Bangladesh Bank (BB) launched on January 29 its Monetary Policy Statement (MPS) for the period of January-June 2015. It followed a predictable approach which is to support the government's development goals by containing price rise, ensuring adequate private sector credit supply and maintaining financial stability through inclusive measures. The new MPS was drafted in consultation with the stakeholders, including economists, academicians, professionals and trade body representatives.
The current MPS contains information about BB's outlook on the key economic sectors and monetary developments in immediate future, based on the assessment of developments during the preceding period, and the strategies required to pursue those in a positive manner. In setting the targets, the monetary policy rightly considered achievements of the previous monetary growth targets. It is observed that most of the targets in the previous MPS were either materialised or stayed on track. 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 with regard to 'maintaining exchange rate stability', 'building up foreign exchange reserves' and 'avoiding excessive volatility of the exchange rate' were achieved.
The current MPS (January-June 2015) has accommodated policy initiatives and strategies to create a more investment-friendly environment and stabilise inflation to spur economic growth and development. BB has targeted 16.5 per cent Broad Money (M2) and 15.9 per cent reserve money growth and bringing the average inflation down to 6.5 per cent by June 2015. The central bank targeted 15.5 per cent private sector credit growth (including foreign borrowings by local corporate houses) at the end of 2015 in line with the output growth target of 6.5 to 6.8 per cent.
BB's initiative to divert credit from the unproductive sectors to the productive ones in recent years is commendable. In the MPS, BB has reiterated its stand to lend only to the creditworthy borrowers in the productive sectors. The targeted private sector credit flows, if productively used, should be sufficient to attain the targeted level of growth.
Financial and credit market of the country is witnessing a change and some challenges in recent time. Currently, most banks are having excess liquidity and the government borrowing from the banking system was much lower. It is well-known that limited borrowing by the government from the banking system could be crucial for achieving the inflation target. This also offers a great opportunity for the banks to lend to the private sector. Though deposit and lending rates fell and interest spread on average decreased during July-December 2014, it is yet to reach the targeted bracket of 5 per cent. BB will continue its efforts to reduce this spread, as stated in the MPS.
As an investment incentive, foreign investors are also allowed to source term loans from local banks. 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. In the recent years, availability of different tools like Credit Risk Management manual, Credit Risk Grading manual, online Credit Information Bureau, legal support, accessibility to tailored software and, most importantly, injection of a pool of talented bankers in the banking sector upgraded the credit operation of commercial banks. Though enforcement of the tighter loan classification norms was a factor, the increase in the volume of nonperforming loans during 2014 might be mainly due to the fallout of scams of 2012, and the difficulties businesses faced in repaying loans following the political unrest in 2013. Even after such an unexpected political turmoil, some of the positive outcomes of the last MPS and recent improvements are really encouraging. As a whole, the recent period is also marked by a stable external sector. This scribe believes a stable business environment would help bring down the classified loans to the reasonable and expected level in 2015. The new MPS reiterated the BB's commitment to strengthen the financial system and improve the asset quality.
As expected, the MPS stated strengthening inclusive and green activities of banks for ensuring macroeconomic and financial stability. It is well-known that BB has undertaken a comprehensive financial inclusion campaign to reach out to the underserved people by making banking services available to farmers by allowing them to open banks account with minimum initial deposit; issuing branch licences to all SME/agriculture service centres; offering easy and effective access to banking services for physically incapable people, hard core poor, unemployed youth, freedom fighters etc.; relaxing conditions of loan repayment and providing fresh facilities to natural calamity affected farmers; participating in agriculture/rural credit by all banks; arranging agriculture credit to sharecroppers; putting emphasis on financing women entrepreneurs; developing ICT solutions for inclusive banking; encouraging creative partnership between banks and MFIs; guiding Green Banking; introducing financial inclusion oriented CSR, school banking, and agent banking etc. More or less, all banks that are in operation in the country -- local and foreign, private and state-controlled -- have come forward in the financial inclusion drive in response to the central bank's initiatives.
Ensuring financial stability as one of the core objectives of the monetary policy received renewed recognition following the most recent global economic crisis. Conventionally, there are arguments that the objectives of 'financial stability' and 'price stability' may contradict each other and thus the objective of price stability may be hampered. Targeting explicitly 'financial stability' was generally viewed as a distraction and risking the central bank's attention in achieving its price stability mandate. The renewed recognition of the importance of preserving financial stability is entirely appropriate and, perhaps, long overdue. Some central banks in developing countries like the BB have opted to deviate from the mainstream monetary policy approach of developed economies. These central banks have been following monetary and financial policies towards supporting inclusive and sustainable growth. BB's monetary policy approach attempts to serve Bangladesh economy in upholding growth and stability and have been experiencing macro financial stability amid domestic shocks and external uncertainties. Monetary policy approaches of many developing countries' central banks have variants of similar inclusiveness and sustainability-supportive aspects. Based on the experiences of several developing countries, it can be stated that price stability, the primary objective of monetary policy, does not occur in isolation, rather financial stability is an important requirement for ensuring price stability.
The policies and measures which have been undertaken so far in Bangladesh in the context of developmental and inclusive banking are, as this scribe finds, steered in the right direction and have already started creating positive impacts.
Dr. Shah Md. Ahsan Habib is Director (Training), Bangladesh Institute of Bank Management (BIBM).
ahsan@bibm.org.bd