FE Report

Bangladesh Bank's monetary policy was not of much help to boost the domestic economy to compensate for the decline in external demand and soften the adverse effects of the global economic crisis during the Q3 of the current fiscal, the Metropolitan Chamber of Commerce and Industry ,Dhaka(MCCI) stated in its latest review of the country's economic situation.

The MCCI had expressed the view, immediately after the announcement of monetary policy statement in January by the central bank, that the monetary policy would tantamount to a de facto contractionary one, as was pursued in the past. "This apprehension came true."

To be fair to the Bangladesh Bank, however, it should, the MCCI noted, be admitted that it advised commercial banks to fix their lending interest rate at a maximum of 13 per cent. However, in the review period, the financial institutions, instead of responding to the central bank's advice, tightened their lending standards on grounds of rising risks in the economy. "As a result, the cost of borrowing by businesses, inclusive of risk premium, did not decline. The demand for bank credit and hence the volume of bank lending shrank, and excess liquidity piled up in banks. No wonder, therefore, that the call money rate declined from 9.89 per cent in September (Q1 FY09) to 8.30 per cent in March 2009 (end of the third quarter of FY09)."

In the face of declining external demand, the government, the chamber stated, will need not only to extend support to exports but also to adopt policies to increase the domestic demand base for the economy. "Under these circumstances, monetary policy can play an important role in softening the impact of the global economic crisis on economic growth and employment particularly by ensuring liberal access to low-cost credit by small and medium scale industries, agriculture and rural non-farm sectors."

The MCCI said the main challenge to monetary policy will be enhancing confidence in the economy so as to effect a sustained reduction in interest rates. "Purely national self-interest should be the prime consideration in the policymaking process, particularly in the conduct of monetary policy," it added.

The MCCI said: "Data on industrial term lending is not available beyond the second quarter of FY09. Available statistics shows that the disbursement of industrial term loans during Q2 of FY09 was Tk 39.90 billion (Tk.3990 crore), which was 19.4 per cent lower than that in Q1 FY09. In Q2 of FY08, disbursement was Tk 58.78 billion (Tk.5878 crore). The recovery of industrial term loans during quarter under review was Tk 39.85 billion (Tk.3985 crore), which was 2.8 per cent higher than that in the previous quarter. In Q2 of FY08 recovery was Tk 33.11 billion (Tk.3311 crore). Net disbursement of industrial term loans thus stood at an unusually low figure of Tk 40 million (Tk 4 crore) during Q2 of FY09, compared to Tk 10.73 billion (Tk.1073 crore) during Q1 FY09."

"Disbursement of agricultural credit during the January-March quarter of FY09 was Tk 26.79 billion (Tk.2679 crore), which was 1.87 per cent lower than that of October-December FY09. In Q3 of FY08 disbursement was Tk 23.88 billion (Tk.2388 crore)."

"On the other hand, the recovery of agricultural credit during January-March FY09 was Tk 29.97 billion (Tk.2997 crore), which was 73.4 per cent higher than in October-December FY09. In Q3 of FY08 recovery was Tk 13.41 billion (Tk.1341 crore). As a result, the net withdrawal of agricultural credit stood at Tk 3.18 billion (Tk.318 crore) in January-March FY09 compared to the net disbursement of Tk 10.02 (Tk.1002 crore) in October December FY09."

The total NBR tax revenue collection during the first nine months of the fiscal (July-March) was Tk. 351.26 billion (35126 crore), which was 64.5 percent of the NBR's original target for the entire FY2008-09. Stronger effort will be needed to achieve the NBR's target in the remaining three months of the fiscal, the chamber said.

It said total budget financing of the government through borrowing was Tk 142.98 billion (Tk.14298 crore) during July-February FY09, which is 59 per cent of the total target of Tk 242.34 billion (Tk.24234 crore) for the entire fiscal year. Of this total amount, domestic financing was Tk 92.69 billion (Tk.9269 crore) (or 54.5 per cent of the total domestic borrowing target) and the remaining Tk 50.28 billion (Tk.5028 crore) came from foreign financing, which is 69.5 per cent of the targeted foreign borrowing during the fiscal. Domestic borrowing has remained within the proportionate target for the eight-month period, and the recent Tk 26.00 billion (Tk.2600 crore) cut in the size of the Annual Development Programme (ADP) may not require the government to borrow the entire targeted amount during this fiscal, it added.

The MCCI review pointed out that outstanding domestic debt of the Government at the end of February 2009 increased by Tk 161.84 billion (Tk.16184 crore) to Tk 1033.71 billion (Tk.103371 crore), or by 18.6 per cent over February 2008. Some 51.5 per cent of this domestic debt was in the form of borrowing from the banking sector and the rest was borrowed from non-bank sources.

"On the external front, export earnings in January-February of Q3 of FY09 showed some signs of improvement. After experiencing a negative growth of 1.6 per cent in the previous quarter, exports grew by 6.0 percent in the quarter under review. However, 6.0 per cent export growth achieved during the review period was below the 30.3 per cent witnessed in Q3 of FY08", it added.

The total import payments, the MCCI stated, contracted by 3.9 per cent in January-February of Q3 of FY09 from the same period of the previous year. The annual growth of import was 30.1 per cent in Q3 of FY08. The marked deceleration of import growth in the review quarter was the result of lower imports of raw materials and a slowdown in imports of consumer goods and capital goods in tandem with weak domestic demand and subdued activity in the manufacturing sector.

"In the quarter under review, the growth of inward remittances decelerated by 14.5 per cent from 19.7 per cent in the previous quarter (Q2 of FY09) and 47.2 per cent in the same quarter of the previous year. In absolute terms, the total amount of remittances during January-March 2009 was US$2529 million, compared to US$2168 million in Q2 of FY09 and US$2209 million in Q3 of FY08.

"Taka depreciated by 0.6 per cent during the quarter under review. The movement in the exchange rate during the quarter was mainly influenced by the decelerating trend in remittance inflows. Further, market confidence was negatively affected by unfavourable reports by various agencies on manpower exports. To address the instability in the market, the Bangladesh Bank tried to augment the supply of funds in the foreign exchange market."

"In the first quarter of fiscal 2009, global oil prices, the chamber noted, "stabilised at a low level after falling sharply in the previous quarter due to weak oil demand, in line with weaker global economic conditions. Lower world oil prices led to a decline in the domestic retail LPG and furnace oil prices by 13-15 per cent. In addition, the drop in the prices of raw materials used in manufacturing production in line with declining world prices as well as the decline in many major crop prices led the Consumer Price Index (CPI) to decline from 9.4 per cent in December 2008 (end of Q2 of FY09) to 8.1 per cent in February 2009 (Q3 of FY09). Also, the 12-month point-to-point inflation dropped to 5.81 per cent at end-February 2009 from 6.03 per cent at the end of December. The latest outlook of prices indicates the possibility of a further reduction in the inflationary pressure. Recent data show a significant decrease in the price of flour (coarse) by 52.4 per cent, the price of rice (coarse) by 40 per cent, soybean oil by 26.9 per cent, mustard oil 23.3 per cent, and milk food by 5.4 per cent during the April, 2008- April 2009 period."