Higher govt borrowings cause BB to lose control over reserve money
FE Report | Friday, 20 June 2008
The Bangladesh Bank's (BB) control over reserve money is on the wane mainly due to government borrowings and movement of net foreign assets, a central bank study said.
"....both net foreign asset and government borrowing loosen the degree of controllability of BB over reserve money," the central bank's policy analysis unit (PAU) said in a report, released Thursday.
The policy note styled 'Money Supply Process in Bangladesh: An Empirical Analysis' also said that the government borrowing from the central bank originates from the budget deficit and remains a major factor in determining the reserve money.
Generally, the central bank sets a safe limit of broad money (M2) growth target in line with the country's projected gross domestic product (GDP) growth and inflation expectation. But the behaviour of targeted and actual money growth do not match.
"The wide gap that exists between targeted and actual money growth indicates that BB has a rather loose control over money supply," the report added.
The study also said the control of money supply is an important policy tool in conducting monetary policy within the monetary targeting framework.
"The success of monetary policy critically depends on the degree of controllability that the monetary authority has over money supply," the study said, adding that the central bank implements monetary policy by setting the reserve money (RM) as the operating target and broad money (M2) as intermediate target in the monetary policy framework.
In order to ensure effective management of reserve money and contain budget deficit within its targeted level, the adoption of a prudent government borrowing strategy could be useful, the study noted.
The PAU also recommended some options including reduction of borrowing from the central bank to manage the government's budget deficit financing in an efficient way.
The study suggested "To adopt and adhere to quarterly ceiling on borrowing from the BB and gradually move toward a more balanced domestic debt strategy to finance budget deficit through long term borrowing sources,"
On the other hand, the movement of net foreign asset is influenced by complex interaction between export and import growth, inflow of remittances, and borrowing from external sources by the government and other entities.
"This brings out the relatively unpredictable nature of net foreign asset which is a part of the common characteristics of less developed countries like Bangladesh," the study said.
The central bank, however, can use sterilisation tools along with interventions in foreign exchange market whenever necessary in view of unpredictability of movement of net foreign asset stemming from changes in the external sector particularly the current account balance and the financial account of the balance of payments, it added.
Besides, a prudent combination of expenditure switching and expenditure reducing policies are required for maintaining the predetermined growth in the reserve money, the PAU noted.
"....both net foreign asset and government borrowing loosen the degree of controllability of BB over reserve money," the central bank's policy analysis unit (PAU) said in a report, released Thursday.
The policy note styled 'Money Supply Process in Bangladesh: An Empirical Analysis' also said that the government borrowing from the central bank originates from the budget deficit and remains a major factor in determining the reserve money.
Generally, the central bank sets a safe limit of broad money (M2) growth target in line with the country's projected gross domestic product (GDP) growth and inflation expectation. But the behaviour of targeted and actual money growth do not match.
"The wide gap that exists between targeted and actual money growth indicates that BB has a rather loose control over money supply," the report added.
The study also said the control of money supply is an important policy tool in conducting monetary policy within the monetary targeting framework.
"The success of monetary policy critically depends on the degree of controllability that the monetary authority has over money supply," the study said, adding that the central bank implements monetary policy by setting the reserve money (RM) as the operating target and broad money (M2) as intermediate target in the monetary policy framework.
In order to ensure effective management of reserve money and contain budget deficit within its targeted level, the adoption of a prudent government borrowing strategy could be useful, the study noted.
The PAU also recommended some options including reduction of borrowing from the central bank to manage the government's budget deficit financing in an efficient way.
The study suggested "To adopt and adhere to quarterly ceiling on borrowing from the BB and gradually move toward a more balanced domestic debt strategy to finance budget deficit through long term borrowing sources,"
On the other hand, the movement of net foreign asset is influenced by complex interaction between export and import growth, inflow of remittances, and borrowing from external sources by the government and other entities.
"This brings out the relatively unpredictable nature of net foreign asset which is a part of the common characteristics of less developed countries like Bangladesh," the study said.
The central bank, however, can use sterilisation tools along with interventions in foreign exchange market whenever necessary in view of unpredictability of movement of net foreign asset stemming from changes in the external sector particularly the current account balance and the financial account of the balance of payments, it added.
Besides, a prudent combination of expenditure switching and expenditure reducing policies are required for maintaining the predetermined growth in the reserve money, the PAU noted.