The New Nation - Internet Edition

Staff Reporter

Bangladesh Bank (BB) yesterday announced its half yearly monetary policy giving more priority to economic growth rather than on the immediate challenge of taming inflation.

Governor Dr Salehuddin Ahmed declared the policy at a crowded press conference at the Bank's head office in Dhaka that targets to maintain satisfactory growth rate amidst soaring inflation.

He said, "The policy stance targets a real GDP growth rate of 6.5 per cent and an average inflation rate of around 9.0 per cent in FY09."

For supporting growth promoting policies, the policy stance would give priority to unhindered flow of credit to private sector and the productive sectors, the Governor said.

The central bank's policy stance, which appears to be expansionary, is directly opposite to the suggestions of the International Monetary Fund (IMF).

The IMF was advocating for monetary contraction to accommodate this year's expansionary fiscal policy of the Government and to curb inflation.

"We will not take any policy that will hamper the credit flow. It is better to try for easing the burden of the inflation rather than to keep it under a certain level," Dr Salehuddin said in this regard.

He categorically said that it is not the duty of this organization to fix a target of inflation rate or directly check its rise.

According to the central bank, Bangladesh cannot afford a tight monetary policy "at present in view of its growth and poverty reduction imperatives".

"While monetary tightening can bring down inflation, it has unacceptably high cost in terms of foregone output and employment," it says.

However, the BB says it will not downplay the importance of avoiding "excessive monetary laxity which would harm macroeconomic stability".

The bank aims to ensure "reasonable price stability" and provide support to "sustainable and high output growth".

The central bank bills agriculture, SMEs, and the rural economy as the prime targets of credit flows. It would also undertake effective measures to encourage increased flow of credit to women entrepreneurs.

Dr Salehuddin Ahmed said that the growth in private-sector credits would be watched carefully, and if the situation warrants, necessary policy adjustments would be introduced.

For ensuring banking sector's soundness and liquidity, the BB will closely monitor the liquidity situation in the banking system and adopt appropriate measures to overcome any temporary pressure on liquidity.

The central bank would also continue to urge the banks to reduce their lending rates, the Governor said.

To keep the pressure of imported inflation under control on the foreign-exchange market, BB would maintain desired exchange-rate stability.

He said that measures would be taken to divert increasing amount of remittances toward investment in productive sectors to ease the potential demand pressure and expand the economy's productive capacity.

BB says that the implementation of the monetary policy stance faces several downside risks, which might make monetary management challenging in FY09. "It would thus be critical to monitor these challenges and implement timely policy response."

However, the Bank will introduce corrective measures speedily if necessary, for anchoring inflation expectations and before any major destabilizing effect on macroeconomic stability takes place.

"While the most effective means of fighting inflation in the present situation is by increasing domestic production, a close watch is necessary on demand side pressure," it says.

Bangladesh Bank was also critical to the fiscal policy of the Ministry and said, "Reducing the government's dependence on bank borrowing still remains an unsettled issue."

Questioned about it, the Governor declined to comment, but said, "The Government should reduce its dependence on banks."

The Bank observes that the domestic economy, despite its enough potential, operates below its capacity which needs to be realised to achieve short-term stability and brighten long-term growth prospects.