Bangladesh Bank Monetary Policy for FY 2012 (2)

Monetary Policy Statement for Monetary Policy Statement for FY 2012 (January-June)FY 2012 (January-June)

Presented byPresented by

Md. Mostafizur RahmanMd. Mostafizur Rahman&&

Shah Md. NoorShah Md. Noor

What is Monetary policy?

Policies that affect the supply of money and credit and the term on which credit isPolicies that affect the supply of money and credit and the term on which credit isavailable to borrowers.available to borrowers.

Through monetary policy Bangladesh Bank regulates:Through monetary policy Bangladesh Bank regulates:

• the supply of moneythe supply of money• interest rateinterest rate• exchange rateexchange rate

Thus it tries to maintain reasonable price level.It regulatesthe cost and availability Thus it tries to maintain reasonable price level.It regulatesthe cost and availability

ofofdomestic credits to the priority sector.domestic credits to the priority sector.

Present Economic ConditionPresent Economic Condition Global GrowthGlobal Growth:: Overall the growth prospects for 2012 in advanced Overall the growth prospects for 2012 in advanced

economies remain weak (due to the unfolding sovereign economies remain weak (due to the unfolding sovereign debt crisisdebt crisis in in several countries and the increasing related several countries and the increasing related risk of a global recessionrisk of a global recession) and ) and there have also been downward growth adjustments for developing countries there have also been downward growth adjustments for developing countries (from 6% in 2011 to 5.4% in 2012) including India and China.(from 6% in 2011 to 5.4% in 2012) including India and China.

Domestic growth:Domestic growth: Domestic growthDomestic growth was projected at 7% in the FY12 was projected at 7% in the FY12 Budget assuming stable domestic and global economic conditions weak aid Budget assuming stable domestic and global economic conditions weak aid inflows, slowing imports and moderating credit growth will limit aggregate inflows, slowing imports and moderating credit growth will limit aggregate demand. As such BB is projecting growth in the range of 6.5-7.0%. demand. As such BB is projecting growth in the range of 6.5-7.0%.

External sector:External sector: Export Export growth ( growth (14.7%14.7% between July-December 2011 between July-December 2011 compared to the same period last year) lags behind import growth (compared to the same period last year) lags behind import growth (22%22% between July-November compared to the same period last year) partly between July-November compared to the same period last year) partly due due to the projected 57% increase in petroleum importsto the projected 57% increase in petroleum imports in FY12 compared to in FY12 compared to the previous year.the previous year.

Capital account:Capital account: The capital account has worsened significantly partly due The capital account has worsened significantly partly due to very low aid inflows ($69 million in 2011)to very low aid inflows ($69 million in 2011)

A key indicator – new Letter of Credit (LC) openings – has fallen by 8% in January 2012 relative to a year ago. A more restrained domestic credit environment is expected to limit import growth further.

Exchange rate depreciation:Exchange rate depreciation: As a result of these pressures, the Taka/US As a result of these pressures, the Taka/US dollar dollar exchange rateexchange rate has depreciated by about has depreciated by about 15%15% in the twelve months in the twelve months leading to mid January 2012 and foreign exchange reserves have also fallen leading to mid January 2012 and foreign exchange reserves have also fallen from US$10.1 billion to 9.2 billion during this period.from US$10.1 billion to 9.2 billion during this period.

InflationInflationIn FY 2011-12, the general inflation rateIn FY 2011-12, the general inflation rate

might be 12.27 percent. The governmentmight be 12.27 percent. The government

projected inflation to be 7.5% in theprojected inflation to be 7.5% in the

current fiscal year but if this situationcurrent fiscal year but if this situation

holds further, this projection will remain holds further, this projection will remain inin

oblivion. oblivion. Source: Statistic Department, Bangladesh Bank, 2012

Figure 2: Inflationary situation in Bangladesh

Monetary Policy Statement (January-June 2012)

This issue of the Bangladesh Bank (BB) half yearly Monetary PolicyThis issue of the Bangladesh Bank (BB) half yearly Monetary PolicyStatement (MPS) outlines the monetary policy stance that BB will pursue inStatement (MPS) outlines the monetary policy stance that BB will pursue inH2 FY12 (January-June 2012), based on an assessment of global and domesticH2 FY12 (January-June 2012), based on an assessment of global and domesticmacro-economic conditions and outlook. To anchor inflationary pressure andmacro-economic conditions and outlook. To anchor inflationary pressure andexpedite the expected level of growth Bangladesh Bank has announced its expedite the expected level of growth Bangladesh Bank has announced its

halfhalfyearly Monetary Policy for January-June, 2012.yearly Monetary Policy for January-June, 2012.

ObjectivesObjectives To curb inflationary and external sector pressures (to bring inflation to To curb inflationary and external sector pressures (to bring inflation to

single digits.single digits.

Limiting depletion of foreign exchange reserves and establishing Limiting depletion of foreign exchange reserves and establishing external sector equilibrium.external sector equilibrium.

Supporting GDP growth of 6.5 - 7.0% in the current fiscal year (FY).Supporting GDP growth of 6.5 - 7.0% in the current fiscal year (FY).

Key Policy Measures Under this Program

To contain credit growth BB has increased the To contain credit growth BB has increased the REPO rates by 100 basis points for by 100 basis points for the second half of FY 2011-12 From 50 basis points in the first half of FY 2011-the second half of FY 2011-12 From 50 basis points in the first half of FY 2011-2012.2012.

Increasing private sector credit growth for productive investment (Credit to the Increasing private sector credit growth for productive investment (Credit to the private sector is envisaged to remain at a healthy private sector is envisaged to remain at a healthy 16.0%16.0%)) ..

Reduction in growth in credit to the public sector. Limiting public sector borrowing Reduction in growth in credit to the public sector. Limiting public sector borrowing from the banking sector can be achieved by from the banking sector can be achieved by increasing interest rates on savings increasing interest rates on savings certificates, through greater external and domestic resource mobilization and certificates, through greater external and domestic resource mobilization and by rationalizing public expendituresby rationalizing public expenditures..

CLR and SLR has been determined respectively 6 percent and 19 percent in the CLR and SLR has been determined respectively 6 percent and 19 percent in the Monetary Policy of December 2010. But in the recent monetary policy, CRR and Monetary Policy of December 2010. But in the recent monetary policy, CRR and SLR have not been determined specifically.SLR have not been determined specifically.

At the same time interest rate spreads will be closely monitored, and apart from At the same time interest rate spreads will be closely monitored, and apart from specific sectors such as SME and consumer lending, BB has advised banks to keep specific sectors such as SME and consumer lending, BB has advised banks to keep these in lower single digits (these in lower single digits (below 5%below 5%).).

Specifically BB aims to contain reserve money growth to Specifically BB aims to contain reserve money growth to 12.2% and and broad money growth to broad money growth to 17.0% by June 2012. Credit to the private sector by June 2012. Credit to the private sector is envisaged to remain at a healthy is envisaged to remain at a healthy 16.0%16.0% well in line with growth targets. well in line with growth targets.

The Bangladesh Bank emphasizes on the sufficient credit availability for The Bangladesh Bank emphasizes on the sufficient credit availability for agriculture, small and medium enterprises, renewable energy and other agriculture, small and medium enterprises, renewable energy and other productive sectors.productive sectors.

Impact on Banking Sector The proposed instruments in recent policy statement such as The proposed instruments in recent policy statement such as

hikes of repo rates may dampen investment by increasing the hikes of repo rates may dampen investment by increasing the cost of capital, as the cost of capital, as the banks will keep borrowing at higher banks will keep borrowing at higher rates.rates.

The rate of return on deposits is not high enough to attract The rate of return on deposits is not high enough to attract savings from the public, in spite of the double-digit inflation.savings from the public, in spite of the double-digit inflation.

And at the same time, the central bank’s expectation of And at the same time, the central bank’s expectation of reduction of reduction of pressure on liquiditypressure on liquidity may not be materialized as may not be materialized as high inflationary pressure may crowd out the attempt to high inflationary pressure may crowd out the attempt to increase the savings rate.increase the savings rate.

For the increased food consumption in FY 2010-11, domestic savings as percentage of GDP falls to 19.6 percent whereas it was 20.1 percent in FY 2009-10. National saving also falls as the remittance inflow decreases in this fiscal year, which was 28.4 as percent of GDP.

Figure 4: Components of Savings

Source: National Accounts wings, Bangladesh Bureau of Statistics (BBS), 2012

Government has increased the Government has increased the rate of return on its various rate of return on its various public savings instruments.public savings instruments. This will have some adverse This will have some adverse impact on deposits with the banks. In that event, this might impact on deposits with the banks. In that event, this might lead to lead to more strains for the banks in order to meet their more strains for the banks in order to meet their own liquidity requirements and to provide credits to the own liquidity requirements and to provide credits to the private sector.private sector.

Policy RecommendationPolicy Recommendation Central Bank should reschedule the CRR and SLR rate so that Banks can Central Bank should reschedule the CRR and SLR rate so that Banks can

keep sufficient fund in their hand for keep sufficient fund in their hand for maintaining liquidity..

BB should keep the BB should keep the rate on savings certificate competitive to the to the financial market.financial market.

Also banks should ensure Also banks should ensure better service excellence to the customers and to the customers and reduce its operating costs in unproductive sectors.reduce its operating costs in unproductive sectors.

Government should take proper steps to attract the Government should take proper steps to attract the inflow of foreign fund in the country. in the country.

Industrialization in Bangladesh is still in its infancy. Worldwide Industrialization in Bangladesh is still in its infancy. Worldwide governments are helping local producers by offering them tax breaks, cash governments are helping local producers by offering them tax breaks, cash incentive, subsidy etc. So incentive, subsidy etc. So cost of capital should be reduced.s.s

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