Bangladesh Bank has announced the monetary policy for the second half of the current fiscal, which the governor has described as cautious and investment-friendly.
Going by economic indicators, the policy for the second half of the 2013-14 fiscal does not appear to be dramatically different from the one for the first half.Private sector credit flow growth has been kept at the previous rate of 16.5 percent, while the broad money growth projection remains at 17 percent.
However, the public sector credit flow growth has been pegged at 22.9 percent, up from the previous 19.5 percent.
While announcing the monetary policy, Governor Atiur Rahman said the GDP growth rate would be in the region of six percent if there are no major debacles in the remaining months of the fiscal.
“The external sector’s effect on the country’s economy during the first half of the fiscal was stable. But there were concerns over the internal sector due to the political unrest in the later part, which massively affected economic activities and livelihoods,” he said.
The announced monetary policy aims to contain inflation within seven percent.
He said this policy was not very different from the previous one, though there is a distinct emphasis on implementation.
“We want to implement the targets. However, if growth rate increases further, we have the capability to meet the increased credit-demand of private and the public sectors,” said the Bangladesh Bank chief.-bdnews24.com
Details: Our Staff Reporter adds – This issue of the Bangladesh Bank (BB) half yearly Monetary Policy Statement (MPS) outlines the monetary policy stance that BB will pursue in H2 FY14 (January-June 2014), based on an assessment of global and domestic macro-economic conditions and outlook. This MPS was preceded by productive consultations with key stakeholders and web-based comments were also received.The last MPS (July 2013) was based on certain key assumptions and policy directions. A review of developments over the past six months suggests that most of these key assumptions materialized and solid progress was made towards the key goals. The July 2013 MPS explained that policy rates were
being kept unchanged due to the risks of inflationary pressures stemming from wage increases and supply-side disruptions. The last MPS also aimed to contain reserve money growth to 15.5% and broad money growth to 17.2% by December 2013. It also predicted that actual private sector credit growth may not use up all the space provided in the monetary program in the lead-up to the national elections.
Latest data for H1FY14 shows that reserve money growth and growth of net domestic assets of Bangladesh Bank remained within program targets, despite a surge in Net Foreign Assets (NFA) arising from robust exports and sluggish import growth. Broad money growth of 16.7% in November 2013 was close to program targets. BB’s facilitation of private sector trade credit from abroad led to some switching to lower cost overseas financing with overall private sector credit growth, from both local and foreign sources, amounting to 13.8% in November 2013. Domestic retail interest rates declined during these six months with the spread between lending and deposit rates dipping below 5% and its trend indicating that lending rates have declined faster than deposit rates.
Adherence to the monetary program along with sluggish aggregate demand due to countrywide shut-downs in recent months led to non-food point-to-point inflation falling from 7.40% in July 2013 to 4.88% in December 2013. However supply bottlenecks along with rising food prices in India led to point to point food inflation rising from 8.14% to 9.0% during the same time period. Average inflation rose from 6.99% to 7.53% during H1FY14 driven by these higher food prices.
The last MPS aimed to preserve external sector stability, building up reserves and avoiding excessive volatility of the exchange rate. Improved external balances are reflected in the accumulation of
international reserves of about USD2.5 billion during H1FY14 with gross reserves of over USD 18 billion at the end of December 2013, sufficient to cover about 5.5 months of projected imports. The Taka: USD nominal exchange rate remained stable in H1FY14 and BB’s interventions in the foreign exchange market have significantly limited the loss of external competitiveness by stemming the appreciation of the Taka.
The July 2013 MPS also sought to strengthen credit and debt markets by taking steps to improve corporate governance, supervisory capacity and stimulate higher demand for government securities,
minimizing devolvement. Latest data shows that there was a reduction in devolvement from 34% of all government securities in FY13 to 26% in H1FY14. BB’s supervision capacity has been strengthened through greater automation with information from the new e-monitoring system used to take prompt remedial action (e.g recently for Inland Bill recovery). Stringent financial improvement plans have been set with the four SOCBs and Basic Bank which includes differential ceilings on loan growth. However despite these steps, gross NPLs rose in the banking sector from 11.9% at end FY13 to 12.8% at end Q1FY14, due to the ‘over-hang’ of earlier scams and the difficulties businesses faced in repaying loans during the countrywide shut-downs.
The monetary stance in H2 FY14 takes these recent economic and financial sector developments into account and will target a monetary growth path which aims to bring average inflation down to 7%, while ensuring that credit growth is sufficient to stimulate inclusive economic growth. BB will use both monetary and financial sector policy instruments to achieve these goals. The persisting inflationary pressures over the past few months with the risks ahead related to the inflation outlook imply that achieving the FY14 inflation target will be challenging. As such BB has decided to keep policy rates unchanged. Moreover the ample liquidity in the banking system suggests that an easing of reserve requirement ratios is also unnecessary.
Specifically BB aims to contain reserve money growth to 16.2% and broad money growth to 17% by June 2014. BB will have a ceiling on net domestic assets as a key operating target. The space for private sector credit growth of 16.5% has been kept well in line with output growth targets and is sufficient to accommodate any substantial rise in investment over the next six months. BB views these figures as indicative ceilings – banks continue to be advised to lend only to creditworthy clients for productive purposes. At the same time these ceilings are flexible and the monetary program can be recalibrated should economic growth pick up faster than projected. The monetary stance also assumes government borrowing from the banking sector will remain around the FY14 budgetary figure of 260 billion taka, and the limited borrowing of 46 billion taka in H1FY14 suggests this is realistic.
In parallel various recent initiatives to support economic growth will continue in H2FY14. In order to cushion the impact of recent domestic disruptions on businesses, BB has taken a number of important policy steps which include broadening the scope of the Export Development Fund, and reducing the
borrowing costs, as well as instructing banks to offer loan rescheduling facilities to genuine borrowers facing cashflow difficulties, especially SMEs, who are temporarily affected by the recent strikes and
disruptions. Moreover in order to stimulate entrepreneurship among low income rural households who have opened ten taka accounts, BB is launching a new 2 billion taka refinancing facility to be implemented by Micro-Finance Institutions.
Effective transmission of monetary policy requires strengthening credit and debt markets and this will remain a key focus for H2FY14. In order to spur secondary market activity BB has recently embarked on secondary trading in Treasury bonds and will continue to do so in H2FY14. Devolvement of these
securities has also fallen from 34% in FY13 to 26% in H1FY14 and this trend is expected to continue in H2FY14. A new Islamic bond of 3 months tenure is expected in H2FY14 which will contribute to better liquidity management of Islamic banks. While not directly under the purview of BB, various monetary and financial sector related actions have contributed to stabilizing the capital market and BB will continue to collaborate with BSEC in this regard. BB will continue to encourage larger borrowers to access the capital market as banks will need to comply with the recently revised regulation on single borrower exposure limits for business groups. In order to fill the gaps in the financial landscape, BB intends to facilitate the role of private equity / venture capital sources of finance. Revised performance agreements for SOCBs and specialized banks have set differentiated ceilings on loan growth depending on bank performance – quarterly performance targets will continue to be published on BBs website to promote public accountability. Clear progress on implementing a credible business plan is a pre-condition for sanctioning the release of additional recapitalization funds. An important development is the fact that SOCBs have reduced their exposure to State Owned Enterprises (SOEs) which is set to continue in H2FY14. Following the uncovering of high-profile financial scams by BB, banks in general are strengthening corporate governance policies, internal controls and anti-money laundering and terrorist financing activities. BB’s supervision ability is being enhanced with greater automation and capacity building and the cumulative effect of these reforms will strengthen the financial sector.
This monetary policy stance also aims to preserve the country’s external sector stability. BB anticipates further build-up in foreign reserves in FY14 though at a more moderate pace than FY13. While the projected decline in remittances will not adversely affect external stability in FY14, it is imperative that manpower exports resume its growth, and opportunities such as investments in government securities are marketed to NRBs, so that remittances can remain an important part of medium-term external balance. BB will continue to support a market-based exchange rate while seeking to avoid excessive foreign exchange rate volatility.
