Private sector credit gallops to 14% amid rising inflation

At a time when global central banks are tightening monetary policy to control inflation, Bangladesh is heading in the opposite direction with credit growth topping 14% in August, a four-year high.

Although inflation slowed slightly in July, the rise in credit put pressure on the prices of goods and services.

In August, credit growth reached 14.07%, signaling that it could breach the monetary target of 14.1% set for the current fiscal year by the Bangladesh Bank in its latest monetary policy.

High import costs amid the rise in the price of the dollar have led to higher financing costs, which has contributed to increased credit growth to the private sector, industry insiders said.

Zafar Alam, managing director of Social Islami Bank, said that although the central bank’s monetary policy has slightly reduced private sector credit growth this year, it has kept interest rates on bank loans down.

Consequently, credit growth increases as customers obtain loans at low interest rates.

Interest rates are currently around 9%, which economists say should be higher given the current economic situation.

Zafar also said prices for all kinds of products have risen, leading to additional costs for manufacturers, which has spurred credit growth in the private sector.

Overall inflation fell 0.08 percentage point in July after five months of strong increases. Food inflation stood at 8.19%, registering a decrease of 0.18 percentage point compared to June.

The government expects inflation to decline further in the coming months as world market oil prices have fallen.

Planning Minister MA Mannan recently stressed that the overall decline in inflation was largely dependent on a reduction in food inflation.

The inflation rate is expected to decline further in the coming months as commodity prices decline in the global market, he said.

Hoping the price of the dollar will come down, Finance Minister AHM Mustafa Kamal also said inflation could return to normal within one to two months.

Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank Limited (MTB), told The Business Standard that bank lending increased as the country’s imports increased post-Covid.

In addition, prices per dollar have increased by approximately 22% in one year, which has increased debt due to the rising cost of consumption.

“The interest rate for loans in banks is very low. Customers easily get loans through which the amount of credit increases. We need to see where customers are spending these loans and this needs to be considered before disbursement.”

According to Bangladesh Bank data, last September the price of the dollar in the country was 85 Tk. Since then, the country has started selling dollars from its reserves as imports have increased, with steady dollar sales pushing its price to Tk 86 amid depleted reserves.

The dollar crisis continued to escalate from April this year, leading to further increases in the price of the dollar. The central bank is looking at Tk 96 per dollar for government imports, while the interbank rate is negotiated at a maximum of Tk 105.35.

As part of the monetary flow tightening, the private sector credit growth ceiling was reduced to 14.1 percent in FY23 from 14.8 percent in FY22, according to the Bank’s monetary policy statement. exercise in progress.

Earlier in 2020, the pandemic, combined with heightened uncertainty, caused credit growth to the private sector to fall to around 8%.

Former Bangladesh Bank Governor Salehuddin Ahmed said inflation was rising due to rising price of goods in the international market. To reduce this inflation, the money supply must be reduced.

If the money supply in people’s hands increases, inflation will increase.

“The growth of credit to the private sector has increased, but if it is spent in the production sector, it will not affect inflation. If production increases, prices will become affordable and inflation will continue to fall” , did he declare.

According to a Bangladesh Bank report, excess liquidity in the country’s banking sector was Tk 2.03 lakh crore in the month of June. Within a month in July, the amount of excess liquidity stood at around 1.9 lakh crore.

In August of the last fiscal year, central bank reserves stood at $48 billion. However, in the outgoing fiscal year, it sold $7.6 billion to banks due to increased import volumes and higher import costs. Additionally, following sales of more than $3 billion so far this year, the amount of reserves stood at $36.97 billion as of September 21.

The highest trade deficit in the country’s history was recorded in the 2021-22 fiscal year, resulting from an increase in the cost and volume of imports relative to exports in the outgoing fiscal year.

The trade deficit was $33.25 billion. At the same time, the current account deficit of transactions with foreign countries also exceeded 18.5 billion dollars.

However, some countries’ dollar market is in a somewhat normal position due to lower import costs and higher remittances since the beginning of the current fiscal year.

In addition, the volume of imports has followed a downward trend over the past two months. Imports in terms of LC (letter of credit) settlement fell by 20% in August compared to the previous month due to various measures such as raising the LC margin to 100% to stabilize the country’s foreign exchange market. LC opening was also on a downward trend.

LC payments amounted to $5.93 billion in August, down from $7.42 billion in the previous month, according to the latest Bangladesh Bank report.