BB has tools to tackle higher liquidity, CA assured
Monday, 29 September 2008
Shakhawat Hossain
The central bank of Bangladesh has assured the Chief Adviser that it has sufficient tools to tackle the higher liquidity pressure arising out of falling import payments, coupled with higher exports and flow of remittance, a top official said Sunday.
'We don't need any special plans to tackle the higher liquidity in the coming months,' said Bangladesh Bank (BB) chief economist Mustafa K Mujeri.
Sufficient tools are available under the existing rules and regulations, which can be applied for proper management of the higher liquidity in the wake of falling import payments and the growth in exports and remittance, he said.
Chief Adviser (CA) Dr Fakhruddin Ahmed had earlier asked the central bank to prepare a 'strong plan' to ensure an efficient liquidity management against the back drop of higher growth in net domestic asset (NDA) and net foreign asset (NFA).
'Liquidity management could prove difficult without proper plans,' Dr Ahmed said in a letter to the central bank.
The central bank officials said they examined the flow of NFA and NDA of the last one decade and found that the two were quite opposite in terms of their flow.
'There is no instance that the NFA and the NDA have recorded higher growth at the same time. If the NDA shows higher growth, the NFA declines,' said another BB official.
The CA, who was a BB governor, noted that the NFA was already showing an upward trend due to falling import payments. It is expected to rise further in the coming months due to the higher flow of remittance and the export growth.
The country's import payments have gone down by US$ 531 million (53.1 crore) in one month due to commodity items' price fall in the international market.
Commodities worth $1.81 billion were imported in August last compared to $2.3 billion of the previous month, according to the BB.
The export income until July last witnessed nearly 16 per cent growth compared to the corresponding period of last year while the inflow of remittance maintained almost 30 per cent growth until August last also compared to the corresponding period of last year.
In his letter, Dr Ahmed pointed out that India and Vietnam faced such adverse situation in 2007-08 due to higher liquidity.
Bangladesh, however, did not face any such adverse situation due to higher import payments as well as external and internal shocks during the period, he observed.
This situation is not going to be repeated and if the favourable environment continues, there may be a pressure for liquidity expansion after takeover of the next government, he warned.
Experts including BIDS director Zaid Bakth supported a proper plan to tackle the liquidity pressure in the coming months to curb the prevailing double-digit inflation.
The higher export earnings and inflow of remittance against the falling imports should be utilised in the productive sector for the purpose of employment generation, Dr Bakth said.
Dr Mujeri, however, said it is very difficult to reach any conclusion against the backdrop of the growth in NDA and NFA due to the volatile oil price that dropped below $100 early this month from a record $147 on July 11 last.
The oil price hiked again to $120 and then fell to $106 Thursday last.
Dr Mujeri said if the NDA and NFA grow further in the coming months, the central bank has the ability to tackle the situation.
The central bank has, however, no tools to make direct intervention in the flow of the country's exports, remittance, aid and FDA, which mainly contributed to the NFA, said the BB officials.
What the BB can do is influence the exchange rate by maintaining the flow of foreign currency in the local market. At the same it has tools like repurchase agreement (repo) and reverse repo to check the higher credit flow to the local market.
The central bank recently hiked the repo rate to squeeze the credit flow recorded 26 per cent until June.
The central bank of Bangladesh has assured the Chief Adviser that it has sufficient tools to tackle the higher liquidity pressure arising out of falling import payments, coupled with higher exports and flow of remittance, a top official said Sunday.
'We don't need any special plans to tackle the higher liquidity in the coming months,' said Bangladesh Bank (BB) chief economist Mustafa K Mujeri.
Sufficient tools are available under the existing rules and regulations, which can be applied for proper management of the higher liquidity in the wake of falling import payments and the growth in exports and remittance, he said.
Chief Adviser (CA) Dr Fakhruddin Ahmed had earlier asked the central bank to prepare a 'strong plan' to ensure an efficient liquidity management against the back drop of higher growth in net domestic asset (NDA) and net foreign asset (NFA).
'Liquidity management could prove difficult without proper plans,' Dr Ahmed said in a letter to the central bank.
The central bank officials said they examined the flow of NFA and NDA of the last one decade and found that the two were quite opposite in terms of their flow.
'There is no instance that the NFA and the NDA have recorded higher growth at the same time. If the NDA shows higher growth, the NFA declines,' said another BB official.
The CA, who was a BB governor, noted that the NFA was already showing an upward trend due to falling import payments. It is expected to rise further in the coming months due to the higher flow of remittance and the export growth.
The country's import payments have gone down by US$ 531 million (53.1 crore) in one month due to commodity items' price fall in the international market.
Commodities worth $1.81 billion were imported in August last compared to $2.3 billion of the previous month, according to the BB.
The export income until July last witnessed nearly 16 per cent growth compared to the corresponding period of last year while the inflow of remittance maintained almost 30 per cent growth until August last also compared to the corresponding period of last year.
In his letter, Dr Ahmed pointed out that India and Vietnam faced such adverse situation in 2007-08 due to higher liquidity.
Bangladesh, however, did not face any such adverse situation due to higher import payments as well as external and internal shocks during the period, he observed.
This situation is not going to be repeated and if the favourable environment continues, there may be a pressure for liquidity expansion after takeover of the next government, he warned.
Experts including BIDS director Zaid Bakth supported a proper plan to tackle the liquidity pressure in the coming months to curb the prevailing double-digit inflation.
The higher export earnings and inflow of remittance against the falling imports should be utilised in the productive sector for the purpose of employment generation, Dr Bakth said.
Dr Mujeri, however, said it is very difficult to reach any conclusion against the backdrop of the growth in NDA and NFA due to the volatile oil price that dropped below $100 early this month from a record $147 on July 11 last.
The oil price hiked again to $120 and then fell to $106 Thursday last.
Dr Mujeri said if the NDA and NFA grow further in the coming months, the central bank has the ability to tackle the situation.
The central bank has, however, no tools to make direct intervention in the flow of the country's exports, remittance, aid and FDA, which mainly contributed to the NFA, said the BB officials.
What the BB can do is influence the exchange rate by maintaining the flow of foreign currency in the local market. At the same it has tools like repurchase agreement (repo) and reverse repo to check the higher credit flow to the local market.
The central bank recently hiked the repo rate to squeeze the credit flow recorded 26 per cent until June.