A review of the Monetary Policy Statement

Like every half-a-year, Bangladesh Bank (BB) has recently announced the monetary policy statement (MPS) for the first half of the FY 2014-15 (July-December 2014). It has mainly focused on restraining inflation. Current monetary stance has targeted the monetary growth path of bringing down the inflation to 6.5 per cent by June 2015 and supporting inclusive economic growth. With a view to attaining this, the BB has revised its reserve money growth target to 15.5 per cent and broad money growth to 16 per cent by December 2014, which were 16.2 per cent and 17.0 per cent respectively in the last MPS (January-June 2014) and thus relatively contractionary in stance. The ceiling for private sector credit growth is now 16.5 per cent, including foreign borrowing, of which 14 per cent from local sources by the next December 2014. With all this, Bangladesh Bank predicts the country's economic growth to be between 6.2 per cent and 6.5 per cent in the current fiscal year (2014-15) which deviates from the budget target of attaining 7.3 per cent of GDP (Gross Domestic Product) growth.
TO ATTAIN INCLUSIVE GROWTH THE MPS STATES THAT:
* Private sector credit growth of 16.5 per cent (from domestic 14 per cent and rest from foreign sources);
* MPS advises to lend only to creditworthy clients for productive purposes;
* It also stated that ceiling on net domestic assets are flexible and the monetary programmeme can be re-calibrated any time if deemed necessary;
* The H1FY15 monetary programme assumes that any unanticipated spending pressures will be accommodated within the sizeable (312 billion taka) borrowing limit set in the FY15 National Budget;
* Fiscal-monetary coordination will continue among senior policymakers of the government.
IN ORDER TO SUPPORT ECONOMIC GROWTH OF 6.5 PER CENT, BB HAS TAKEN A NUMBER OF POLICY STEPS WHICH ARE :  
* The size of the Export Development Fund has been raised from $1.2 billion to $1.5 billion and this will be reviewed periodically in line with demand and productive use of these funds. Moreover, the single-party ceiling was raised from $12 million to $15 million;
* As an investment incentive, foreign investors are now allowed to source term loans from local banks and access working capital as an interest-free loan from their parent company.
EFFECTIVE TRANSMISSION OF MONETARY POLICY REQUIRES WELL-FUNCTIONING, BROADER AND DEEPER CREDIT AND DEBT MARKETS. THIS, IN TURN, HAS A NUMBER OF DIMENSIONS AS BB
STATED:
* Promoting interest rate flexibility by tackling asset quality issues - A number of steps were taken in H2FY14 and will continue in the coming months to strengthen the financial system and improve asset quality. Since the non-performing loans are concentrated among SoCBs (state-owned commercial banks), a stringent financial improvement plan for four SoCBs and Basic Bank is being enforced. Detailed guidelines were issued to all banks on improving corporate governance in line with the amended Bank Companies Act.
* Strengthening financial inclusion and diversification - BB's ongoing financial inclusion campaign, coupled with recent issuance of agent banking guidelines, are designed to extend outreach of financial services into remaining pockets of inclusion in under-served areas and among under-served clients.
* Strengthening domestic debt markets - Promoting trading in corporate papers and asset-backed securities will remain important for market development.
TO PRESERVE THE COUNTRY'S EXTERNAL SECTOR STABILITY BB HAS PROPOSED:  
* Further building-up of foreign reserves in H1FY15 though at a more moderate pace than FY14.
* BB will continue to support a market-based exchange rate while seeking to avoid excessive foreign exchange rate volatility.
REVIEW OF THE MONETARY POLICY STATEMENT BY THE GENERAL ECONOMICS DIVISION, PLANNING COMMISSION: Like all other monetary authorities or central banks, Bangladesh Bank (BB) is regularly publishing monetary policy statements twice in a year. Publishing and maintaining credibility of MPS is not an easy task in a developing country like Bangladesh. Before preparing Monetary Policy Statement for H1FY15, BB analysed global economic prospects and probable consequences for our economy, discussed and reviewed previous MPS (January- June 2014), held productive consultation with key stakeholders and went for web-based comments.
Following the same spirit this H1FY15 monetary stance has focused on restraining mainly inflation as of previous couple of Monetary Policy Statements. Current H1FY15 has targeted monetary growth path of bringing down the inflation to 6.5 per cent by June 2015 and proposing inclusive economic growth. With a view to attaining this, BB has revised its reserve money growth to 15.5 per cent and broad money growth to 16 per cent by December 2014, which were 16.2 per cent and 17.0 per cent in the last MPS (January to June, 2014) respectively. It also revised its Net Foreign Asset (NFA) growth to 30.3 per cent and Net Domestic Asset (NDA) growth to 12.4 per cent which were 8.4 per cent and 19.0 per cent respectively.
The ceiling for private sector credit growth is now 16.5 per cent, including foreign borrowing, and 14 per cent from local sources by December 2014. Expectedly, borrowing from foreign sources would be preferred given the very low interest regimes than the domestic sources.
Apart from the above, BB has also aimed to raise Export Development Fund from $1.2 billion $1.5 billion to boost exports. To consolidate country's external sector stability, BB will continue to support a market-based exchange rate by building-up of foreign reserves in H1FY15 at a more moderate pace than FY14 to avoid excessive foreign exchange rate volatility. It is also hoped to maintain fiscal-monetary coordination on a regular basis by attending Coordination Council meeting. For effective transmission of monetary policy BB aims to promote interest rate flexibility by tackling asset quality issues, strengthen financial inclusion diversification and strengthen domestic debt market.
At the retail level both deposit and lending rates fell in H2FY14 and interest rate spreads have on average increased - from 4.99 per cent in January 2014 to 5.22 per cent in May 2014 as the deposit rates have fallen faster than lending rates. The interest spread is above five per cent indicating failure to keep the spread below 5.0 per cent as was desired in the last MPSs.
Global growth prospects for 2014 (3.6 per cent) are higher than previous two years and it is expected to grow even higher (3.9 per cent) in 2015 which clearly signals a good prospect of increasing export momentum.
Considering all these, Bangladesh Bank predicts the country's economic growth between 6.2 per cent and 6.5 per cent in the current 2014-15 fiscal year not conforming to the national budget expectation. In June 2014, the government announced the national budget with a GDP growth target of 7.3 per cent and inflation 6.0 per cent for FY2014-15. On the other hand, Bangladesh Bank in its MPS for H1FY15 forecasts the GDP growth at 6.2-6.5 per cent and inflation 6.5 per cent for FY2014-15. These two authorities' growth and inflation projections differ significantly within a very short span of time though by this time country's economic environment, along with global economic environment, didn't signal any sort of positive or negative shocks. Does it imply weak coordination between fiscal and monetary authorities?
The aim of the Perspective Plan (2010-2021) is to promote Bangladesh as a Middle Income Country within 2021. For this, the government has been implementing the FY11-FY15 Sixth Five Year Plan (SFYP) in order to accelerate GDP growth. Continuous growth is the key factor of generating employment and reducing poverty. Monetary Policy should also be accommodative along with the SFYP targets for restoring macroeconomic stability and supporting growth of the economy.
Regarding the interest rate spreads MPS has mentioned, "At the retail level both deposit and lending rates fell in H2FY14 and interest rate spreads have on average increased - from 4.99 per cent in January 2014 to 5.22 per cent in May 2014 as the deposit rates have fallen faster than lending rates…" However, no further discussion and suggestions for remedies from this situation has been provided. An interesting result has been found from Bangladesh Bank's Interest Rate Spread Data.
Interest rate spreads among different types of banks such as SoCBs, specialised banks, foreign banks, and private banks are 3.53, 3.55, 8.28, and 5.5 respectively. The average spread is 5.22 per cent. It shows that spreads in the foreign banks dominates the interest rate spreads. Therefore, Bangladesh Bank could adopt required initiatives accordingly.
In the MPS it is stated that - (1) Bangladesh Bank will continue to support a market-based exchange rate while seeking to avoid excessive foreign exchange rate volatility, and (2) it will further build up  foreign reserves in H1FY15 at a more moderate pace than FY14. These two statements apparently contradict each other. Current foreign exchange reserve covers more than six months' import bill which implies that the BB's current reserves are sufficient enough by any consideration. With a huge reserve, if BB again tries to build up foreign exchange reserve, it may bring external stability but may not ensure market-based exchange rate management.
BB has opened up a window for private sector investors' to take foreign currency loan from outside the country. It may be a good and courageous initiative by the BB, but needs to be scrutinised carefully and cautiously regarding foreign currency loans risks and threats. Current MPS does not analyse expressively anything about the probable risks and threats of short-term foreign borrowing
Under the subsection 'Promoting interest rate flexibility by tackling asset quality issues', MPS has discussed very little about NPL (non-performing loan) and the absence of governance practice by SoCBs. It should incorporate more detailed analysis and provide guidelines about governance and NPL handling along with the citable corrective measures already taken in order to bring back confidence among the private sector prospective investors.
Under the subsection 'Strengthening domestic debt markets', MPS has rightly discussed about developing a domestic debt market. It is a long pending and desirable issue. It is very essential to develop market-based instruments instead of non-market based (e.g. various Sanchaypatra) instruments to ensure transparency and demonstrate the strength of debt market to the investors (both domestic and foreign).
As the economy is not currently growing as it was expected in Sixth Five Year Plan, we need to review credit expansion policy for boosting investment which will help growth. If we check for investment as percentage of GDP, it has been hovering around 27-28 per cent (assessing with new Base Year) for last couple of years. If we analyse the previous data we can find that M2 growth was 22 per cent and 21 per cent in FY11 and FY12 respectively, which supported the government's fiscal expansion by increasing public investment, especially, the Annual Development Programme contributing to attaining growth rate of 6.71 per cent. The fiscal expansion is envisaged towards higher investment followed by economic growth. Higher growth with medium inflation rather than conundrum of low growth, low inflation is always preferred in a country like Bangladesh.
On the other hand, we are currently expecting 16 per cent M2 growth in the current MPS which is tightening the economy to contain inflation which is declared as the major task of the central bank. But to be an accommodative monetary policy, it should seek the path for encouraging investment-friendly credit expansion. Global growth is also an important factor for growth in Bangladesh.
As the Global growth prospects (estimated) for 3.6 per cent in 2014 and 3.9 per cent in 2015 are higher than the previous two years (3.2 per cent in 2012 and 2.9 per cent in 2013), the global demand will also increase. Enormous investment is needed to utilise the scope of export.
To boost investment, credit facilities to the investor need to be enhanced by easing the credit procedure and lowering the effective interest rate which appears not well articulated in the current MPS. For higher economic growth a medium inflation might be a good match for a country like Bangladesh in its current situation.
Nowadays, monetary policy is a very important tool to boost growth, maintain external stability, and containing inflation.
For the emerging market economies, there should be a common policy issue, which is how to achieve robust and sustainable, private-consumption-led growth. This requires a more transparent and effective expansionary monetary policy with liberalising interest rates, flexible exchange rate regime, reforms for better governance and quality of growth and also a well strengthened financial sector regulation and supervision.  
Productive investment is the key to achieving higher level of GDP growth. To attract potential investors it is very crucial to provide uninterrupted power and gas supply and minimise cost of doing business, along with political
stability.
Prof. Shamsul Alam, an economist, is Member, General Economics Division, Bangladesh Planning Commission since July 2009).
 [email protected]