The central bank has tightened money supply to discourage imports and reduce mounting pressure on forex reserves, Governor Atiur Rahman said yesterday.

“Tightening money supply was the only tool left with me,” Rahman told The Daily Star in an interview.

He said there is no need to flood the market with non-productive items and luxuries, such biscuits, fruits and luxury cars.

Bangladesh Bank raised the repo rate, which is used to inject money into the banking system, by half a percentage point to 7.75 percent on Thursday. It was a fifth hike since March. It also increased the reverse repo rate, through which it absorbs excess cash from banks, to 5.75 percent.

Also, the central bank has recently raised the LC margin, which is an advance payment to bank by importers, to 50 percent from 30 percent of total value to discourage imports. It also withdrew cap on lending rates so that banks can set it in line with their rising cost of funds.

“The steps are yielding results. The growth of LC opening was minus 3 percent last month,” Atiur said.

The economy is in a challenging situation due to national and international factors. The debt crisis in Europe, which is the destination of Bangladesh's over 50 percent exports, is likely to affect export earnings.

The continuous devaluation of the taka has been fuelling inflation. The dollar traded at Tk 83 on Thursday, which was Tk 70 in January last year. Stagnant foreign aid has also made the central bank concerned. Foreign exchange reserve has gone down to $9.6 billion from nearly $11 billion a year ago.

“I'll continue with a tight monetary policy for a while. If the import goes down further there will be an equilibrium attained in a few months,” Rahman said.

Still, the governor is not fear-free.

“If the oil prices increase further, additional pressure will be on the foreign exchange reserve,” Atiur said.

According to BB data, import payments for fuel have doubled to over $6 billion this fiscal year to feed the rental-power plants which is creating a mismatch in the balance of payments and reserve.

Asked if a tight money supply and government borrowing would affect private sector credit, the governor said it is not likely to be so.

“If it (credit) goes down a bit, it can't be a concern,” said Rahman.

Of Tk 400,000 crore annual credit, the government borrows around Tk 25,000 crore only, he explained.

The Daily Star/Bangladesh/ 8th Jan 2012