Macro Analysis /

Bangladesh MPS Review: Credit growth targets adjusted to reflect state of economy

    S. M. Galibur Rahman
    IDLC Securities
    31 July 2019
    Published by

    Bangladesh's central bank announced its Monetary Policy Statement (MPS) for FY 20 with no change in policy directives. There has, however, been a few changes to reflect the current state of the economy. 

    Lower target for private sector credit growth, but remains higher than at present: An ongoing liquidity crunch has hit the private sector credit growth badly as it stood at 11.3% in June compared with the 16.5% target. We also see loan demand decrease due to the recent interest rate hike. Adjusting to the current reality, the central bank has lowered the target to 13.2% for December 2019 and 14.8% for June 2020. 

    High government borrowing to continue: The target for government borrowing has increased substantially to 25.2% for December 2019 and 24.3% for June 2020 compared with the 10.9% target of the previous MPS. We note that growth in government borrowing has already crossed 20% in FY 19. This higher government borrowing is to finance the budget deficit from lower growth in government revenue collection. Altogether, the central bank targets 14.5% domestic credit growth for December 2019 and 15.9% for June 2020. 

    Higher target set for reserve money and broad money growth: Reserve money growth stood at 5.3% and broad money growth stood at 9.3% in June.The central bank has set a higher growth target of 9.8% for reserve money and 11.3% for broad money in December 2019. Much higher growths are targeted for June 2020 – 12.0% for reserve money and 12.5% for broad money.

    Current account deficit declined to 1.7% of GDP, projected to improve further: Higher import growth in FY 18 due to large infrastructure projects and rice import normalised in FY 19, which led to C/A deficit declining to 1.7% of GDP from 3.2% in the previous year. In absolute terms, it improved to US$5.2bn in FY 19 from US$8.8bn in FY 18. Net Foreign Asset (NFA) growth of 2.2% versus a projection of -3.4% helped in C/A recovery faster than expected. The central bank projects this NFA growth to continue in December 2019, growing by 2% but eventually declining to 0.3% at end-FY 20. Besides, the central bank projects official reserves to stay at similar levels (US$32.7bn) for the next year as well. 

    No change in policy rates as the central bank believes market is in a comfortable balance: The policy rate was kept unchanged – repo rate at 6.0% and reverse repo rate at 4.75%. Besides, CRR and SLR were also kept unchanged at 5.5% and 13.0%, respectively. As both the taka and foreign exchange interbank rates have eased, the central bank decided not to make any change in the policy rates. 

    Reiterated budget targets for GDP and inflation: Targets for GDP growth at 8.2% and inflation ceiling at 5.5% were set in the National Budget for FY 20. The central bank maintains the same target.  

    Note that there will only be one MPS for each year from now on. However, the central bank will bring necessary changes in policy directives intermittently if there is any need.