MPS H1 targets to spur private investment

The monetary policy statement (MPS) for the first half of the current 2016-17 fiscal year (FY17) was  unveiled by the Bangladesh Bank (BB) last week. It is a policy instrument of the BB for achieving price stability by controlling money supply and fostering economic growth. The growth rate in the private sector credit flow was set at 16.6 per cent and the growth rate in the public sector credit flow at 15.9 per cent for the first half of the 2016-17 fiscal (July-December). Broad money (M2) growth for FY17 is set at 15.5 per cent.
The national budget of Tk. 3.40 trillion was passed for the FY 2016-17. The government has set the gross domestic product (GDP) growth target for the current fiscal year at 7.2 per cent and inflation within 5.8 per cent.
The monetary policy for the last half of the 2015-16 fiscal (January-June) had set a growth rate in the private sector credit flow at 14.8 per cent and the public sector credit flow at 18.7 per cent. The growth in private sector credits rose to 15.59 per cent in April on a year-on-year basis from 15.16 per cent in March 2016. The growth rate stood at 16.40 per cent until May 2016.
The MPS H2 FY16 projected a 15.5 per cent growth in domestic credit while broad money was expected to grow at 15 per cent. The last half-yearly monetary policy had also aimed at achieving 6.8 per cent GDP growth rate and bringing down the inflation rate to 6.2 per cent.
From Table - I, it is seen that the private sector credit growth showed an upward trend at the end of the FY16. While it was 10.8 per cent in June 2013, private credit growth reached as high as16.4 per cent in May FY16. The private sector credit growth declined from the targeted 18.3 per cent to 10.80 per cent in the MPS (January-June, 2013) due to weak physical infrastructure, inconvenient business environment as well as high interest rate on lending.
The private sector credit growth rose to 13.72 per cent in November 2015 from the targeted 14.30 per cent in the MPS (July-December, 2015). The target of 16.6 per cent private credit growth for the first half of the current 2016-17 financial year (FY17) appears to be ample to support output growth ranging from 7.1 per cent to 7.3 per cent.
According to the H2 FY16 data of Bangladesh Bureau of Statistics (BBS), it is observed that the general point-to-point inflation increased to 5.53 per cent in June 2016 from 5.45 per cent in May 2016. The general point-to-point inflation in April 2016 was 5.61 per cent while it was 5.65 per cent in March 2016. Inflation slightly dropped to 5.61 per cent in the month of April on point-to-point basis following a declining trend in both food and non-food items. The general point-to-point inflation came down to 5.45 per cent in May on point-to-point basis mainly because of fall in prices of food items amid international market glut. The point-to-point food inflation increased to 4.23 per cent in June 2016 which was 3.81 per cent in May 2016. The point-to- point non-food inflation rate decreased to 7.5 per cent in June 2016 which was 7.92 per cent in May 2016. Overall inflation had dropped to 5.92 per cent in the 2015-16 fiscal, according to the BBS data.
Bangladesh is among the top 12 developing countries, which achieved 6 plus per cent growth in 2016. The monetary policy has, no doubt, a critical role to play in economic activities. For an economy to be successful, both monetary policy and fiscal policy should act in a positive direction.  Economics literature suggests that if money supply increases, interest rate will decrease; thus investment demand will increase and aggregate output will increase.
From Figure - I, it is apparent that the target of growth of 7.0 per cent in FY 2011-12 has been missed by 0.8 percentage points and 7.2 per cent in FY 2012-13 by 1.19 percentage points. The same thing happened in FY 2013-14 and FY 2014-15, when the country's actual rate of growth fell short by 1.08 and 0.79 percentage points from the targeted 7.2 and 7.3 per cent. In FY 2014-15, the growth rate in GDP target was 7.3 per cent where 6.55 per cent was achieved with a shortfall of 0.75 percentage point. In FY2015-16, the growth rate in GDP target was 7.0 per cent but 7.05 per cent was achieved-- surplus of 0.05 percentage point. The target of growth in the budget for FY 2016-17 has been set at 7.2 per cent.
The effects of monetary policy stance are reflected in a number of areas including private investment, real output, exchange rate movements and changes in inflation-adjusted real rates of return on depositors' money and price situation. Lower lending rates are supposed to spur private investment and increase output in the economy owing to expected demand-driven increased supply of formal credit. But it is equally important that the depositors, particularly those of small and medium categories and also those on retirement, do not face any unfair deal because of a negative real rate of return. The low interest rate option of foreign borrowing by industrial undertakings exerted downward pressure on domestic lending rates.
The interest rate spread (IRS) in Bangladesh is indicative of interactions of the factors such as high cost of intermediation as a consequence of large non-performing loans (NPLs) and practice of setting higher-than-competitive deposit interest rates. It is noticeable that the average lending rate fell from 12.84 per cent in July 2014 to 10.57 per cent in May 2016 and the average deposit rate fell from 7.71 per cent to 5.67 per cent over the same period.
Increase in loanable funds did not translate to higher investment and consumer spending. Various factors can be cited to explain why credit growth did not pick up but it does not mask the fact that issues like energy supply and land constraints can again hinder transmission of higher loanable funds to greater investment and output. This leaves only the exchange rate channel to facilitate higher output from expansionary policy.
It is generally accepted that private investment in Bangladesh is constrained by infrastructure deficiencies and general political and governance issues. Lowering of lending rates to single digit levels, as demanded by private sector investors and business community in general, is not unreasonable but it certainly cannot be delivered over the short term. Despite some deficiencies in the quantitative framework, the latest MPS contains valuable insight into monetary policy stance of the BB for the coming months. The cautious monetary policy, aimed at supporting 7.2 per cent growth and 5.8 per cent inflation target, is appreciable.
The writer is a student of the Department of Finance, University of Dhaka.
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