Much awaited robust pick-up in economic activities; Bangladesh Bank takes proactive cautious stance against credit growth to control unwanted inflation.
** Annual Average Inflation Ceiling
In fiscal year 2017, Bangladesh achieved GDP growth of 7.28% driven by buoyant domestic demand led manufacturing and service sector growth, outperforming the average growth of 4.7% of emerging and developing economies. Despite some challenge (flood related loss) in beginning of the fiscal year, overall economic activity remained buoyant in first half of FY2018. Bangladesh Bank’s econometric model forecast a GDP growth rate in the range of 7.1% to 7.4% in FY18 considering recent economic developments, estimates and sectoral analysis.
Economic activities remain robust due to
Inflation has been gradually edging up in recent months driven by increasing food prices, which is a result of both flood related disruptions and higher global commodity prices. Food inflation increased to 7.1% (point to point) whereas non-food inflation declined to 3.8% in same period making overall inflation to increase to 5.8% in December 2017.
During the remainder of the fiscal year, food inflation pressure is expected to ease from imports and Boro rich harvest (in Bangladesh, rice constitutes 20% in national CPI basket). Bangladesh Bank targets to keep average annual inflation around 6.0% in FY2018. However, based on econometric estimate, Bangladesh Bank projection shows annual average inflation for FY2018 to be around 5.7% to 6.0%. According to inflation expectation survey, one-year-ahead inflation expectation for June 2018 is 6% to7%.
Bangladesh Bank has not made any changes in policy rates considering the trade of growth and inflation risk. However, it will review the rates periodically and make necessary changes if needed. The current Repo rate is 6.75% and reverse repo rate is 4.75%.
Broad Money (M2) growth has been targeted at 13.3% for fiscal year 2018 which was actually 10.7% in December 2017. The target has been set after taking the public and private sector credit growth into consideration. Bangladesh Bank thinks that M2 growth is expected to be adequate for supporting the growth and inflation target of Bangladesh Bank.
H2, FY 18 Target:
Private sector credit growth experienced moderate growth of 18.1% in December 2017 driven by large project related imports of construction and industrial raw materials. Bangladesh Bank has strengthened its supervision over credit disbursement in order to ensure that loan channels to productive sector. Besides, Bangladesh Bank has also intensified on-site and off-site supervision to mitigate any institution specific or system-wide risks. Public sector credit growth was negative in H1, FY2018 as government paid its debt through proceed from the larger-than-planned sales of NSCs.
Non-bank budget financing shifted from market-based tools (bank loans and government securities) to non-market instruments, e.g., National Savings Certificates (NSCs). It may be noted that, during July- Dec, FY18, net NSC sales, were BDT 238 billion.
H2, FY 18 Target
During July-November, FY18, the current account balance recorded a deficit of USD 4.8 billion, deteriorated from a deficit of USD 1.5 billion in preceding fiscal year (FY 2017). Strong import growth of 27.6% caused current account deficit to widen despite uptick in export growth and rebound in remittance inflow. The current account deficit was compensated by favorable financial accounts (higher FDI and medium to long term loans (MLTs).
Current gradual depreciation of BDT against USD and depreciation of USD itself against other major currencies is enhancing export competitiveness and workers’ remittance inflows.
Current account deficit in FY 2018 triggered by
Remittance inflow is expected to improve through
In FY2018 (Jul – Nov)
Bangladesh Bank thinks that bullish trend of capital market during July-December of 2017 was facilitated by positive macroeconomic outlook and increased participation by foreign investors. Bangladesh Bank considers recent fund raising through long-maturity bond issuance by the non-financial corporates much needed as such shift from bank loans to capital market fund raising would help develop the bond market.
(The cover story is developed by IDLCSL Research Team)
The Central Bank announced the Monetary Policy Statement for the second half of FY 2017-18 on January 29, 2018 in the wake of the banking sector’s acute inquisitiveness regarding new directives for lending. As the industry experts and economists labeled the MPS aptly as “Cautionary”, it sets a lukewarm tone for private sector lending. The private sector credit growth target set for H2, FY 18 is 16.8% which is modestly higher than that of last half (16.2%) and considerably lesser than the growth achieved in December’17 (18.13%). In another bid to tighten credit supply and enable banks to continue lending appropriate sectors, the Central Bank curtailed the Advance-Deposit Ratio (ADR) of conventional banks to 83.5% from 85% (89% IDR for Shariah based Islamic banks from 90%), in a separate circular. The new directive asserts that banks must show steady growth in deposit mobilization alongside lending, unlike the scenario till date. On another note, the effort of the Central Bank to curb excessive lending may have a bright impact on the mounting NPL trend. It is the time to discern how the banks maneuver the perfect deposit-lending portfolio mix aligning with the directions by Central Bank and still maintain the thriving growth of their profitability.Download View