Economists divided over cheap foreign borrowing

The country's leading economists were divided on Thursday over cheap foreign borrowing by the corporate houses.
Some of them argued this type of borrowing is risky for the country's financial sector while others favoured it saying that this is pivotal to be competitive in the global market.
The sharp division among the economists emerged at a discussion meeting on the latest monetary policy held at the Bangladesh Institute of Development Studies (BIDS) in the city.
Bangladesh Bank (BB) Governor Dr. Atiur Rahman attended the programme as chief guest while former BB governor Dr. Salehuddin Ahmed and lead economist at the Dhaka office of the World Bank (WB) Dr Zahid Hussain joined as the panellists.
Director General of the state-owned BIDS Dr Mustafa K Mujeri was moderator of the programme.
BIDS senior research fellow Dr Monzur Hossain presented keynote paper titled 'Recent monetary policy stance in Bangladesh: a critical review.'
However, the economists were also divided on whether the latest monetary policy statement (July-December) unveiled on July 26 last is in the right direction or not.
Many economists said only improvement of governance in the country could lead to the expected result of the MPS (Monetary Policy Statement).
Speaking at the programme, Dr Salehuddin Ahmed questioned foreign borrowing by corporate houses.
He said many who have been borrowing from foreign sources do not qualify for loans in the domestic sector.
Dr Ahmed said the target for credit to the private sector should be at least 18.0 per cent.
 "I know that the target will not be achieved, but it will work as a signal to the investors," Dr Ahmed said.
Higher target of private sector credit encourages the investors, especially the new entrepreneurs, he added.
Terming the July-December MPS as a contractionary one, the former head of the central bank said small borrowers are affected by the contractionary policies.
Dr Ahmed said the BB should intensify its monitoring and supervision of the banking sector to avert scams.
He said the MPS should have been more analytical.
Speaking at the function, executive director at the Policy Research Institute of Bangladesh (PRI) Dr. Ahsan H Mansur said customers' choices are to be competitive in the global market.
 "Foreign borrowing is giving them a choice," Dr Mansur said.
Dr Mansur said the MPS is not tight rather it is flexible one.
He said bad borrowers are causing problems for depositors as the rates of interest on deposits had dropped.
He said the bad borrowers are also affecting the good ones as the lending rate is not falling due to development of the default culture.
Dr Zahid Hussain, lead economist at the Dhaka office of the WB said the MPS is in the right direction considering the state of the economy.
Quoting a recent study conducted by the IFC, Dr Hussain said the country has utilised its capacity, especially in terms of manufacturing plants, and Bangladesh has surplus labour.
 "In my view, considering the present state of the economy including many infrastructural constraints, the MPS does not have adequate space to do…"
Speaking at the function, former adviser to the caretaker government Dr AB Mirza Md Azizul Islam saw a mismatch in currencies and maturity over foreign borrowing.
 "Foreign borrowing is risky mainly due to currency mismatches," he noted.
Dr. Islam was pessimistic over the targets of the MPS saying many targets set will not be achieved.
 "In my view, even attaining the target set for private sector credit at 14.5 per cent will not be achievable," he noted.
Dr Islam, also a professor at the Brac University, said the central bank has been claiming that the inflation, particularly the core one, remained low due to its pursuance of 'cautious' monetary policy.
But, he said this happened mainly due to the depressed demand.
He noted that the country's banking system is maintaining a 'collusive oligopoly' involving price fixings.
Executive director at the Centre for Policy Dialogue (CPD) Dr. Mustafizur Rahman said fluctuation in the rate of LIBOR (London inter-bank offered rate) might affect the local corporate houses which have been borrowing the foreign loans.
 "It is risky in case of medium to long-term borrowers as the rate of LIBOR fluctuates," Dr Rahman said.
He said LIBOR was 1.5 per cent in 2002 and it shot up to 5.8 per cent in 2007. And it is now less than 1.0 per cent.
Dr Rahman said the non-performing loan (NPL) is growing in the banking system. He urged the central bank to tighten its supervision of the issue.
He noted that the higher sales of savings instruments will raise the debt burden on the government and interest payments.
Dr. MA Taslim, professor at the Department of Economics at the Dhaka University said the central bank should take care of private sector credit to boost investment and then the real output.
He said enhancement of public borrowing is nothing but a waste of money.
Dr. Taslim said financial scams are leading to the NPL that shot up to 10 per cent.
Dr Atiur Rahman said the central bank has been designing the MPS in order to ensure sustainable development.
He said there were many pressures for expansionary policy but the BB did not yield to it.
Dr. Rahman said the latest MPS has a direct link with the real output growth.
He said not only agriculture but also export and SMEs are also deriving benefits from the monetary policies.
The chief of the central bank said inequality both in consumption and income has reduced significantly following adoption of right monetary policies.
 "We are putting emphasis on productive sectors instead of consumption. Actually, we have been performing a balancing act through the MPS".
Dr. Rahman said the MPS wants to contain inflation as a tool to rein in other indexes of the economy.
The BB chief said local companies have been competing globally but manufacturers of other countries had access of cheap borrowing at 3.0-4.0 per cent interest rates.
 "How will the local companies compete if they don't get the same cheap borrowing facility?"
He said only the corporate houses with export orientation and import-substitution industries have access to such types of foreign loan.
 "One portion is earning foreign currencies while the other portion is saving it," Dr. Rahman said.
The BB governor said the central bank is working on the asset quality.
He said the BB is monitoring each and every transaction at home.
 "If any bank fails to realise its instalments, the BB instantly sends electronic mails and the next day the central bank inspectors visit the branch," he said.
Dr. Hassan Zaman, BB chief economist, said the latest MPS has given ceiling for private sector credit growth in the MPS.
 "It is not a target but a ceiling. There is a risk for inflation above the ceiling ," he said.
He said the MPS has estimated 6.5 per cent inflation for the current fiscal year. The BB estimated what will actually happen, he added.
He said the government fixes its targets based on some aspirations. "The BB works on what will actually happen."
Change management adviser to the BB Md Allah Malik Kazemi said liquidity in the banking system has surged as local companies go for foreign loan.
He said a significant amount of liquidity has been mopped up through raising the cash reserve ratio by 0.5 percentage basis points.
He said around Tk 30 billion has been mopped up.
Dr Zaid Bakht, research director at the BIDS said the latest MPS is a contractionary one as the BB has mobilised money from the banking system.
While presenting keynote paper, Dr Monzur Hossain said the current tight stance needs to be revised and an accommodative monetary policy is expected. He said the MPS must take into account the high profit margins of the banks and also reduce the Repo rate.
He said private credit growth has been dropping and it reached 10 per cent in June in 2014.
He noted that private investment has not been geared up. It hovers around 21 per cent of GDP, well below the target (25 per cent ) set in the sixth five year plan.
He also noted that private investment and private credit have positive correlation and lower private credit growth hurts economic growth.