Monetary Policy July-December 2014: A review

Monetary Policy Statement (MPS) for July-December 2014, as unveiled by Bangladesh Bank recently, shows certain encouraging developments during the last six months, but few vital questions still remain unanswered. The MPS for January-June 2014 was based on certain key assumptions and policy directions. A review of developments over the past six months, as claimed by Bangladesh Bank, reveals that most of the assumptions materialised and considerable progress was made towards achieving the key goals. In the last MPS, projected growth rate was from 5.8 to 6.1 per cent and according to figures released by Bangladesh Bureau of Statistics (BBS), growth achieved is 6.1 per cent.
An overview of the new monetary policy reveals that it is actually a continuation of the just expired MPS and as Bangladesh Bank governor declared, it has been prepared with the same cautious and investment-friendly outlook as the last one, which means there is nothing new about it and no significant policy shift is noticeable. Bangladesh Bank has shown controlled ambition in keeping with the ground reality. Credit limit for the private sector has been reduced.
It appears that Bangladesh Bank has made provisions for higher government borrowing. It is difficult to predict at this stage if the government will be able to keep its borrowing within the budgeted limit. In 2013-14 fiscal, the government financed most of its credit requirement by collecting money from public through savings certificates. It remains top seen whether the same thing will happen during this period too.
Provision for availing foreign private loans has been retained and the reason thereof is obviously low rate of interest. But Bangladesh Bank has admitted that increased foreign private loans could not have substantial influence on the interest rates. On the contrary, there has been a reduction in interest on deposits. In that case, it is difficult to figure why foreign credit shall be welcome and what is the benefit to be derived out of it.
Some people allege that monetary policy has affected price inflation of non-food items, while others contradict this view opining that stable exchange rate, depression in consumption and price situation in world market have played a greater role in this respect.   
The Banking system of the country was struck by major disasters in the form of unforeseen corruption and financial malpractices over the last couple of years, so much so that Bangladesh Bank looked helpless at times. The Banking sector has never experienced such disasters before, which left the whole system in tatters. The crumbling banking system itself dealt a big blow to investment in the private sector, as a result of which interest against loans is not coming down. Media covered the issue extensively and there had been public uproar. At times, the government also appeared toeing a tough line in bringing the criminals to book. But in the end, the realisation and initiative required to tackle the issue is hardly noticeable.
Cases of Hallmark and Destiny are unique examples of plundering public money perpetrated by customer-banker nexus, while the Basic Bank tragedy is the outcome of syndicated crime by bank officials.  On the other hand, capital market which is a major money supplier for private sector investment was destroyed by unscrupulous manipulators. All these caused a landslide erosion of public confidence and trust in the banking system - a situation that the economy is yet to recover from. The matter deserves to be investigated by an independent review commission. The new monetary policy does not have much to offer to win back the eroded public trust.   
The last MPS explained that policy rates were being kept unchanged due to the risks of inflationary pressures, but in order to support economic growth, prudential policies and other incentives would be used. This does not appear to be a good enough explanation for keeping the interest rates unchanged, because there are accepted methods pursued by countries around the world to combat inflation and at the same time foster growth. As we know, inflation means increase in money supply and rising prices is the effect of inflation. When it comes to protecting investment from the ravages of inflation, there are several popular strategies. First and foremost is the stock market. Rising prices tend to be good news for equities. For fixed-income investors, seeking an income stream that keeps pace with rising prices, Treasury Securities are a common choice. These government-issued bonds come with a guarantee that their par value will rise with inflation, as measured by the Consumer Price Index (CPI), while their interest rate will remain fixed. Thankfully, the government negotiated the line recently and was largely successful in undershooting bank borrowing targets. Whether it succeeded in controlling inflation is another matter that needs to assessed separately. It is true, if inflation is controlled and at reasonable levels, the economy may prosper. With controlled lower inflation, employment increases, consumers have more money to buy goods and services, and the economy benefits and grows. However, the impact of inflation on economic recovery cannot be assessed with complete accuracy.
Reserve money and broad money are two important components of a monetary policy. The monetary authority of Bangladesh has gone on to explain that the last MPS aimed to contain reserve money growth to 16.2 per cent and broad money growth to 17.0 per cent by June 2014. Latest data for the second half of 2014 fiscal year (H2FY14) shows that reserve money growth and growth of net domestic assets of Bangladesh Bank remained within programme ceilings. Typically, a growth in reserve money is useful because it helps keep prices stable as productivity increases in the system. But during times of serious inflation, the money growth needs to slow to control it. Here again, inflation remains to be an important element.
Reserve Money is sum of a country's currency in circulation and banks deposits with the Central Bank. Bank's deposits are reserves maintained as cash reserve ratio by banks in the current account with the central bank. It forms the basis on which money supply builds and circulates in the system. When BB creates reserve money, it provides liquidity into the banking system which thereby supplies money to the economy. Thus BB infuses liquidity by increasing reserve money. Reserve money is also known as high powered money, monetary base and base money.
Broad money means money in any form including bank or other deposits as well as notes and coins. Broad money can also include Treasury Bills and gilts. These financial securities are seen as 'near money'.
The latest MPS reveals that broad money grew at 15.2 per cent in May 2014 which undershot programme ceilings due both to lower public and private sector borrowing from the banking sector. BB's facilitation of private sector trade credit from abroad led to lower overseas financing cost with overall private sector credit growth, from both local and foreign sources, amounting to 15.7 per cent in May 2014. Domestic retail interest rates declined during these six months but the spread between lending and deposit rates rose indicating that lending rates have declined by less than deposit rates.
The MPS H2FY14 has embodied a commitment that it will be supportive of the capital market through on-going deeper regulatory coordination and policy support. The capital market of the country was subjected to indiscriminate manipulations by unscrupulous stock traders that pauperised innocent investors. How BB offers itself to be supportive of these primary investors needs elaboration. This means, a little more than opening of no-frill 10 taka accounts is required. Review of rules governing private equity begun by BB should be concluded in quick time.
In MPS, July-December 2014, BB has set up a 2 billion taka refinancing facility via micro-finance institutions, to provide small loans to those lower-income rural households. This is being hailed as a positive move which will help contain or may even bring down average inflation alongside ensuring that credit growth is sufficient to stimulate inclusive economic growth.
While it is officially recognised that the persisting inflationary pressures over the past few months has made achieving the FY15 inflation target challenging, significant liquidity in the banking system has led to a sharp rise in reverse repo operations with consequent costs to BB and ultimately the taxpayer.
BB's ongoing financial inclusion campaign, coupled with recent issuance of agent banking guidelines, are designed to extend the outreach of financial services into remaining pockets of exclusion in under-served areas and among under-served clients.
Mobile phone financial services are growing with 16.1 million account holders in May 2014. This is a fast growing sector, but its outreach is limited to payment services to individuals only. BB has rightly decided to promote the use of mobile phone services for government and business payments, as well as broadening this into a wider range of banking services.
Bangladesh has excelled in production of food items over the last few years and has reached close to being self-sufficient in this sector. Creation and introduction of a separate agri loan structure incorporating provisions for loans at softer and easier terms to agriculturists, will help attain complete food autarchy in quick time and reduce dependence on import of food items significantly. It would have been better if monetary policy of H2FY14 had included similar provisions.
Saleh Akram is a TV personality and writes on economic issues. [email protected]