Country Report Bangladesh July 2000 Updater

Economic policy outlook: Monetary policy

The government has been pursuing an expansionary monetary policy, criticised by the IMF in late June as threatening Bangladesh's macroeconomic stability. The broad money supply in 1995 expanded at an annual rate of more than 15% but, during the first half of the 1999/2000 government borrowing from commercial banks -- to finance the fiscal deficit -- increased by 39%. Meanwhile, private credit growth has remained weak. Excess liquidity in the banking system increased to Tk51.3bn (US$1bn) at end-December 1999 compared with Tk37bn at end-December 1998. According to the World Bank, however, this is mainly owing to increased caution being exercised by the banks in their choice of new loans and higher new lending rates, rather than crowding-out caused by excessive government borrowing. The authorities will continue with their attempts to maintain a loose monetary policy throughout the forecast period. The effectiveness of this will be restrained as banks will shy away from offering fresh loans, and the government will continue borrowing from domestic sources to finance politically motivated policies and projects in the run-up to the forthcoming general election.

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