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The Central Bank set the private sector credit growth of 14.1% for this fiscal year, which is close to what has been achieved in August.
However, the growth may not be a good indicator of investments as inflation and the Taka’s depreciation is forcing the private sector to borrow more. The private sector credit growth crossed 14%, a four-year high.
According to Bangladesh Bank’s latest data, credit growth reached 14.07% during that month.
Though it’s still lower than the central bank’s monetary target, economists think it may cross the ceiling.
According to the monetary policy statement, the private sector credit growth ceiling was cut to 14.1% for FY23 from 14.8% for FY22.
This important indicator of the economy, which had taken a big hit during Covid-19 lockdowns, has turned around.
Regarding the rising trend, economists and bankers had differing views.
Economists said that bankers had allegedly put a dent in healthy growth, owing to rising import costs from high dollar prices, as well as the extended cash margin for imports of different goods, including the non-essential ones.
AB Mirza Azizul Islam, economist and former financial adviser to the caretaker government told Dhaka Tribune that the cost of raw materials and capital equipment for investment has increased more than before due to the price hike in the international market and the devaluation of the taka.
“The actual investment has not increased much and it is necessary to analyze whether more loans are required to meet the rising import costs,” he added.
Regarding imported inflation, former Bangladesh Bank governor Salehuddin Ahmed said that if the increased credit flow to the private sector is spent on manufacturing, it will not stoke inflation, it will rather be positive for the country’s economy.
“We need to reduce lending to the private sector to tame inflation and for this, the lending rate should be raised,” he added.
According to bankers, if the central bank withdraws the lending rate cap, the interest rate on financing for imports will also increase.
The private sector will be discouraged from taking loans at a higher cost and reduce imports, and subsequently, associated payments.
Requesting anonymity, the managing director and CEO of a first-generation private bank said some banks’ lending to the private sector increased since the reopening of economic activities. “The rising prices of dollars have led to more demand for cash liquidity,” he noted.
Bangladesh Bank’s target
The central bank set the private sector credit growth of 14.1% for this fiscal year.
However, data analysis shows that, in January 2022, the growth of credit flow was 11.07% which came to 14.07% within just eight months.
Earlier, the central bank also hiked its policy rate twice within a month for the first time since its introduction in 2003.
The central bank raised it by 25 basis points on May 29 this year and by 50 basis points recently.
The policy rate is what the central bank charges when commercial banks take loans from it for a short term.
An increase in the rate makes loans costlier.
(DT)
