Dhaka, Bangladesh (BBN) - Credit flow to private sector expanded by nearly 26 per cent in the fiscal 2010-11 (FY11), exceeding marginally the central bank's original projection, officials said.
"The credit flow to private sector increased in FY11 mainly due to the rise in financing productive sectors like small and medium enterprises (SME), agriculture and trade sectors," a senior official of the Bangladesh Bank (BB) said.
Credit to the private sector rose by 25.84 percent to BDT 699.51 billion in July-June period of FY11. It was 24.24 per cent to BDT 528.33 billion of the previous fiscal year, according to the central bank statistics.
The BB official also said high prices of essentials, including food grains and edible oil, in the global market have also contributed to increased flow of credit to the private sector.
Meanwhile, the country's overall imports grew by 38.60 per cent in FY 11 against 7.11 per cent of the previous fiscal, the BB data showed.
The value of letters of credit (LCs) against imports worth US$ 31.952 billion were settled in FY11 compared with $23.053 billion in FY10.
Higher private sector credit growth in the consecutive two years was responsible, in part, for igniting the inflationary fuel, despite different measures taken by the central bank as well as the government to curb the rate of inflation, bankers and experts said.
The central bank has announced its latest half-yearly monetary policy statement (MPS), aiming to contain inflationary pressures through discouraging credit flow to unproductive sectors and for speculative purposes including real estates and investments in stock market, beyond affordable limits.
The government has also taken a number of supportive steps to keep the prices of commodities stable, expecting to bring down the rate of inflation to 7.50 percent by the end of this fiscal.
The country's inflation, as measured by consumers' price index (CPI), moved slightly in the month of June last on an annual average basis, mainly because of increase in prices of food items.
The inflation rate moved up to 8.80 per cent in June 2011 from 8.67 per cent of the previous month on an annual average basis, according to the Bangladesh Bureau of Statistics (BBS) data.
The central bank had estimated the private sector credit growth at 25.5 per cent by the end of June 2011, according to the MPS by the BB announced on July 27 last.
"Towards reining in credit growth BB raised repo, reverse repo interest rates in four steps totaling 225 basis points in FY11, besides raising CRR for banks by 50 basis points in December 2010 but had to keep injecting substantial Taka and USD liquidity to prevent inter-bank markets from drawing to grinding halt," the MPS said.
Under the new monetary program, credit growth rate to the private sector will be limited to 18 percent by the end of FY12 from an estimated level of 25.5 percent in June last.
"Such policy measures will take some time to bear fruits because of weak monetary transmission mechanism prevailing in the financial system of Bangladesh, unlike the case in neighbouring countries like India," another BB official said.
He also said monetary policy intervention works promptly in those countries including India and China because of their relatively quicker transmission mechanism.
BBN/SSR/AD-15Aug11-12:55 pm (BST)