FE Report
High interest spreads, ineffective corporate governance and inadequate regulatory oversight of financial institutions are adding to the risk of financial instability, said business consultancy Keystone.
Despite repeated instructions to bring the rate within the desired level, high interest spreads are present in the financial system, it said in its Quarterly Review (July-September.)
"It is not impossible to overcome these problems. The challenge would be to move beyond cosmetic reforms and this requires extensive political commitment as well as government and stakeholders, especially bankers," it said.
Bangladesh Bank (BB) is responsible for formulating and implementing monetary policies in Bangladesh. BB's primary objectives are to maintain price stability and financial system robustness, support inclusive growth, create employment, and reduce poverty.
"The primary objectives of the monetary policy are to maintain price stability and financial system robustness, supporting inclusive growth, creating employment, and reducing poverty," the Keystone, a business consultancy, said.
The central bank's new monetary policy for the first half of the current fiscal year focuses on reining in inflation, and keeping the key policy rates unchanged.
Key variables such as projections of GDP growth, inflation, measures of liquidity, credit market and capital market scenarios, existing balance of payment, foreign exchange reserves, exchange rates and other key variables are used to formulate monetary policy.
The cautionary monetary expansion since FY 2011, aided by favorable developments in commodity production and prices at both home and abroad, and stable exchange rates have been able to bring inflation near the estimated optimum level of 7-8 per cent.
A more expansionary stance is unnecessary if not dangerous. BBs quantitative focus on stable inflation and exchange rate would better serve growth and employment generation in the medium and long run.
Given excess liquidity stemming from expansionary monetary policy in 2009, real interest rates for private banks reached very low levels in FY 2008 - FY 2012.
These investments heated up the stock market as well as the real estate market.
BB's intervention in mid-2010 to curb speculative investment was not a bit too late. Millions of small investors lost their capital, 38 per cent of the Tk 355 billion loans in real estate sector were classified, while insiders with privileged information made millions without adding to productive capacity of the nation.
"If the regulatory environment does not improve, monetary expansion will remain prone to risks of malinvestment," said the review.
Economy of Bangladesh has maintained growth rates of above 6 per cent since FY 2009. According to government statistics, the economy grew at 6.12 per cent in FY 2014 (an increase over FY 2013 growth of 6.03 per cent despite deteriorating political and economic environment).
Except for exports and public investments, indicators such as private credit growth and growth in imports suggest that a sustained upturn in state of economic activity has not been reached yet.
The increasing investment and import of machineries are at stark contrast with low credit growth and high levels of real interest rate. In addition, declining loan-to-deposit ratio and building up of excess liquidity shows that liquidity constraint is not the reason of dwindling investments.
Given the cautious stance of banks, gloomy business climate, and political instability, the likely outcomes of pumping additional money into the system will exacerbate inflation without boosting growth, said the Keystone Quarterly Review.
"If another asset price bubble occurs at this point, there is a possibility of financial debacle in Bangladesh".
That would preclude the country from enjoying fruits of a global economic upturn in the horizon. BB is on the correct stance of focusing more on keeping inflation under control and it should continue to do so.
The current monetary policy has tamed inflation that reached a highest, 10.17 per cent, in FY2011. Inflation has decreased to 6.97 per cent by the end of FY2014.
Food inflation has decreased from 12.51 per cent in FY2011 to 8 per cent in FY2014. In addition to prudent monetary stance of BB, decrease in growth of world food prices, stabilisation of exchange rate, food transfer programme for the poor, and good harvest in recent years have all played important roles in curbing food inflation.
babulfexpress@gmail.com
High interest spreads, ineffective corporate governance and inadequate regulatory oversight of financial institutions are adding to the risk of financial instability, said business consultancy Keystone.
Despite repeated instructions to bring the rate within the desired level, high interest spreads are present in the financial system, it said in its Quarterly Review (July-September.)
"It is not impossible to overcome these problems. The challenge would be to move beyond cosmetic reforms and this requires extensive political commitment as well as government and stakeholders, especially bankers," it said.
Bangladesh Bank (BB) is responsible for formulating and implementing monetary policies in Bangladesh. BB's primary objectives are to maintain price stability and financial system robustness, support inclusive growth, create employment, and reduce poverty.
"The primary objectives of the monetary policy are to maintain price stability and financial system robustness, supporting inclusive growth, creating employment, and reducing poverty," the Keystone, a business consultancy, said.
The central bank's new monetary policy for the first half of the current fiscal year focuses on reining in inflation, and keeping the key policy rates unchanged.
Key variables such as projections of GDP growth, inflation, measures of liquidity, credit market and capital market scenarios, existing balance of payment, foreign exchange reserves, exchange rates and other key variables are used to formulate monetary policy.
The cautionary monetary expansion since FY 2011, aided by favorable developments in commodity production and prices at both home and abroad, and stable exchange rates have been able to bring inflation near the estimated optimum level of 7-8 per cent.
A more expansionary stance is unnecessary if not dangerous. BBs quantitative focus on stable inflation and exchange rate would better serve growth and employment generation in the medium and long run.
Given excess liquidity stemming from expansionary monetary policy in 2009, real interest rates for private banks reached very low levels in FY 2008 - FY 2012.
These investments heated up the stock market as well as the real estate market.
BB's intervention in mid-2010 to curb speculative investment was not a bit too late. Millions of small investors lost their capital, 38 per cent of the Tk 355 billion loans in real estate sector were classified, while insiders with privileged information made millions without adding to productive capacity of the nation.
"If the regulatory environment does not improve, monetary expansion will remain prone to risks of malinvestment," said the review.
Economy of Bangladesh has maintained growth rates of above 6 per cent since FY 2009. According to government statistics, the economy grew at 6.12 per cent in FY 2014 (an increase over FY 2013 growth of 6.03 per cent despite deteriorating political and economic environment).
Except for exports and public investments, indicators such as private credit growth and growth in imports suggest that a sustained upturn in state of economic activity has not been reached yet.
The increasing investment and import of machineries are at stark contrast with low credit growth and high levels of real interest rate. In addition, declining loan-to-deposit ratio and building up of excess liquidity shows that liquidity constraint is not the reason of dwindling investments.
Given the cautious stance of banks, gloomy business climate, and political instability, the likely outcomes of pumping additional money into the system will exacerbate inflation without boosting growth, said the Keystone Quarterly Review.
"If another asset price bubble occurs at this point, there is a possibility of financial debacle in Bangladesh".
That would preclude the country from enjoying fruits of a global economic upturn in the horizon. BB is on the correct stance of focusing more on keeping inflation under control and it should continue to do so.
The current monetary policy has tamed inflation that reached a highest, 10.17 per cent, in FY2011. Inflation has decreased to 6.97 per cent by the end of FY2014.
Food inflation has decreased from 12.51 per cent in FY2011 to 8 per cent in FY2014. In addition to prudent monetary stance of BB, decrease in growth of world food prices, stabilisation of exchange rate, food transfer programme for the poor, and good harvest in recent years have all played important roles in curbing food inflation.
babulfexpress@gmail.com
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