Monetary Policy Statement: Abdicating Accountability

Unnayan-OnneshanNGO News Desk :: The Unnayan Onneshan, an independent multidisciplinary think-tank, in its current issue of the Bangladesh Economic Update on Monetary Policy Statement (MPS) states that the central bank continues to pursue contratctionary stance, abdicating its accountability for consecutive decline in the rate of growth of the economy.


Explaining the decline of growth mainly due to fall in investment demand, the leading research organisation points out that the International Monetary Fund (IMF)-prescribed contractionary stance has reduced the investment capacity of the private sector through lesser availability of credit, which in turn has reduced rate of growth from 6.71 percent in FY 2010-11 to 6.23 percent in FY 2011-12 and to 6.03 percent in FY 2012-13, 0.20 percentage points lower than the decadal average rate of 6.23 percent.


The growth of private sector credit witnessed a nosedive to 11.4 percent in May of FY 2012-13, from 14.8 in January of FY 2012-13 percent against the target of 18.5 percent of MPS. The targeted growth of private sector credit in the current MPS is set at 15.5 percent, which is a three-percentage points lower than that of the preceding MPS.


“The proposed mechanisms is a sequel to the past MPSs, which have already been restraining the rate of growth in private sector through high rate of interest and may further dampen the investment by increasing the cost of capital, as the banks are already advancing at higher rates, resulting in continuance of contracted national output,” alerts the monthly Update on the Bangladesh economy.


Pointing out the recent decline in quantum index of industrial production, the Unnayan Onneshan suggests that the lower industrial production is directly linked to monetary policy as the rate of growth in the industrial term loan has been experiencing a decreasing trend since FY 2010-11. In the third quarter of FY 2012-13, the disbursement of loan in industrial sector was Tk. 10061.24 crore which was Tk. 2172.26 crore less than that of second quarter. In FY 2011-12, the rate of growth in industrial term loan was 9.68 percent, which were 24.30 percent and 29.56 percent in FY 2010-11 and FY 2009-10 respectively.


Referring to the failure of the central bank in keeping a check on the increased government borrowing, the Unnayan Onneshan observes: “this upward trend of borrowing has exerted pressure on the loanable fund of these banks which in turn crowds out private investment,” adds, “this has also led to debt payment emerging as a major expenditure and lessened fiscal space.” Interest payment has risen from Tk. 23,630 crore in FY 2008-09 to Tk. 38,627 crore in FY 2012-13, representing an increase of 38.83 percent


Referring to foreign exchange reserve of USD 15000 million, the Unnayan Onneshan terms it residual and not to be mistakenly seen as a sign of healthy economic dispensation, considering that the central bank has purchased a huge amount of dollar to stablise the exchange rate, the adjustment of exchange rate reduced the export earnings and import failed to take the advantage from such exchange rate due to lower credit availability to the private sector. In FY 2012-13 (up to March), the Bangladesh bank has purchased USD 5114 million, from mere USD 157 million in FY 2011-12 and USD 316.50 million in FY 2010-11.


Observing that the economic policymaking has been going through a self-conflicting way, the Unnayan Onneshan sates that the budget remains expansionary to placate the ruling party stalwarts in an election year while the central bank has adopted contractionary monetary policy.


Table: Targets of MPS (July -December, 2013) and Achievements of MPS (January -June, 2013)




Rate of Inflation The MPS and budget aimed to keep the average inflation down to 7.0 percent. Average rate of inflation reached at 7.70  percent in July 2013
Credit to the Private Sector  

The private sector credit to grow by 15.5 percent in December 2013.

The rate of growth on credit to private sector declined to 8.89 percent in July-May 2012-13 from targeted 18.5 of previous MPS.
Government Borrowing Maintain the budgetary target of FY 2013-14. Government borrowing from banking system increased to Tk. 248 billion in FY 2012-13.
Rate of Interest Spreads Limited rate of interest spreads for the banking sector Rate of Interest spreads to 5.13 percent at July 2013. Interest rate spread of weighted average rate of interest on deposits and advances in foreign and private bank is 8.59 and 5.34 respectively in July 2013.

Broad Money

Set the rate of growth on broad money at 17.2 percent by December 2013 The rate of growth of broad money was 14.46 in July-May 2012-13* against the target (last MPS) of 17.7 percent.

Reserve Money


Set at 15.5 percent by December 2013

The reserve money rose by 14.25 percent up to July to May 2013* against the target (last MPS) of 16.1 percent.
Net Domestic Assets Target set at 16.8 percent by December 2013. The net domestic assets increased by 8.69 percent till July-April, 2013* against the target of 18.4 percent in previous MPS.
Net Foreign Assets Target  is 19.3 percent in current MPS The net foreign assets target was achieved 51.2 percent in may 2013 and set at 14 percent in the last MPS.

Rate of Exchange

Market based rate of exchange while seeking to avoid excessive foreign exchange rate volatility. Bangladesh Bank has been purchasing a huge amount of dollar to stablise the exchange rate. In FY 2012-13 (up to March), BB has purchased USD 5114 million, from mere USD 157 million in FY 2011-12 and USD 316.50 million in FY 2010-11.

Source: Unnayan Onneshan, 2013. Abdicating Accountability: The Monetary Policy Statement of July – December 2013

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