Express (July 06, 2011)
The Bangladesh Bank (BB) has sounded warning bells on the country's Balance of Payments (BoP) situation, which, it fears, might come under 'tremendous' pressure in the coming months if the current trend in import demand and growth of domestic credit persists.
It said if the current account balance continues to be in the red and the capital account surplus fails to record growth, the BoP would experience greater deficit in the coming months.
The central bank has made a few suggestions to the government to reverse the trend. It felt that the Taka should be allowed to depreciate further vis-à-vis the greenback with a view to facilitating greater inflow of remittance and export proceeds.
According to the BB statistics, between August and February of the last fiscal, the BoP had been always in the negative territory.
The BB has also suggested enforcement of a contractionary monetary policy that, it maintains, would lead to hike in lending rates and consequent squeeze in the supply of broad money (M2).
To complement the suggested moves to reduce pressure on the BoP, the money market regulator has requested the government to pursue a 'conservative' fiscal policy in order to keeping its borrowing from the banking system within the targeted limit.
Furthermore, the central bank suggested taking initiatives to attract foreign investment in the country, enhancing the receipt of soft loans and grants, accelerating the pace of implementation of foreign-funded development projects.
It also suggested strengthening of manpower export, opening of foreign exchange account for Bangladesh Petroleum Corporation and ensuring the repatriation of export proceeds in time. The BB also suggested adjusting domestic prices of petroleum products in phases to help reduce the subsidy content.
"The suggestions we have made to the government need to be implemented given the situation with the country's foreign exchange reserve, which was $10.91 billion as on July 4," an Executive Director of BB, told the FE.
"The pressure on BoP is due mainly to enhanced volume of import by the private sector", he added.
The high official of BB said the growth of private sector bank credit rose above 30 per cent during July-April period of the current fiscal year putting pressure on current account balance.
According to BB data, Taka has been depreciated by nearly 7.0 per cent over a period of last one year.
Earlier, the International Monetary Fund (IMF) in a report in May this year asked the BB to refrain itself from intervening in the forex market so that exchange rates reflected the market conditions better.
The IMF in its report also said the country's foreign exchange reserve situation would come under severe strains in the next twelve to eighteen months, if the existing policies on subsidies, monetary stance and exchange-rate were not adjusted in time.
The IMF cautioned that the forex reserve might come down to its half, in the absence of appropriate policy adjustments.
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