The Monetary Policy Statement (MPS) that the Bangladesh Bank (BB) launched recently for the period of July-December 2014 has adopted an approach to supporting the government's development goals by containing price rise, ensuring adequate private sector credit supply and financial stability. The BB was first issued MPS in January 2006, and in continuation of this tradition the 18th half-yearly MPS was announced on July 26 last.
As expected, the MPS has been framed with the objectives of maintaining inflation at moderate levels and supporting the government in meeting its inclusive growth objectives. The issues related to financial stability received due attention in the MPS. In fact, ensuring financial stability as one of the core objectives of the monetary policy received renewed recognition following the most recent global economic crisis. The BB's approach is, however, different from the mainstream monetary policy approach of the developed economies. The BB monetary policy approach is: It is aimed at helping the economy maintain growth and stability and macro financial stability amid domestic shocks and external turbulences. The new MPS was drafted following an acceptable democratic process after consultations with stakeholders, including economists, academicians, professionals and trade body representatives. Web-based comments from different quarters were also considered.
Based on the assessment of development during the preceding period, the structured MPS contains information about BB's outlook on the real sector and monetary developments in immediate future and the strategy to pursue. In setting the targets, the monetary policy authority rightly considered achievement of the previous monetary growth targets. It is observed that most of the assumptions in the previous MPS were materialised and the monetary growth targets stayed on the track during the last six months. The latest available information reveals that the growth in the reserve money (RM) and net domestic assets remained within the estimated ceiling and the average inflation was under control. A stable exchange rate scenario, improvement in external balances, and adequate foreign exchange reserve positions indicate that the BB targets in the MPS in regard to 'maintaining exchange rate stability', 'building up foreign exchange reserves' and 'avoiding excessive volatility of the exchange rate' were achieved.
We all are aware that the economy of the country suffered heavy losses during the prolonged political unrest in the second half of 2013. According to an estimation of the Centre for Policy Dialogue (CPD), shutdowns, blockades and strikes cost 4.7 per cent of the country's GDP (gross domestic product). Business houses, especially small enterprises, were badly affected by the political turmoil. Under such circumstances the January MPS of the BB projected economic and financial sector recovery supported by macro-prudential policies and supportive incentives. Following the turmoil, the BB offered a temporary opportunity to reschedule loans at less-than-required down-payments and an extended time for instalment payment to support the business houses affected by the prolonged political unrest. The BB also undertook initiatives to broaden the scope of the Export Development Fund and reduce the borrowing costs of genuine borrowers facing cash-flow difficulties. Though there were some complaints about misuse of the BB flexibility in regards to rescheduling of loans by some banks, as a whole the outcome of the BB's initiatives was praiseworthy. These initiatives must have contributed to the recovery process of the economy after the political turmoil. The recent increase in the non-performing loans might be due to the 'overhang' of earlier banking irregularities and scams and the difficulties the businesses faced in repaying loans during the political unrest. Even after such an unexpected political turmoil, some of the positive outcomes of the January MPS and recent improvements are really encouraging. As a whole, the recent period is marked by falling inflation and a stable external sector.
The current MPS (July-December 2014) has accommodated policy initiatives and strategies to create a more investment-friendly environment and stabilise inflation to spur economic growth and development. The BB has targeted containing the Broad Money (M2) and reserve money growth and bringing the average inflation down to 6.5 per cent by the fiscal 2015. The central bank targeted 16.5 per cent private sector credit growth (including foreign borrowings by local corporate houses) in line with the output growth targets of the country, out of which 14 per cent borrowing is expected from local sources by December 2014. However, the BB has reiterated its stand to lend only to the creditworthy borrowers in the productive sectors. The private sector credit growth might not be sufficient to ensure an adequate private sector credit flow and attain the desired GDP growth rate. Actually, the targeted private sector credit flows, if productively used, should be sufficient to attain the targeted level of growth. The BB's initiative to divert credit from the unproductive sectors to the productive ones in recent years is really commendable.
Financial and credit market of the country is witnessing a change and some challenges. Currently most banks are having excess liquidity and the government borrowing from the banking system was much lower than projected. It is well-known that limited borrowing by the government from the banking system is crucial for achieving the inflation target. This also offers a greater opportunity for the banks to lend to the private sector. The BB raised CRR (Cash Reserve Ratio) in June 2014 by 50 basis points to absorb part of the excess liquidity and tame inflation. As an investment incentive, foreign investors are now allowed to source term loans from local banks. However, banks must also find alternative lending and investment opportunities in the productive sector and lend to the people in un-served and underserved regions.
The BB is encouraging banks to diversify their portfolios and ensure the quality of credit. There is no doubt that it is mainly the quality of the credit that matters most in promoting sustainable banking and economic growth of the country. The new MPS reiterated the BB commitment to strengthen the financial system and improve the asset quality.
It is well-known that the BB has been working towards maintaining financial stability and extending financial outreach to the underserved, and the new MPS has restated its promise in this connection. The BB has undertaken some notable initiatives for improving credit flows to the agriculture and SME (small and medium enterprise) sectors as part of its financial inclusion campaign. It is monitoring the interest rate spread in order to promote a more competitive banking sector and enforcing a stringent classification and provisioning system. As asserted in the MPS, the BB would continue to focus on the quality/composition of private sector credit and the interest rate spreads.
Aiming to improve market mechanism, the BB is working to strengthen domestic debt management through promoting greater use of the secondary market trading platform for government securities. The central bank has also committed to continue its collaboration with the regulatory authorities in the effort to stabilise the capital market of the country.
Certain limitations of the BB must be considered while assessing the MPS. It is well-recognised that the monetary policy is not an exact science. It projects and identifies the path to move along with some goals set. In Bangladesh, changing these targets is very common and expected where the success of the central bank should depend upon how efficiently and quickly it can adjust with the changing targets of the government. The inflation target is being closely coordinated by the Ministry of Finance and it is recognised that restraining the price rise depends on a number of factors. Inflation affects the low-income community most in the form of pulling food prices and it is related to social justice. In today's open trade regime, the food price is obviously a supply-side problem.
The BB does not have any control over the borrowing by government and state-owned enterprises. In such circumstances, any government decision on borrowing from the banking sector would be a determining factor for the expected outcome. Other than domestic factors, it is obvious that the price level of the country cannot be clearly kept apart from the global price level, especially the energy and commodity prices.
The credibility of the BB lies in financial stability where it is playing a notable role and paying due attention. The BB has brought remarkable changes in the areas of financial inclusion and supervisory mechanism. Its supervision capacity has been strengthened in recent years through greater automation. The BB's initiative to implement the Basel II framework is a praiseworthy initiative that has improved the risk absorption capacity of banks.
Sometimes we can very easily point fingers to 'supervisory failure' while detecting any fund misappropriation or increase in the non-performing loans in the banking sector. It is generally recognised that such types of unscrupulous activities cannot take place without the active collaboration or passive approval of a section of bankers. It is also well-recognised that no degree of supervision can prevent the irregularities altogether; it can reduce the probability only. This is because of the inherent nature of supervision where a time lag always exists before any irregularity can be observed by the supervisory authority. It is recognised that when an irregularity is detected by a supervisory authority, it becomes too late to prevent that. Steps can only be undertaken for preventing future irregularities. This makes the internal control system the most effective mechanism in preventing any sort of banking irregularities. It is for this reason that a strong internal control culture is recognised as the best defence against any unscrupulous transaction in the banking operation.
Dr Shah M Ahsan Habib is Director for Training at Bangladesh Institute of Bank Management (BIBM).
ahsan@bibm.org.bd
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