Adopt heterodox policies to reduce gap between demand, supply

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FE Report
Bangladesh Bank Governor Salehuddin Ahmed said Monday a set of heterodox policies in tandem with fiscal, monetary and trade policies should be adopted to reduce the gap between demand and supply of essential commodities.
"Monetary policy is not the sole factor to spur the economy…other factors are equally important to ensure the economic growth," the central bank governor said while addressing the monthly luncheon meeting of American Chamber of Commerce in Bangladesh (AmCham) as guest of honour held in a city hotel.
He said because of the external pressure on both prices and demand side inflationary expectations in the domestic economy appear to persist.
"In a rapidly globalised world, it would be important for the policy-makers to monitor future development of food prices in major trading partners, particularly neighbouring India," the BB chief said.
The inflation, calculated on the basis of 12-month average consumer price index (CPI), stood at 7.20 per cent in June, 2007 compared with 7.16 per cent in June, 2006. On the other hand, the CPI inflation on point to point basis stood at 9.20 per cent in June 2007 against 7.54 per cent in June of 2006.
AmCham president Syed Ershad Ahmed delivered the welcome address while vice president Trevor MacDonald offered vote of thanks.
Replying to a question, the BB governor said though the export-import business of the country faced some slowdown in recent months, the economy will pick up in near future.
"There is no restriction on opening letter of credit (LC) and we don't see any problem in the economy," Salehuddin said.
Replying to an AmCham president's demand, the BB governor said the foreign exchange transaction regulations will be amended to match the global practices.
Highlighting the development of equity market and a fully functional bond market, the BB Governor said both the central bank and the Securities and Exchange Commission (SEC) are working to develop the debt market.
"There is no alternative to a strong equity market to pave the way for financing the large projects and also to bring down the interest rate at a reasonable level," Salehuddin asserted.
The BB chief stressed the need for enforcing complete adherence to regulatory guidelines regarding provisioning and capital adequacy and thorough restructuring of state-owned commercial banks and specialised banks to end the problem of non-performing loans.
On control mechanism and risk management, the BB Governor said financial institutions must have adequate control system both vertically and horizontally.
"The BB has issued a set of core risk guidelines on the line of international best practices," he said adding banks usually reduce their exposure to risks by sharing risks through diversified means like securitisation, derivatives, hedging etc.
He said the recent sub-prime financial crisis emanating from mortgage-based housing loan in the USA points to the need for more careful examination of credit proposal, profile of borrowers and credit rating of borrowers in the context of Bangladesh economy.
The BB governor further said merger of small banks into larger and stronger entities would be the way forward as in other developed financial markets, which will prove to be an effective strategy for financing large projects through the modalities of syndication loan with minimum risks.
"Furthermore, reorganisation and restructuring of the broader financial sector (NBFIs, merchant banks and insurance) may involve suitable merger and consolidation and these issues need to be explored in a transparent manner," he added.
The BB chief stressed the need for evolving the strategy to help Bangladesh economy grow at an accelerated rate in the medium term paving the way for becoming a success case of overall development by the end of the next decade.
AmCham president Syed Ershad Ahmed in his welcome address said the central bank should bring transparency and efficiency so that good performers are awarded and bad performers are punished in the banking sector.