When Central bank authority declares a new monetary policy, definitely it has hope for its accuracy in the go for implementation and for having its control over financial intermediaries. The debate on whether it is "expansionary" or "contractionary" gets less weighted upon, if financial sector remains disarray. Then declaration of monetary policy statement (MPS) seemingly takes the task of ritual practice. So discussion on MPS taking on the financial sector scenario has its relevancy. Nothing is different with MPS for the July-December period of the fiscal year (FY) 2018-19 unveiled in Tuesday, 31st 2018.
The central bank announced a new monetary policy statement (MPS) for promoting job-centric growth with a restraining approach to curb inflationary pressure on the economy. The MPS for the first half (HI) of the FY focused on helping the sectors in achieving sustainable economic growth by reining in inflation. BB governor told reporters "the MPS will be a restrained one like the previous one to facilitate economic growth and curb inflation." It seems to us, BB's efforts in formulating MPS aiming at maintaining status quo with no ripple and no risk taking on macro variables. Even BB is compromising with private sector investment. Its only headache is how to rein in inflation and achieve growth target. But how! It is done we believe, with an eye on coming general election. The BB has kept unchanged its domestic credit (DC) target at 15.9 per cent for FY 19.
The target of broad money (M2) supply rose to 10.2 per cent for HI of FY19 and 12 per cent for H2, from 9.2 per cent of FY18. BB believes such monetary targets of domestic credit and broad money are sufficient to accommodate real GDP growth of up to 7.8 per cent and average annual inflation of up to 5.8 per cent in FY19. The BB projected the GDP growth ranging between 7.5 per cent and 7.7 per cent in FY19, assuming a continuation of calm domestic political situation and no further escalation of global trade related conflicts. The BB estimated the average inflation to be around 5.4-5.8 per cent in December 2018. While the government set the inflation target at 5.6 per cent for FY19. The BB's latest estimation came against the backdrop of an upward trend of inflation in FY 18, following higher prices of food grains. Food inflation stood at 7.13 per cent in FY18 as compared to 6.02 per cent in the previous fiscal.
The BB has decided to keep policy rates unchanged at their current levels with repo and reverse repo rates at 6.0 per cent and 4.75 per cent respectively, due to elevated inflation expectation, exchange rate pressures and rising global interest rates. The BB also kept unchanged its private sector credit growth target to 16.8 per cent for FY19. On the other hand, credit growth to public sector is estimated at 8.6 per cent for HI of this fiscal and 8.5 per cent for H2. The public sector credit growth was negative 2.5 per cent in FY18. Meanwhile private sector credit growth exceeded the target, set by BB earlier, in June despite a declining trend in the recent months.
The BB data shows that the growth in credit flow to private sector came down to 16.95 per cent in June 2018 on a year on year basis from 17.60 per cent a month ago. It was 15.66 per cent in June 2017. So private sector credit crunch and decline in investment pose a threat to growth target.
But it is to be remembered, an efficient banking channel, reduced corporate leverage, concentration risks and extent of non-performing loans (NPLs) and effective central bank's control over financial sectors determine the workability of a monetary policy. Are they present for the newly declared MPS? Disarray in financial sector is a boil behind a big economic success story of the government. The rising default loans in the eight state banks which accounts for 57.53 per cent of the total classified loans in the banking sector. Bangladesh bank's Financial Stability Report said it.
The presence of state-run banks in the top 10 list for non-performing loans may weaken the stability of the financial system as these banks play critical roles in financial intermediation. Inadequate due diligence in credit management is one of the major reasons behind the escalating non-performing loans (NPLs) in the eight state banks in recent years. The NPL of the eight state banks -- Sonali, Janata, Agrani, Rupali, BASIC, Bangladesh Development, Bangladesh Krishi and Rajshahi Krishi Unnayan -- increased 16.46 per cent to TK42, 752 crore in 2017 from a year earlier.
The practice of loan rescheduling also went up heavily in the banking sector last year in line with the rising default loans which created further stress on banks. In 2017, the amount of rescheduled loans stood at TK 19,120 crore, up 24 per cent year on year. The rescheduled loans, however, had declined in 2016 from a year earlier. Poor due diligence, influenced lending, fraud and negligence in compliance of risk management practices could be the reasons for the rise in rescheduled loans. Private Banks accounted for a highest portion of the rescheduled loans that is 53.1 per cent of total such loans in the banking sector.
The banking sector is said to be the main source of funds in accelerating economic growth through short-term financing. But the pile up of rescheduled loans seems to be a matter of concern. Industrial sector particularly garment and textile are enjoying large amount of rescheduled loans. The banking sector is also facing a provisioning shortfall. Behind such a backdrop, whatever matured it is, a monetary policy is bound to get stuck in non-functional. The bank should boost recovery drives to ensure collection of dues and speedy resolution of stressed assets.
