Bangladesh’s Monetary Policy 2010

8/7/2019 Bangladeshs Monetary Policy 2010

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Ban ladeshs Monetar Polic 2010

Dr. Atiur Rahman

Governor, Bangladesh BankEmail: [email protected]

Luncheon Meet in of

Embassy of t he Federal Republi c of Germany

13 April, 2010

Dhaka

Outline

Introduction

Objectives of Monetary Policy in Bangladesh

Monetary Policy Framework in Bangladesh

Formulation of Monetary Policy

Near Term Growth and Inflation Outlook

Monetar Polic Stance for H2 FY 10

2

Targeted Versus Actual Growth Paths of Monetary Aggregates

in FY10

Sovereign Rating: Stable Outlook for Bangladesh

Concluding Remarks2


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Introduction Monetary policy, both in developed and developing

economies, seeks to maintain price stability

accompanied by sustained output growth in the face of

internal and external shocks faced from time to time.

For developing economies like Bangladesh with

significant underemployment/under exploitation of

production factors, supporting higher output growth is an

.

Monetary policy of Bangladesh Bank (BB) therefore aimsat maintaining price stability while permitting monetary

expansion needed to support output growth at sustained

high rate.

33

Evolution of Monetary PolicyFormulation in Bangladesh

In the 1970s and 1980s, monetary policy in Bangladeshwas conducted with full direct control over the

interest rates and exchange rates and also on the

volumes and directions of credit flows.

The situation began to change in the 1990s with the

abolition of directed lending and gradual liberalization

of interest rates. The regime of flexible exchange rate

s ar e rom .

From then on, interest rate and exchange rates arelargely market driven with occasional central bank

interventions to maintain stability and to address

consumer protection concerns.44


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Objectives of Monetary Policy in

Bangladesh Maintaining domestic price stability, external sector

v a y;

Supporting inclusive, broad-based economic growth.

55

Formulation of Monetary Policy:Current Practices in BB

Since 2006, BB has been announcing half-yearlyMonetar Polic Statements MPS to anchor inflation

expectations of economic agents and the general

public.

For the first time, drafting of the Monetary Policy

Statement for H2 FY10 was preceded by extensivestakeholder consultations from the grassroots level up

6

o e eve o exper ence pro ess ona s nc u ngpast Finance Ministers /Advisers / Governors, think

tanks and trade bodies.

6


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Monetary Policy Framework in

BangladeshPol icy I n st r u m en t s: Goals: Targets :

CRR and SLR

Open Market O perations

withdrawing or injecting

liquidity

Changes in policy interest

rates (bank rate, repo,

reverse repo rates)*

Price Stability

Economic Growth

Financial Stability

( i ) Ope ra t ing Ta rgets

Reserve Money

( i i ) I n term edia te Targets

Broad Money

Po l ic y D ec is io n : I n f o r m a t io n V ar i ab l es :

77

Based on market

information and value

judgment of the policy

makers

Foreign Reserves

Short-term Interest Rates

Liquidity Situation

Domestic Credit

Information and Exchange Rates

* In addit ion to poli cy interest r ate changes fr om monetar y policy perspect ive, int erventions onspecifi c lending rates occur sporadically t o rectif y aberrant tr ends like excessive inter mediat ionspread.

Policy Approaches and Tools BB mainly uses monetary targeting to influence

CPI, drawing up monetary programs each financial year

with target growth path for broad money (M2) that

accommodates monetary expansion commensurate with

the projected real GDP growth, inflation, and the likely

change in income velocity of money.

Reserve Money (RM) growth path is the operating target

used by BB to influence the M2 growth path (the

8

,CPI, the final target.

Changes in key policy interest rates (repo, reverse repo

rates), Cash Reserve Requirement (CRR) and Statutory

Liquidity Ratio (SLR) are also employed as necessary, in

support of the monetary programs.8


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Near Term Growth Outcome & Outlook Domestic demand remains robust, well supported by

growing workers remittance inflows and budgetary

stimulus outlays including higher social safety net

spending.

After a slower first quarter, manufacturing output and

investment activities accelerated from Q2 FY 10.

During July-March 2009-10, opening of import LCs

9

grew by around 22%.

Following 10.3% y-o-y growth in FY 09, exportsweakened in FY 10 (4.7% y-o-y decline during July-

January 2010) due to weak growth recovery in marketsabroad.

9

Near Term Growth Outcome..(Contd) The agriculture sector output activities are responding

robustly to market price incentives and support

measures provided by the GoB and BB.

During July-February FY 10, the growth of agricultural

credit disbursement was recorded at 21% against 7.2%

during the same period of FY 09 .

Output activities in the service sector are

10

correspondingly vibrant; Capital market activitiesremain buoyant.

BBs monetary program for FY 10 is designed to

accommodate 6% real GDP growth.

10


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Growth Outlook

1111

Near Term Inflation Outcome & Outlook

Rate of Inflation CPI inflation(12 month average)

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

%

2 00

4.00

6.00

8.00

10.00

12.00

%

1212

Jan-0

9

Feb-0

9

Mar-0

9

Apr-0

9

May-0

9

Jun-0

9

Jul-0

9

Aug-0

9

Sep-0

9

Oct-0

9

Nov-0

9

Dec-0

9

Jan-1

0

12 Month Average Point to Point

.

Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09

Jul-09

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

General Food Non -food


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Near Term Inflation Outlook..(Contd) Point-to-point and 12-month average CPI inflation in

Bangladesh were both on declining trend in FY 09 from

Q2 onward, driven by decline in global commodity and

fuel prices and bumper domestic output of the bororice crop.

In FY 10 CPI inflation has been edging upwardslowly, driven mainly by rising import prices of

commodities.

13

The 12-month average CPI inflation is projected to beat or under 6.5% at end June 2010.

13

Fiscal Developments Revenue receipts in H1 FY 10 registered 16.8% growth

over the same period of previous year with high

growth in income tax offsetting the low growth in

custom duty receipts.

The 28.2% utilization of ADP of the annual allocation

of Taka 305.0 billion during H1 FY10 was better thanthe 23.0% utilization during the same period of FY 09.

14

High net sales of NSD instruments and substantialbudget support from ADB drove down bank borrowing

for deficit financing into negative; leaving greater

room for expansion of credit to the private sector.

14


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Developments in External Sector Export shipments declined in FY 10 due to weak

demand recovery in markets abroad with 4.7% y-o-y

decline during July-January 2010.

There are indications of incipient recovery in export

growth; Order books of exporters in the apparel sectorare reportedly full with shipments to new destinations

in East Asia beginning to offset demand weakness in

traditional markets.

15

Opening of LCs for imports of inputs by the apparel

sector are on increasing trend. Opening of LCs forinputs of capital goods have lately on rising trend,indicating restoration in new investment momentum.

15

Developments in Money and Credit Slow off-take of bank credit from deposits and soaring

workers remittance inflows led banks to leave large

excess balances in their Taka and foreign currency

accounts with the BB in H1 FY 10, causing high growthin reserve money.

The liquidity surge in H1 FY 10 has declined in H2 FY

10, with pick up in imports and with BBs active use ofreverse repo tool.

1616


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Monetary Policy Stance: Jan-Jun 2010 The latest issue of BBs half yearly Monetary Policy

Statement MPS outlines the monetar olic stance

to be followed in H2 FY10.

The MPS for H2 FY10 stresses on support for sustained

high broad-based economic growth in the unfolding

internal and external context, while containing

inflation within tolerable moderate levels.

17

BB will continue a supportive monetary stance until

fuller restoration of investment confidence in thedomestic economy and with firmer demand recovery

in the export markets recovering from the global

recession.17

Broadening Financial Inclusion

Monetary policies of BB seek to support enhancementnot onl in uantum but also in ualit of rowth

measured in terms of inclusiveness and environmental

sustainability.

Therefore, BB has recently embarked on campaign-like

thrust on broadening financial inclusion, and haslaunched several refinance support lines for increased

18

en ng o sec ors e:

agriculture, SMEs, effluent/waste disposal, solar/

biogas/other renewable energy projects.

18


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Broadening Financial Inclusion..(Contd) The Agricultural Credit Program announced by BB for

FY 10 en oins all banks to en a e in lendin for a

comprehensive range of on- and off-farm rural

economic activities.

A first ever Taka 5.00 billion refinancing line against

loans to landless sharecroppers.

19

Bank accounts for farmers at only Taka 10.

Motivating banks and financial institutions to expand

lending to under-served sectors both as business caseand as CSR obligation.

19

In FY 10, Actual Growth Paths of Monetary AggregatesRemain Close to Their Programmed Paths

3600

Broad Money (M2)

2072

2453

2566

2722

2754

2915

30643174

3274

1,806

2,114

2,487

2,668

2,719

2,782

2,964 2,9803,035

3,1193,1253,229

3,280 3,279

1800

2000

2200

2400

2600

2800

3000

3200

3400

InBillionTaka

Prog. Actual

2020

1276

1481

17301,297

,

1000

1200

1400

1600


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Domestic Credit3092

3258

3200

3400

1675

1973

2350

2492

2668

2735

2892 2899

2982

1746

1997

2433

2576

2639

27012818 2833 2836

2895

2927

2950

1600

1800

2000

2200

2400

2600

2800

3000

InBillionTaka

Prog. Actual

2121

1152

14021231

1444

1000

1200

1400

Credit to Private Sector

24532543

23142373

2437 24642550

1261

1492

1749

1951

20882116

2234

2249

2393

1120

1323

1522

1901

1996

20452102

2179 2196

2229

1350

1550

1750

1950

2150

InBillionTaka

Prog. Actual

2222

889

1086959

750

950


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Reserve Money and Net Domestic Assets

611.3

679.1629.1 673.9

651.8 649.7 649.7 642.7700

. . .. .645.0 645.0

.

237.0277.8

300

400

500

600

BillionTaka

Reserve Money

Net Domestic Assets

2323

228.0

201.8189.5 168.1

152.4 154.5 156.0 142.6

147.8

216.2

157.3 145.0

188.8

100

200

Jun.-09

July-09

Aug.-09

Sep-09

Oct.-09

Nov.-09

Dec.-09

Jan.-10

Feb.-10

March-10

07April-10

Jun.-10

RM Actual RM Prog. NDA Actual NDA Prog.

Sovereign Rating: Stable Outlook forBangladesh

Sovereign rating for the first time Country S&P Moodys

agencies- Standard and Poors

(S&Ps) and Moodys regarded

Bangladesh as a reliable

destination for international

creditors and investors.

In the lobal financial arena the

n a - aa

Bangl ade sh BB - Ba3

Pakistan B- B3

Sri Lanka B NR

Indonesia BB Ba2

Thailand BBB+ Baa1

Vietnam BB Ba3

24

BB- and Ba3 sovereign credit

ratings by S&P and Moodys

respectively, ranked Bangladesh

only behind India in South Asia.

24

Malaysia A- A3

Cambodia B+ B2


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Sovereign Rating: Major Observations Resilience of Bangladesh economy to domestic and

external shocks with stable economic growth over the past

decade.

Macroeconomic and price stability underpinned by prudent

economic management.

Strong and resilient RMG sector and robust inflow of

workers remittances maintaining external sector viability.

25

Domestic demand underpinned by strong remittances, MFI

activities and social safety net payments.

Narrow revenue and export base seen as ratings

constraints.25

Concluding Remarks Supportive monetary condition will be maintained in FY

10 to help the recovery of exports and new investment

activities get firmer traction.

Successful spurring of growth will keep inflationary

pressures in check by maintaining benign situation onthe supply side.

Efficient and expeditious ADP implementation will

26

create conditions crowding in private sectorinvestments, facilitated by congenial monetary regime.

BB has taken recent steps to deepen and broaden

secondary trading in treasury securities to eliminate

settlement risks.26


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Concluding Remarks..(Contd)

BB has introduced mandatory Basel II based capitalrequirements for banks from 2010 to enhance banks

capacity of handling intermediating large financial

flows.

Steps have also been taken to develop and strengthen

risk assessment capacities including forward looking

stress testing in the banks as well as in BB supervision

27

.

In conclusion, BB stands ready to respond promptlywith appropriate modification in monetary stance

required by any exigency in unfolding developments

in the domestic and external scene.

Many thanks

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Documents

Bangladesh’s Monetary Policy 2010