Financial Sector of South Asia Revisiting the Benchmark Condition · 2018-01-12 · Contents 1. Introduction 2. Financial Transaction between South Asian Countries 3. Intra-regional

Financial Sector of South Asia Revisiting the Benchmark Condition

Dr Khondaker Golam Moazzem

Additional Research Director

Centre for Policy Dialogue (CPD)

Presentation by

Contents

1. Introduction

2. Financial Transaction between South Asian Countries

3. Intra-regional Movement of Capital in South Asia

4. Impact of Financial Transactions beyond the Region: Exchange Rate Movement

5. Review of the Condition of the Domestic Financial Sector of SA Countries

6. Various Initiatives undertaken in the SAARC Process

7. Concluding Remarks

2

1. Introduction

• South Asian countries have exposed with different kinds weaknesses and challenges on financial issues in less than a decade

• Experienced with adverse impact of global financial crisis

• Slow recovery of the global economy has also caused trouble to SA economies

• Domestic challenges on financial and monetary issues

• At the same time, South Asian countries have taken initiatives to strengthen their financial sectors (e.g. BASEL I, II, III)

• Global engagement of SA countries particularly of India has been increasing

• Such dynamics and changes of SA countries need to take into account while discussing about financial and monetary cooperation

• It is important to reexamine the benchmark condition of SA countries on financial and monetary issues

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4

0.0

10.0

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2008 2009 2010 2011 2012 2013

Export to SAARC region Import from SAARC …

Afghanistan

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Export to SAARC region

Import from SAARC region

Bangladesh

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Bhutan

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Export to SAARC region Import from SAARC region

India

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70.0 Export to SAARC region


Maldives

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Nepal

Intra-regional Trade in Goods in SA

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Pakistan

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Sri Lanka


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• Because of limited intra-regional trade of larger economies, regional financial transactions are likely to be increased at a slow pace

• Missing regional value chain hampers expected level of growth of financial transaction in South Asia

•Most of the transactions are taking place in US$ •Due to sheer size of trade a number of countries have either pegged or adjusted the values of their currencies with Indian rupee

• ACU Payment process provides the settlement of monetary transactions among the members of the Union.

Intra-regional Trade in Goods in SA


• South-South trade is also visible in case of most of the SA economies

• SA countries are part of various bilateral, sub-regional and regional trade agreements: various production networks operate in Asia

• Financial transactions outside the region is dominant for most of the SA countries

• SA countries have become member of various financial agreements

• BRICS Contingency Reserve Agreements

• It is important to reexamine what kinds of financial and monetary arrangement between SA and non-SA countries would better facilitate the interest of SA countries

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Intra-regional Investment in South Asia

Region / economy Y2010 Y2011 Y2012

World 18 337 11 405 10 973

Developed economies 4 386 3 781 4 196

Developing economies 12 355 6 957 5 488

Africa 5 116 2 661 1 829

Asia 6 493 3 535 3 084

East Asia 199 356 183

South-East Asia 4 135 2 457 1 981

South Asia 1 262 260 157

West Asia 897 462 763 Latin America and the

Caribbean 746 761 575

Transition economies - - 814

Unspecified 1 596 666 475

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India’s Outward FDI flow (million US$)

India's Outward FDI Stock (million US$) Region / economy Y2010 Y2011 Y2012

South Asia 517 602 1 078 Bangladesh 59 69 114

Maldives 6 13 18 Nepal 57 72 401

Sri Lanka 379 432 522

• India contributed the overwhelming share of outward investment of the region.

• India’s investment in South Asia is least

• Outward investment is not encouraged by other SA countries

• Non-convertible capital account • Besides, regional investment is not encouraged by few countries •SAARC Development Fund for facilitating projects on social issues

• The window of commercial investment is yet to be started



• India’s outward investment is highest in Europe, SE Asia and Africa

• High tech manufacturing, infrastructure development and resource extracting industries

• Portfolio investment in major global exchanges is growing

• SA countries have become member of various financial agreements

• India is a founder member of BRICS Bank; India and Bangladesh are member of AIIB

• Overall, a limited level of movement of capital in SA but growing outward movement of capital by India outside SA are the key features.

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0

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India's Outward FDI Stock to Different Regions

Y2010 Y2011 Y2012

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1-1-2009 1-1-2010 1-1-2011 1-1-2012 1-1-2013 1-1-2014

Exchange Rates of BRICS Currency against Euro

USD/BRL(Brazil) USD/RUB(Russia)

USD/INR(India) USD/CNY(China)

USD/ZAR(South Africa)

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1-1-2009 1-1-2010 1-1-2011 1-1-2012 1-1-2013 1-1-2014

Exchange Rates of BRICS Currency against US$

USD/BRL(Brazil) USD/RUB(Russia)

USD/INR(India) USD/CNY(China)

USD/ZAR(South Africa)

• Currencies of BRICS countries have experienced fluctuating trends against US$ and Euro since early 2012

• Weaken investors’ confidence on currencies of BRICS countries • India’s capital market problems partly responsible

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• Currencies of Non-BRICS countries have experienced fluctuation against BRICS currencies

• Adverse effect on developing countries’ current and capital account balances

• Fluctuation of currencies in short term may not cause ‘crisis’ in the BoP

• Need support to tackle such situation if continues for long period

• Because of multiple linkages in financial transactions, a single currency-based financial arrangement (other that US$) would not be so effective

• In this context, what kinds of financial and monetary arrangement between SA and non-SA countries would facilitate most is an important issue of concern.

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Indian Rupee vis-à-vis Chinese Yuan, Indonesian Rupiah, Argentina Peso and Bangladeshi Taka

INR / IDR INR / CNY INR / ARS



2005 2010 2013

Afghanistan .. 34.7 60.1

Bangladesh 10.2 9.7 12.1

Bhutan 84.6 71.6 33.7

India .. .. ..

Maldives 32.2 27.9 37.1

Nepal 10.6 10.7 14.6

Pakistan 13.2 9.7 12.9

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Liquid Reserve - Asset Ratio

1990 2000 2005 2010 2013

Afghanistan .. .. .. 35.2 32.3

Bangladesh 23.3 34.6 54.5 67.4 70.8

Bhutan 20.6 50.3 51.4 71.7 53.9

India 41.5 53.7 64.5 76.2 77.4

Maldives 26.1 41.1 53.0 58.1 67.0

Nepal 32.0 51.3 54.2 73.2 85.6

Pakistan 39.1 38.6 49.2 41.1 40.2

Sri Lanka 28.3 38.4 41.7 37.4 ..

Broad Money as % of GDP 1990 2000 2005 2010 2013

Afghanistan 12.3 .. .. 1.1 0.9

Bangladesh 10.6 10.8 11.6 6.1 5.1

Bhutan 0.7 0.7 0.9 1.1 1.0

India 24.0 6.2 3.9 4.3 4.9

Maldives 2.3 2.1 2.8 3.4 4.0

Nepal 3.3 2.9 2.8 3.3 2.5

Pakistan 15.0 13.7 4.8 4.2 12.4

Broad Money to Reserve Ratio


1990 [YR1990]

2000 [YR2000]

2005 [YR2005]

2010 [YR2010]

Afghanistan .. .. .. .. Bangladesh 12.0 8.6 8.1 7.1 Bhutan 6.5 8.3 4.5 2.0 India .. .. .. .. Maldives .. 6.9 6.5 4.0 Nepal 11.9 6.0 2.3 3.6 Pakistan .. .. 2.6 8.1 Sri Lanka 19.4 9.2 5.6 6.9

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Deposit Rate (%)

1990 2000 2005 2010 2013

Afghanistan .. .. .. 11.5 4.1

Bangladesh 16.7 24.7 33.8 47.1 48.3

Bhutan 4.1 8.9 18.2 41.4 44.2

India 24.5 27.9 39.4 49.6 51.8

Maldives 12.4 19.1 45.5 57.8 44.7

Nepal 12.8 30.7 28.7 54.6 58.1

Pakistan 24.2 22.3 28.6 21.4 15.7

Sri Lanka 19.6 28.8 32.9 26.6 ..

Domestic Credit to Private Sector

1990 [YR1990]

2000 [YR2000]

2005 [YR2005]

2010 [YR2010]

2013 [YR2013]

Afghanistan .. .. .. 15.7 15.1

Bangladesh 16.0 15.5 14.0 13.0 13.0

Bhutan 15.0 16.0 14.0 14.0 14.0

India 16.5 12.3 10.8 8.3 10.3

Maldives .. 13.0 13.0 10.4 11.1

Nepal 14.4 9.5 8.1 8.0 ..

Pakistan .. .. 9.1 14.0 12.0

Sri Lanka 13.0 16.2 10.8 10.2 12.6

Lending Rate 1990 [YR1990] 2000 [YR2000] 2005 [YR2005] 2010 [YR2010]

Afghanistan .. .. .. ..

Bangladesh 4.0 6.9 5.9 5.9

Bhutan 8.5 7.8 9.5 12.0

India .. .. .. ..

Maldives .. 6.1 6.5 6.3

Nepal 2.5 3.5 5.9 4.4

Pakistan .. .. 6.5 5.9

Sri Lanka -6.4 7.0 5.1 3.3

Interest rate spread


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2000 2005 2010 2013

Afghanistan .. .. 49.9 6.0

Bangladesh 34.9 13.2 .. ..

Bhutan .. .. 5.2 12.7

India 12.8 .. 2.4 3.8

Pakistan 19.5 9 14.7 14.3

Sri Lanka .. .. .. 5.2

Non-performing loan to Gross Loan

1990 2000 2005 2010 2013

Afghanistan .. .. 12.7 0.9 7.6

Bangladesh 6.1 2.2 7.0 8.1 7.5

Bhutan 10.0 4.0 5.3 7.0 7.0

India 9.0 4.0 4.2 12.0 10.9

Maldives .. .. .. 6.6 2.3

Nepal 8.2 2.5 6.8 9.3 9.0

Pakistan 9.1 4.4 9.1 13.9 7.7

Sri Lanka 21.5 6.2 11.6 6.2 6.9

Inflation

1990 [YR1990] 2000 [YR2000] 2005 [YR2005] 2010 [YR2010]

Afghanistan .. .. .. ..

Bangladesh 1.1 2.5 5.0 15.6

Bhutan .. .. .. ..

India 11.8 31.1 66.3 94.6

Maldives .. .. .. ..

Nepal .. 14.4 16.5 32.7

Pakistan 7.1 8.9 42.0 21.5

Sri Lanka 11.4 6.6 23.4 40.2

Market Capitalisation


• South Asia’s financial sector is overwhelmingly dominated by banking sector

• Banking sectors are at different stages of development

• Differences in terms of size, focus, level of efficiency, level of practices of prudential rules

• Diverse national policy perspectives on the development of the banking sector

• Monetary and fiscal policies are influenced by political perspective of the government

• Alternate markets for financing particularly capital market has yet to be developed

• Inefficient operation, poor regulatory structure

• Lack of harmonization of policies, regulations, operations, monitoring and enforcement and political perspective etc. are major features of SA financial sector

• Harmonisation and coordination are the foremost important tasks in the process of development of domestic financial sector for future cooperation

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• 17th SAARC Summit directed the SAARC Finance Ministers to chart a proposal that would allow for greater flow of financial capital and intra-regional long-term investment

• Draft SAARC Agreement on Promotion and Protection of Investments is long due.

• Sixth Meeting of the Inter-Governmental Expert Group (IGEG) on Financial Issues was held at the SAARC Secretariat on 23-24 April 2013.

• Discussed about Public Debt Management; Development of Capital Market in South Asia; Financial Inclusion - Access to financial services and credit to financially excluded sections of the society; Experiences of Financing for Infrastructural Development; Combating Money Laundering and Terrorist Financing; Harmonisation of fiscal and trade indicators; comparative performance of key economic indicators; sharing of experience and best practices in the financial sector; greater flow of financial capital and intra-regional long-term investment.

• Reviewed the progress in the implementation of Swap Arrangement.

• Two Meetings of SAARC Public Debt Managers’ Forum have been held in Sri Lanka and India in 2012 and 2013 respectively.

15


• Sixth Meeting of IGEG on Financial Issues also agreed to discuss the best practices on number of sectors during the next Meeting of IGEG.

• Study on codification of variations in the level of development of Capital Markets in SAARC Member States has also been conducted with the financial and technical assistance of Asian Development Bank.

• A Study is being conducted with the help of Asian Development Bank to examine the need to develop a Regional Coordinated Surveillance Mechanism to forecast the fall-out of external shocks which may create an economic and financial dislocation within the SAARC region

• A regional network of SAARC Central Bank Governors and Finance Secretaries called ‘SAARC Finance’ was set up in September 1998 with the objective of member countries sharing their experiences on macroeconomic policy issues

• At the 17th meeting of ‘SAARC Finance’ Central Bank Governors, the idea of a regional payment system was agreed in principle

• It was decided to develop a framework tentatively called the Regional Cooperation on Payments and Settlement System.

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• SAARC process on financial issues highlights on development of domestic financial sector

• At an early stage; knowledge-sharing stage

• Need a broader framework for coordination and harmonization on different financial issues

• Given the multiple risks, a Regional Coordinated Surveillance Mechanism to forecast the fall-out of external shocks is needed

• Regional investment needs to be facilitated by developing domestic, bilateral and regional policies

• Capital account needs to be opened up at a limited scale for regional investment by SAARC countries

• Barriers for bilateral investment need to be reduced

• Regional investment promotion and protection agreement needs to be signed by SAARC countries

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7. Concluding Remarks

• It is too early to consider monetary and financial integration in South Asia

• Minimum benchmark level has not yet established

• Major economies have yet to develop strong resilience towards global risks

• It is also important to consider whether South Asia based financial and monetary integration would be effective given the growing financial engagements of most of the SA countries beyond the region?

• At this stage, domestic preparedness of South Asian countries needs to be emphasized most

• In terms of liberalization of monetary and financial indicators, capital market development and capital account liberalization

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Thank you.

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Documents

Financial Sector of South Asia Revisiting the Benchmark Condition · 2018-01-12 · Contents 1. Introduction 2. Financial Transaction between South Asian Countries 3. Intra-regional