BB recommends changes in debt management policy

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Siddique Islam
The Bangladesh Bank (BB) has recommended changes in the government's debt management strategy to facilitate proper implementation of the monetary policy.
"....bringing appropriate changes in the government's debt management strategy would be important to improve the balance between short and long term borrowing since any shift in the borrowing pattern has implications for the conduct of monetary policy," the central bank's policy analysis unit (PAU) said in a report, released Tuesday.
The policy paper styled 'Monetary Policy Stance and Recent Movements in Monetary Aggregates: Policy Implications' also said that the success of the policy actions would require greater fiscal and monetary coordination to ensure clear recognition of the importance of the monetary policy stance appropriate alignment of relevant policy parameters within the overall macroeconomic framework.
Meanwhile, the government has gradually changed its debt management strategy towards long-term borrowing from short-term to facilitate development activities, officials said.
Under the new strategy, the government will increase borrowing for longer tenure by issuing different bonds instead of short-term borrowing through treasury bills (T-bills).
The government has already set a borrowing target of Tk 134.98 billion from the country's banking system to finance the budget deficit in fiscal 2008-09 (FY09).
As part of the strategy, the government has decided to borrow Tk 87.75 billion from banking system by issuing bonds of different tenures.
During the current fiscal, the government also set the target of short term borrowing worth Tk 47.25 billion through auction of three categories of T-bills.
In fiscal 2007-08, the government borrowed Tk 72.53 billion from banking system through issuing T-bills and bonds.
The BB officials, however, said the government would still be able to borrow substantial amounts from the central bank using 'ways and means' head to meet its day-to-day expenditure.
The limit of the government's short-term borrowing from the central bank was set at Tk 10 billion from Tk 640 million since fiscal 2006-07.
Under the existing rules, the government will be able to borrow a maximum of Tk 10 billion from the central bank without issuing any treasury bills.
"The government should move into the secondary securities market instead of the banking system that would also help to implement the monetary policy properly," a BB senior official told the FE Tuesday.
He also said the government has set a target to borrow Tk 68 billion from the central bank for FY09 out of Tk 135 billion.
The monetary programme of BB set the reserve money (RM) growth at 17.2 per cent and broad money (M2) growth at 17.5 per cent for FY09 compared to 19.8 per cent and 17.6 per cent respectively in FY08, according to the study paper.
"It is presumed that the growth of private sector credit would be 18.5 per cent and net credit to the government would not exceed Tk 135 billion in FY09," its said, adding that the assumed increase in net foreign asset (NFA) would be by Tk 56.6 billion during the current fiscal.
The study found that the BB's liquidity management in FY09 has to face three major challenges: first, injections from high fiscal deficit, second, liquidity implication arising from potentially high NFA and third, limiting domestic liquidity at the programmed level to face strong credit demand by both public and private sectors.