows that government borrowing from the banking system will increase in the second half of the current fiscal. Now that the surplus liquidity of banks has been greatly used up, we would expect that the government will borrow as little as possible to allow the private sector a greater access to bank credit", it observed.
Furthermore, the chamber expressed its appreciation of the BB's emphasis on efforts to deepen financial intermediation and broaden secondary trading in treasury securities while enhancing banks' capital base and quality of risk management and strengthening its own supervision departments.
Private sector lauds
monetary policy
Meanwhile, another FE report adds: Businessmen and bankers have praised the central bank for continuing with the existing 'accommodative' monetary policy saying that it will help spur growth in agriculture and industrial sectors.
They said the Bangladesh Bank (BB) has rightly decided to pursue the growth supportive monetary policy against the backdrop of strong Asian economics recovery and uncertainty in the United States and European Union turnaround.
Ahsan H Mansur, executive director at Policy Research Institute, said the central bank's just-unveiled monetary policy wouldn't be so effective to fend off inflation.
"Inflation is a monetary phenomenon. It has to be controlled through monetary policy," he told the FE.
Dr Mansur, a former International Monetary Fund economist, said that Open Market Sale (OMS) of rice can "alleviate the problem of poor, not the problem of inflation in the economy."
Executive Director of the Centre for Policy Dialogue (CPD) Mustafizur Rahman said the focus of the monetary policy is on Consumers Price Index (CPI), which is import for the economy.
"The inflationary pressure on the economy could become a problem in the near future," Mr. Rahman told the FE, adding that the government's move to reduce its bank borrowing in the second half would help curb the inflationary pressure on the economy.
The central bank in its monetary policy, released on Tuesday, projected a further rise in the country's CPI inflation on point-to-point basis in the coming months of this fiscal. However, it expressed the hope that the 12-month average CPI would remain within the target by the end of FY10.
The country's CPI inflation increased slightly to 6.71 per cent on a point-to-point basis in October last from 4.60 per cent in September because of the rise in prices of both food and non-food items.
The CPD' executive said that it would be a challenging task for the BB to maintain exchange rates between local currency and the US dollar.
Talking to the FE, Mamun Rashid, a banker and economic analyst, said: "Bangladesh Bank's monetary policy has rightly addressed the need for continuing the support for accommodative policy in the backdrop of (a highly probable) strong Asian recovery and not so certain US/EU turnaround."
He said key challenges would be to contain the inflationary pressure induced by cost push (from commodity price hikes) and excessive crowding-in to the private sector (in the event of inefficient Annual Development Programme-ADP implementation and Public Private Partnership execution) while maintaining such monetary support.
"Underspent ADP, may also keep the public sector growth targets unattended and make this overambitious," he noted.
On Tuesday, the central bank promised to continue with the existing 'accommodative' monetary policy during the second half of the fiscal 2009-2010 (FY10) in line with the stakeholders' recommendations.
Top two trade bodies - the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI) and the Metropolitan Chamber of Commerce and Industry, Dhaka (MCCI) - earlier recommended that the central bank continue with the existing accommodative monetary policy for the next six months of FY10 to help achieve maximum economic growth.
"We had recommended the BB to keep continue with the growth supportive monetary policy for another six months of this fiscal for creation of employment opportunity through increasing industrial and agriculture production," Vice-President of the FBCCI Abul Kashem Ahmed told the FE Wednesday.