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Economists back BB's strict stance

Businessmen say curbs on credit to hurt investment

Sohel Parvez
Bangladesh Bank's tightened monetary policy received applauds from economists, but businesses expressed concerns that the target to curb credit to the private sector would discourage investments.
The reactions came after the central bank unveiled its Monetary Policy Statement with an aim to bring down inflation by reining in credit growth.
The economists said, other than targeting growth in money supply, scope for the BB to contain inflation and reduce external imbalance was limited in the face of a slowdown in exports, heavy depreciation of the taka and dwindling foreign exchange reserves.
But the success of the BB in attaining its targets will depend on a squeeze in government's borrowing from banks.
Here, the decision lies with the hands of the government, its fiscal policy and ability to ensure speedy disbursement of foreign aid, they added.
“Monetary policy alone is not sufficient. The fiscal policy should share the burden of adjustment as well," said Ahsan H Mansur, executive director of Policy Research Institute.
In the first six months of the current fiscal year, credit to the public sector
soared by 62 percent.
Mansur said the government's borrowing from the banking system needs to be contained urgently.
“We have to anchor domestic credit as a whole. This can only be achieved with active support from the fiscal side managed by the finance ministry.”
In the MPS for January-June, the BB aims to bring down credit growth to government to 31 percent by June this fiscal year. It also targets to restrain credit growth to the private sectorto 16percentby June down from 18 percent in July-December.
Mustafizur Rahman, executive director of the Centre for Policy Dialogue, said the BB might achieve its target on private sector credit growth. But it will be difficult to bring down government borrowing in line with the BB target, he said.
"The major problem remains here," he said. "Achieving that target depends largely on the government itself."
"The success of the policy depends on the government's fiscal policy and economy-wide policy," Rahman said, pointing to increased revenue generation by the government to finance budget deficits and government's ability to mobilise and utilise foreign aid. Hassan Zaman, senior economic adviser to the BB governor, said, “BB's restrained monetary stance aims to bring inflation down to a single digit in the next few months, and restore a new external sector equilibrium along with sufficient space for private sector credit growth.
He said the average private sector credit growth rate in emerging Asian countries in the second half of 2011 was 15 percent. The 16 percent private sector credit growth in BB's new monetary policy is therefore in line with regional comparators and more than sufficient to meet growth targets, he said.
Zahid Hussain, senior economist at the World Bank Bangladesh, said achieving the targets will require protecting the net foreign assets at very close to the end-December levels.
It will also require not allowing credit to the public sector to grow by more than 4.9 percent and credit to the private sector by not more than 7.7 percent, he added.
"There is thus very limited room for credit expansion to both public and private sectors."
However, Mir Nasir Hossain, former president of the Federation of Bangladesh Chambers of Commerce and Industry, said the target to squeeze credit to private sector would hurt investment and job creation.
He said credit has already become costlier as banks are charging 16-17 percent interest.
He said cost of business in the productive sector would also rise after BB withdrew the cap on interest rate earlier.
Md Shafiul Islam Mohiuddin, president of Bangladesh Garment Manufacturers and Exporters Association (BGMEA), said the central bank's target to reduce credit flow to the private sector would discourage new investments in the clothing sector and affect industrialisation.
"Fresh investment will not come the way we expected," he said.