Boosting investment confidence, improving banking governance

The Bangladesh Bank issued on December 30, 2014 a brief overview of the Bangladesh economy in 2014. Here is a review in somewhat greater detail of economy's attainments in 2014 and its prospects in 2015.
In 2013 normal economic activities suffered substantial disruptions from political unrest, including blockades and hartals, in the run up to national elections. Uncertainties in investment and output activities loomed large. The Government and Bangladesh Bank took various supportive steps to keep the wheels of the economy in motion. These steps and the post-election restoration of stability quickly restored investment and output activities back into momentum in 2014. Financial sector indicators in 2014 have shown mixed trends, but with significant improvement on many counts.  
Bangladesh Bank adopted pragmatic and cautious but output-friendly monetary and financial policies supportive of the country's inclusive growth aspirations. Inclusive financing helped uphold broad-based domestic output activities, and incremental employment and income attendant thereto. Signs of recovery in investment momentum showed up clearly in the later quarters of 2014, with Taka and US dollar liquidity overhang in the local market being used up and  BOP (balance of payments) current account balance turning round to negative. Increase in output in step with increasing demand helped keep inflation low and declining, exports and remittance inflows took foreign exchange reserves to record height. Lending interest rates remained on slow but clear declining trend. Movements of trends in social sector indicators, including poverty incidence, life expectancy, per capita income etc. were in the desired positive direction.
MACROECONOMIC TRENDS: Annual real GDP (gross domestic product) growth rate reached 6.12 per cent in FY2014 from 5.14 per cent of FY2009, averaging 6.14 per cent over last five years. This growth rate for FY2015 can be expected to exceed the 6.12 per cent level of FY2014 by substantial margin, subject to continuation of the current stable environment. Twelve-month average CPI inflation in terms of CPI (consumer price index) came down from 7.7 per cent in end June 2013 to 7.4 per cent by end June 2014 and to 7.1 per cent by end November 2014, in a trend of steady decline. Imports rose to $37 billion in FY2014 from $23 billion of FY2009, with around 10 per cent annual average growth over the last five years.
For FY2015, import growth is projected to be over 10 per cent. Strengthening growth trends in import of capital machinery and production inputs in the latter half of 2014 have created the platform for stronger growth in output activities over the coming months. Export earnings amounted to $30 billion in FY2014, against around $16 billion in FY2009. Export growth is likely to remain modest (in single digit level) in FY2015 due to sluggish demand in European and North American markets.  
Workers' remittance inflows reached $14 billion in FY2014, against $10 billion of FY2009. Based on current trends, growth in remittance inflows in FY2015 is expected to exceed 10 per cent. Sustained growth in exports and remittance inflows has led to phenomenal rise in foreign exchange reserves - the current balance exceeding $22 billion is enough to cover about seven months' import requirements. The reserve build-up has kept Taka strong and stable in exchange rate, at levels somewhat below Taka 78 per US dollar in the interbank market.
Increase in real income of the population has raised per capita GNI (gross national income) to $1190 by end June 2014, doubling over the last six years.
Daily wages of a day labourer can now buy 10-11 kg of rice, against at most three kg six years back. With daily consumption need of around three kg, the day labourers can now use the rest of their income on various other needs. Their standard of living has thus improved substantially.
BANKING SECTOR: The capital base of the banking sector has been strengthened because of transferring a big portion of banking profits into capital. The banks were able to preserve 11 per cent of risk weighted assets as capital. At the end of 2008, the amount of reserve capital stood at Taka 210 billion ($2.7 billion), which climbed up to Taka 650 billion ($8.33 billion) in September 2014. Classified loans stood at 10.8 per cent of the outstanding loans in 2008. The figure rose to 12.8 per cent in 2013 and then slightly slid down to 11.6 per cent in the third quarter of 2014. Actually new rules of loan classification satisfying the global standard has pushed the figures up. Bangladesh Bank sees these figures as hazardous and has already taken some corrective measures to clamp down on classified loans. We hope to see their descent soon. Banks have to take strong measures to recover these loans and if not, will take hit in their balance sheets for these irregularities. Bangladesh Bank will not be lenient in this regard. While the cases of the credible borrowers with potential for better businesses will be reviewed, the central bank will not hesitate to take any stern measures against the habitual defaulters and bad borrowers with a track record of persistent delinquencies.
Bangladesh Bank facilitated investment in both local and foreign currencies. Lending rates are on the slide, though slowly. The average lending rate has fallen by 1.0 percentage point in one year and came down to almost 12.5 per cent in October 2014. The deposit rate has not fallen that much and hence the spread remains around 5.0 percentage point whose further reduction is on the agenda.  
Private sector credit grew at 12 per cent in 2014 as opposed to 11 per cent in 2013. From 2009 to 2014 the country received $6.2 billion as overseas borrowing with lower single-digit rate of interest which saw exponential growth in 2014 when almost $2.0 billion was approved to inflow. The central bank played a crucial role in bolstering this inflow.
Excess liquidity, including investment in treasury bills and bonds, amounted to Taka 1200 billion ($15.4 billion) in October 2014. But idle money was only Taka 3.0 billion ($38.4 million). Pressure on liquidity increased around the end of 2014 because of increased demand for capital machinery and industrial loans. Hence, the interbank call money rate, which was softer up to the middle of 2014, began to rise at the end of same year, suggesting the absence of looseness in the money and credit markets. The call money rate on December 23 of 2014 was 8.3 per cent. This only means business was picking up of late.
At the end of October 2014, total deposits grew annually at a 13 per cent and stood at Taka 6930 billion ($88.8 billion), which is almost 60 per cent of GDP. Now the government is taking less amount of loan from the banking sector than before which is a sign of improved fiscal responsibility. At the end of October 2014, the government loan from the banking system increased by only 2.5 per cent which was 17 per cent in corresponding period one year ago. At the end of September of the current fiscal year, the long-term industrial loans stood at Taka 128 billion ($1.64 billion) which was 44 per cent higher than previous corresponding period.
FINANCIAL INCLUSION: In the tradition of the last five years, Bangladesh Bank continued its financing programmes on corporate social responsibility (CSR), agricultural credit, supporting small and medium enterprises, and other environment friendly projects. Besides, the central bank undertook other financial inclusion activities targeted to the low-income people of the society. Consequently, domestic demand is on the rise. In September 2014 the number of bank branches rose to 8,849 whose 57 per cent are situated in rural areas. The growth of bank branches has been 17 per cent over the last five year on average. The central bank has implemented a system of 10-Taka account opening for the farmers, hapless freedom fighters, garments workers, and the poverty-stricken people. This system has created a renaissance in the history of banking. The total number of accounts under this programme has risen to as high as 14.3 million whose 70 per cent belong to farmers. This programme was been extended to the distressed street children, who work for survival, in 2014. Bangladesh Bank has also undertaken a refinancing scheme of Taka two billion ($26 million) for the Taka-10 account holders. Thirty-one banks have signed a memorandum of understanding to avail this fund. Another inclusion programme called 'School Banking' registered 800 thousand account holders whose total amount of deposits stood at Taka 6.12 billion ($78.5 million) in September 2014.
The amount of agricultural loans disbursed in FY2009 was Taka 93 billion ($1.2 billion), which rose to Taka 160 billion ($2.1 billion) in the last fiscal year, displaying 12 per cent growth. Previously sharecroppers were not eligible to borrow from the banks. To address the issue Bangladesh Bank undertook a special project of Taka five billion ($64.1 million) to extend credit facilities to the deprived sharecroppers. Over the last five years, Bangladesh Bank has given Taka 15 billion ($192.3 million) to almost one million sharecroppers across all the districts of the country.  
The central bank has expanded SME (small and medium enterprises) financing to create new entrepreneurs and employment opportunities in addition to empowering the women. During the period from 2010 to 2014 Bangladesh Bank has extended SME loans of Taka 3340 billion ($42.8 billion) to 2.2 million entrepreneurs, five per cent of whom are women. In addition, 15 per cent of SME refinancing facilities have been devoted to form the 'Women Entrepreneurship Fund.' The SME loan programmne has provided Taka 500 billion ($6.4 billion) to more than 250 thousand new entrepreneurs who in turn created around 1.5 million new employment opportunities.  
Mobile financial services, an innovation of the central bank, brought a revolution in electronic transactions of inland remittances. The number of accounts under mobile banking has doubled in one year to reach the figure of  23.3 million. Nineteen banks have been servicing this programme through their 519 thousand agents. The working people of urban areas can now remit their income to their family members living in rural areas through the system of mobile banking which records transactions of more than Taka three billion ($38.5 million) per day. The central bank was laurelled the 'Alliance for Financial Inclusion Policy Award' in 2014 for its policy support to mobile financial services.
Bangladesh has started a new fund in the name of 'Green Banking' consisting of Taka two billion. The objective of the fund is to encourage the projects of renewable energy and environment-friendly initiatives.  Taka 1.64 billion was refinanced from this fund up to November 2014. The central bank formed another fund of Taka four billion under the financing of the Asian Development Bank to the environment-friendly brick fields. In 2014 the central bank initiated 'Agent Banking' to spread technology-based banking service to each and every corner of the country. So far five commercial banks have been approved to shoulder the service of Agent Banking.  
Bangladesh Bank has inspired all financial institutions to participate in CSR (corporate social responsibility) programmes. The initiative amounted to Taka half a billion in 2009, and it augmented eight times in the last five years to reach almost Taka 4.5 billion ($57.7 million). Under the new guideline of the central bank, 30 per cent and 20 per cent of total CSR expenditure has to be spent for education and health, respectively. Punitive steps will be taken should any CSR expenditure sponsors terrorism or violence. Anti-money laundering drills will be fully enforced in such cases. Bangladesh Bank has also established a new initiative called 'Bangladesh Bank Disaster Management and Social Responsibility Fund.'   
DIGITISATION AND SMART BANKING: The central bank has been endeavouring to develop itself as a fully digitised institution to support the government's dream of building a 'Digital Bangladesh.'  A big portion of banking services have also been digitised. Almost 90 per cent banking services nowadays are technology-based. The examples include online CIB (Credit Information Bureau) services, automated clearing house, the electronic fund transfer network, e-commerce, and internet banking while RTGS (Real Time Gross Settlement) remains in the queue. Liberalisation has been scaled up for foreign exchange transactions related to foreign travel, training, education, treatment and so on. A foreigner and non-resident Bangladeshi can now easily open and operate foreign currency accounts. The size of the Export Development Fund has been increased to $1.5 billion. Any foreign professional can now carry out all transaction services such as hotel booking, payment of charges, various fees, purchase of software and apps through international credit cards. Even ordinary people who do not hold international credit cards can avail these services of online payments and purchases.
STRENGTHENING SUPERVISION: The central bank has taken various steps to improve supervision so that financial frauds can be minimised, if not eliminated entirely. Digital technology has been deployed to investigate big financial transactions and loans in order to stop the repetition of banking irregularities. Electronic dashboard is an example in this regard.
CONCLUDING REMARKS: Bangladesh Bank is devoted to improve financial stability in the economy through development and inclusive programmes across the board. As a result, in the face of recession in Europe, America and Japan, and domestic political maelstrom, Bangladesh has continued its economic success without deviation. Recently, the International Monetary Fund (IMF) has termed Bangladesh's economy as 'Stable' and has labelled the financial sector  as 'Strong.'
If internal demand, which has begun to stimulate in the later part of 2014,  is continued in the same pace through 2015, it will not be hard to achieve a growth rate of 6.5 per cent or more. Some risks, however, still remain for three reasons. These include the new pay scale, the possibility of oil price hike because of political tension in the Middle East, and finally, the demand pull impact on the price level because of output growth. Bangladesh Bank will keep these risks in mind and design the upcoming monetary policy accordingly so the targeted 6.5 per cent inflation is achievable.
The economy has scopes of improving infrastructure and mobilising revenue which should be addressed in 2015. Different ministries will enjoy the reduction in the deficit of their budget programmes owing to a fall in oil prices. But it should not entail a room for complacency. Rather, revenue collection has to be enhanced to support the ever-augmenting government investment and expenditure. We need further revenue income to support the building of the mega projects such as the deep seaport, four-lane highways of Dhaka-Chittagong and Dhaka-Mymensingh routes, the metro rail and many other large infrastructures. The National Board of Revenue (NBR) can be digitised and strengthened to expedite revenue collection. Attention must be given on the development of power and energy. Traffic congestion must be addressed on a priority basis, because the megacities work as 'Growth Centres' for an emerging economy like Bangladesh.   
Additionally, Bangladesh Bank will help boost investment confidence by improving banking governance. One of the main targets of the financial sector will be to increase the purchasing power of the lower and middle income people. The way the external sector is performing convinces us that macro stability in 2015 will be improved to a great extent.  
'Resilience' is one of the great characteristics of our people. They have the capacity to adjust any adverse situation and to stand up again and again. This is the main strength of our nation, and we got its testimony many a times in the past. For example, Bangladesh achieved a growth rate over 6.0 plus per cent even in FY2014 after facing all political odds during 2013 and also by nullifying all negative comments of the foreign agencies about our prospects. If stability prevails, our upward trend in growth will become a shining example to the globe as most countries are now experiencing uncertainties, particularly in terms of their tumbling foreign exchanges. But Bangladesh currency remains strong and stable. I believe our economy will be more consolidated and stable in 2015.
Dr. Atiur Rahman is Governor, Bangladesh Bank.