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CPD spots monetary policy flaws

Star Business Report
The Centre for Policy Dialogue (CPD) said yesterday that Bangladesh Bank in its recently announced Monetary Policy Statement (MPS) has failed to address a series of issues relating to industrial term loans, bad debt and interest rate spread.
Issues that also failed to attract attention of the central bank include integration of microfinance in monetary aggregates, and guiding principles for banks for complying with implementation of Basel 11 framework. observed the private think tank.
The CPD suggested that the government form a high-powered committee to devise practical mechanism to deal effectively with bad debt, infuse competition in financial market, reduce interest rate spread and ensure availability of borrowing by private sector.
“We have no disagreement over the fundamental stance of Monetary Policy that alms to accommodate GDP growth, spur investment and anchor Inflation." said Debapriya Bhattacharya, distinguished fellow of CPD.
"But we feel sorry that issues such as disbursement of industrial term loans to accelerate investment and GDP growth, policy guidelines to deal with bad debt, and reduction of interest rate spread have not received adequate attention," he said.
His remarks came at a press briefing organised by the CPD to share its analysis on the BB monetary policy statement.
In the MPS, the money market regulator said it has taken a policy stance with an aim to accommodate as much as 6 percent GDP (gross domestic product) growth with 6.5 percent annual average inflation.
The MPS also targeted to contain domestic credit (public and private sector) growth at 18.7 percent with private sector credit being at 16.7 percent for fiscal year 2009-10, up from the estimated growth of private sector at 15 percent a year ago.
CPD said the target of 6.5 percent inflation at the end of FY2010 was quite realistic but observed that prices of commodities might start increasing In near future due to recovery of economies from slow-
down.
“Now prices of oil and soybean are on upturn on the international market. So there is no reason to feel comfort under this circumstances,” said Debapriya.
He however said credit demand from private sector could be met due to present liquidity glut in banks although the government wanted a portion of money from banking system.
“Crowding out effects on private sector credit remains a concern. (But) in the view of surplus liquidity, this should not be a worry,” he said.
CPD blamed the central bank for attaching importance to growth of agriculture while paying less attention to expansion of modern and labour-intensive industries.
"If Bangladesh needs to attain a 6 percent GDP growth, expansion of modem and labour-intensive industries is necessary," Debapriya said.
Disbursement of industrial term loan fell by 9.6 percent during the July-March period of FY2008-09 to Tk 13,174.22 crore fromTk 14,574.31 crore a year ago, he mentioned.
He said the central bank earlier
took several steps such as raising the loan disbursement capacity of state-run banks to increase credit flow to productive sectors.
“The MPS did not present any indication of the outcomes of these measures on industrial credit,” he said. "Disbursement of industrial credit will greatly define the growth prospect of manufacturing sector."
He also focused on nonperforming loans, which stood at a total ofTk 23,586.22 crore in the first three quarters of FY 2009.
"Large amount of nonperforming assets has been afflicting the financial sector for a long time."
He said the recent intervention from the highest policy level — statement of Prime Minister Sheikh Hasina and disclosure of Finance Minister AMA Mihith -- regarding loan defaulters has once again resurrected the forgotten issue.
“Given the pessimism about private investment as w’ell as debate on high cost of borrowing, it was expected that the MPS would provide some policy guidelines about dealing with the existing bad debt overhang." said Debapriya.