Fazle Kabir, Governor of Bangladesh Bank formally unveiled the Monetary policy statement for the second half of the financial year 2017-2018 and the period of – January – June 2018 on 29 January 2018 at a press conference in Bangladesh. Among others, Shitangshu Kumar Sur Chowdhury, Banking Reform Advisor, Bangladesh Bank; Abu Hena Mohd. Razee Hassan, Deputy Governor, Bangladesh Bank, Faisal Ahmed, Chief Economist, Bangladesh Bank; and Allah Malik Kazemi, Change Management Advisor, Bangladesh Bank, spoke during the occasion.
The cautious and quite conservative monetary policy is termed as a growth – supportive aimed to curb the inflationary pressure through using the tools of discouraging credit flows. The Governor terms it as employment focused and growth and stability’ oriented Monetary Policy Statement (MPS); though the policy set private sector credit growth 16.8% while it was projected 18.1% in the year 2017.
The repo and reverse repo has remained unchanged respectively at 6.75% and 4.75%. According to the economist, it is usual to have a contractionary’ MPS at the election year amidst the fear of inflationary pressure due to the rise of price in world commodity market.
MPS Highlights
· Sharp above-trend upturns in imports and credit to private sector appear to indicate a much-awaited robust pickup in investment and output activities, supported by progress in addressing infrastructural deficiencies, robust domestic demand, and a broad-based pickup in global output and trade growth. Besides increased food grains imports due to flood-related crop losses and depletion of public food grain buffer stocks, import increases mainly comprise capital machinery and production inputs. These bode well for growth going forward but also poses near-term challenges containing monetary growth-driven inflationary pressures and of protecting external sector balance of payments (BOP) sustainability.
· Excess liquidity from FY17 largely met the monetary demand from increased economic activity, keeping domestic credit (DC) growth at 14.5%, in line with the 14.5% H1 FY18 program target, even with private sector credit growth (18.1%) substantially overshooting the 16.2% H1 FY18 program target.
· Moderation of the transient external imbalance from credit-fueled high import growth to a sustainable trend will accordingly be a key priority for monetary and macro-prudential policies in H2 FY18, besides keeping in check the inflationary risks from rising global commodity prices and any spillovers from food to non-food inflation from any undue exuberance in domestic credit expansion. The H2 FY18 monetary program and its attendant macro-prudential measures will seek to address this priority mainly by intensive, intrusive supervision focusing on quality and sectoral composition of credit flows rather than by any blanket curb restricting access to credit for productive pursuits.
· Given the global and domestic inflation outlook, H2 FY18 monetary program retains domestic credit growth ceiling unchanged at 15.8%, adequate to accommodate the targeted 7.4% real GDP growth with up to 6% annual average inflation. A continued negative trend of government’s bank borrowing is projected to leave room for higher 16.8% FY18 private sector credit growth, against the previous projection of 16.3%. Reserve money (RM) growth and its attendant inflationary impact will remain moderate in H2 FY18, aided by the government’s likely negative or small bank borrowing. Expected near-zero net foreign assets (NFA) growth due to high import payment outflows will result in moderation in broad money (M2) growth to 13.3%, against the earlier projection of 13.9%.
· Repo and reverse repo policy interest rates will for the time being be left unchanged at 6.75% and 4.75%, respectively. Macro-prudential steps to curb imprudent unproductive lending include:
(a) intensive surveillance on adherence to prescribed Asset-Liability Management (ALM) and Forex Risk Management guidelines; a new directive requiring banks to rationalize their Advance/Deposit Ratios to curb their overexuberance in lending; increased surveillance on the end use of bank loans including import finance;
(b) encouraging banks to avoid unduly high medium- or long-term investment financing exposures to corporate borrowers, helping instead corporate bond issuance in the capital markets, using banks only as interim bridge financing windows;
(c) The taka’s market pressure-driven depreciation against USD, coupled with depreciation of USD +itself against other major currencies is helping restore external balance by enhancing export competitiveness and workers’ remittance inflows. Preventive and punitive steps against the abuse of mobile phone accounts in illegal hundi operations are also shoring up banking channel remittance inflows.
· Furthermore, steps are being taken towards getting banks more proactively engaged in mobilizing foreign savings of Non-resident Bangladeshis (NRBs) by promoting sales of government’s Wage Earners’ Development Bonds and also in attracting NRB portfolio investments in Bangladesh capital markets by opening and managing Non- resident Investment Taka Accounts (NITAs) in their names. Besides augmenting inflows into the forex market, these will also help increase equivalent Taka liquidity in the financial and capital markets. Work is underway on further simplifying banking channel transaction procedures relating to exports of goods and services through internet-based e-commerce platforms will also help further in augmenting forex inflows.
