The move by Bangladesh Bank (BB) for maintaining higher cash reserve requirement (CRR) to absorb access liquidity from the banking system would fail to contain inflationary pressure rather it would adversely hamper private sector investment in the country.
The monetary policy for the first half of current fiscal (2014-15) may fail to achieve the target of taming inflation to 6.5 percent and ensuring the private sector credit growth of 16.5 percent, set for the first half of FY2014-15.
The UO made the observation of the Monetary Policy Statement announced for the first half of the current fiscal year by the Bangladesh Bank recently.
“Funds are becoming costly for the private investors resulting in continuation of decline in private investment. On contrary, the government depends more on banks for financing budget deficits and non-development expenditure, which is causing inflationary pressure in the economy,” the UO added.
Besides, debt-instrument-based deficit financing of the budget results in inflation and along with high interest rates on government savings stifle investment demand, which ultimately decelerate the rate of growth in gross domestic product (GDP), cautioned the think tank.
A review of the previous monetary policy statements indicates that the targets set for inflation and private sector credit growth were not achieved. Actual inflation was calculated at 7.35 percent, 7.35 percent and 8.05 percent against the target of below 7 percent, 7 percent and 7.5 percent in second half of FY14, first half of FY14 and second half of FY13 respectively, whereas the actual private sector credit growth was 15.7 percent, 11.1 percent and 11.4 percent against the target of 16.5 percent, 15.5 percent and 18.3 percent, the UO mentioned.
The research organisation evinces that the CRR has been raised by 50 basis points in order to address the increased reverse repo operations with consequent costs to central bank, while the interest rates on national savings certificates and bonds are between 12.6 percent and 13.5 percent causing the sales of national savings certificates and bonds to increase by 4.21 percent in the FY14 over the FY13 and cashing of savings tools to decline by 44.12 percent during the corresponding period.
Meanwhile, the interest rate spreads have on average increased from 4.99 percent in January 2014 to 5.22 percent in May 2014, implying that the deposit rates have fallen faster than the lending rates, says the Unnayan Onnesha.
The formulation of monetary policies in recent periods by the central bank keeping the policy rate higher in order to contain inflationary pressure has not been effective in ensuring sufficient growth in private sector credit causing the private investment to decline from 22.50 percent of GDP in FY2011-12 to 21.75 percent in FY2012-13 and then to 21.39 percent in FY2013-14, shows the research organisation.
The think tank further finds that while the private investment is on declining trend in recent periods, the government has increasingly been borrowing from domestic sources in order to finance budget deficits. In FY2011-12, the government borrowed Tk. 20822.11 crore to finance the budget deficit, while government borrowing amounted to Tk. 24549.10 crore and Tk. 13173.10 crore in FY2012-13 and FY2013-14 (July-February) respectively, stifling the investment demand in the economy.
Besides, poor risk management, fraudulence driven by captured governance in the banking system resulting in lower profit to the stakeholders, adoption of contractionary monetary policy characterised by higher CRR would put the country’s banking sector in traps, says the research organisation.
“The risk of inflationary pressure and insignificant growth of private sector credit from domestic sources can be checked by a farsighted and creative harmonisation of both fiscal and monetary policies since increased private investment and employment creation will ensure the use of money in productive sectors and make money and fiscal multiplier effects work in the economy,” adds the UO.
Courtesy: Daily Sun