Monetary policy for July-December, 2017

Dhaka,  Sun,  24 September 2017
Published : 18 Aug 2017, 20:41:29

Monetary policy for July-December, 2017

Credit has strong relevance to monetary policy. After all credit creates money or deposits and deposits create loan or credit. One is inseparably linked with the other, writes Saleh Akram
The Bangladesh Bank (BB) recently rolled out its monetary policy for July-December, 2017 period and which set policies that support the government's efforts to rein in inflation and foster economic growth. But the policy statement as well as the deliberations in the press conference that followed centred around credit and appeared more like a credit policy rather than a monetary policy. Naturally the issue of non-performing loans came up and the BB governor told the pressmen present that the BB discourages big loans and will continue to do so in future. If big loans are discouraged, how could the economy grow? What is happening in our country is that big loans are concentrated in a few hands and banks have become a hostage to them. SME loans are also found to be concentrated in a few regions. The whole thing boils down to a single fact that not enough small and medium entrepreneurs are getting loans and many big borrowers are not paying back. They are getting their loans rescheduled and in some cases restructured. There are no clear guidelines for steps to be taken to address the issue and the aspect of spreading SME loans across the country has not been explained.

According to the central bank, this monetary policy is designed to control inflation and provide employment by supporting development activities of the government. Whereas the common perception is that inflation is peoples' enemy, enemy of the country as well as of the economy. Over the last few years, our inflation has already been under control because of reasons other than the dictates of monetary policy. It is because prices of our major imports, such as oil, fell dramatically in international market. Not only oil, prices of other consumer products, intermediate products, raw materials etc. were also sliding down. All these combined to keep inflation under control. Additionally, price of rice in domestic market was stable for a long time which had a positive impact on inflation. But prices of different varieties of rice registered an upward trend recently due to floods in Sylhet and other areas and loss of crops thereof and, decrease in stock of rice in government warehouses. As a result, inflation has been rising and by June 2017 it rose to 5.72 per cent, whereas the government's target is to keep it below 5.5 per cent. All these indicators suggest that the central bank alone cannot prevent inflation, there are other catalysts involved. 

Credit has strong relevance to monetary policy. Credit is inseparably linked with deposits and deposits create loan or credit. According to the policy declared by the Bangladesh Bank, supply of credit will be increased by 16.2 per cent which was 16.5 per cent for the period from January-June 2017. Despite an inflation target of 16.5 per cent for January-June 2017 period, deposits increased only by 11.21 per cent and deposits cannot be upped now by reducing supply of credit. For the last two and a half years, the rate of growth in credit was more than the growth of deposits and in a situation like this, liquidity crisis is the likeliest consequence.  

Banks were in liquidity crisis a few years ago, deposits slumped and interest rate plummeted. A similar situation is likely to occur in the face of protests by the business community. Interest for deposits was excessively lowered and other charges were imposed that work as disincentives for depositors, some of whom are going for savings certificates and some are rushing towards stock market. If flow of credit increases at the present rate and deposits are discouraged by low rate of interest, it will be difficult to maintain credit-deposit ratio which is vital for money in circulation. The central bank must provide incentives for depositors.
Editor : A.H.M Moazzem Hossain
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