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Wednesday, July 17, 2013

Record low credit growth and new monetary policy

Private sector credit growth recorded a five-year low of 11.4% in May 2013 (against the central bank's target of 18.3%), due to depressed private investment, which resulted in a pile of liquidity (about Tk72,000 crore in May 2013) in the banking sector. Economic uncertainty based on the current political crisis and global economic slowdown are the reasons for lower private investment. Although the central bank's Chief Economist also reasoned the greater scope for borrowing from foreign financial institutions for such trends, but this probably a negligible reason. Even if it is a leading factor, then the central bank should take responsibility of allowing such credit in the economy despite having a record level of excess liquidity in domestic banking sector. Also, this questions the central bank's decision of allowing new banks in the market.

Now, the central bank is in the verge of announcing a new monetary policy for the first half of FY14. Given the liquidity scenario and investment condition, the central bank should adopt some innovative strategy, if it is smart enough, to run for much-expected expansionary monetary policy. It is now clear that only adopting expansionary monetary policy won't be enough to attract investors at this moment. While allowing any policy, it should take into consideration a few things: (i) investment should not be allowed to those sectors which may encourage inflation; (ii) investment should be encouraged for fresh employment; and (iii) growth promoting sectors would be priority for investment strategy.

Credit growth hits 5-year low
Expansionary policy likely to revive private investment

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