Bangladesh Bank got mixed results while analysing the impact of pay scales on inflation, according to the new monetary policy statement released yesterday.

“Our analysis did not indicate any clear or near one-to-one relationship (between pay scale and inflation),” the BB said in its policy stance for January-June of 2015.

The central bank has analysed the causative factors of inflation around different pay hikes since 1982 after the proposed eighth pay scales triggered controversy centring its possible effects on inflation.

Some economists and policymakers argue that it will create inflationary pressures on consumers while another section says it will not.

The BB analysis found that inflation rates after the third (in 1985) and fourth (in 1991) pay scales showed downward trends though it was rising before the announcement.

The fifth (in 1997), sixth (in 2005), and seventh (in 2009) pay scales, on the other hand, were followed by rising inflation rates.

“Despite the rising trends in inflation rates after three pay scales, it would be unwise to conclude that the eighth pay scale would also follow suit,” the BB said.

The central bank found that higher inflation rates were caused by a variety of factors during the different pay scale periods. The major factors reported were higher prices of oil and food items in international markets, distortions in supply side factors, natural calamities and disasters, political instability, and disruption in domestic and global food production.

Other factors included the effect of private credit expansion, high government borrowing, sharp depreciation of the taka, disruption in industrial production, food supply shortage, and pay hikes.

It is difficult to clearly attribute the factors that led to higher inflation, except for a few well-documented factors such as oil price hike, high food prices in the international market, supply shortage, and political instability.

"A strong relationship between the announcement of the pay scales and inflation cannot be established," the BB said.

Last month, the Pay and Services Commission proposed a new salary structure -- a hike of up to 100 percent -- for government employees.

Inflation extended its declining trend in December, coming down to 6.11 percent -- the lowest in 25 months -- mainly due to falling commodity prices in the global markets. The overall inflation rate, which has been on the decline in the last several months, was 6.21 percent in November. In October 2012, inflation was 5.86 percent.

Governor Atiur Rahman announces conservative monetary policy for second half of fiscal year

The central bank will continue to follow its restrained monetary policy in the second half of the fiscal year in a bid to contain inflation and move to a higher growth path amid the prevailing political unrest.

Bangladesh Bank cited three reasons: the annual average CPI inflation is still above the targeted ceiling, core inflation continues to be trending upward and the political unrest is not subsiding even after 25 days.

“The cautiously restrained monetary policy stance of the first half will be continued in the second half, without any new loosening or tightening,” Bangladesh Bank Governor Atiur Rahman said while announcing the Monetary Policy Statement yesterday.

In the second half, a monetary growth path that would bring down the average annual inflation to 6.5 percent while ensuring sufficient credit growth to stimulate inclusive economic growth will be pursued.

The BB expects economic growth in fiscal 2014-15 to be a “respectable” 6.5-6.8 percent, which is below the government's target of 7.3 percent but in line with the development partners' forecasts.

Accordingly, the ceiling for private sector credit growth has been kept at 15.5 percent, which is sufficient to accommodate any substantial rise in investment and trade finance over the next six months, it said.

The business community views the existing average lending rate of 12.5 percent to be high enough to dampen investment, so the central bank will also endeavour to bring down the cost of funding by narrowing the existing spread of 5.2 percent.

It has also urged the commercial banks to devise ways to reduce the lending rates, which did not come down in line with the inflation trend over the last three years.

Inflation dropped almost 5 percentage points since the end of 2011 but the average lending rate fell only 1 percentage point in that time, empowering banks to earn high real rates of interest and making investment costlier than before.

Subsequently, the BB has left the repurchase rate unchanged at 7.25 percent and the reverse repo rate at 5.25 percent.

The regulator pledged to shore up banking governance to clamp down on loan delinquencies. While the cases of credit-worthy borrowers will be reviewed, habitual defaulters will face lawful consequences, it said.

The central bank will also look to further consolidate the country's external sector stability. It will continue to support a market-based exchange rate while seeking to avoid excessive swings.

The central bank will continue to maintain a comfortable amount of foreign currency reserves to cover imports of five to ten months.

This safety net is required to avoid any sudden collapse in the value of taka and to ensure a healthy growth of imports of productive inputs, the BB said, adding that it anticipates a further build-up in foreign exchange reserves in the second half.

The pace though would be more moderate than in fiscal 2013-14, as its projection suggests there will be a correction in export growth.

In the best-case scenario, the overall export growth in fiscal 2014-15 will be 8 percent, import growth 15 percent and remittance growth 12 percent, to yield a “reasonable” balance of payments surplus of $642 million.

The BB said Bangladesh evidenced the highest amount of stability in inflation and economic growth in the South Asian region over the last 20 years.

During the period, Bangla-desh's growth performance was the second best (5.73 percent) after India (6.77 percent) in the region and its inflation was the lowest (6.45 percent).

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After rescheduling twice, Bangladesh Bank (BB) is now set to unveil today its flagship monetary policy statement (MPS) for the rest six months of the current 2014-15 financial, reports BSS.
Like previous years, the governor will announce the MPS at a press conference at the central bank headquarters in the capital at 2 pm. The central bank's chief economist Biru Paksha Paul earlier told the news agency that the MPS would be announced on January 29, but the schedule was changed to January 28 before re-fixing it to its original schedule.
While announcing the MPS for the first half of the current 2014-15 financial year (FY15) on July 26 last year, the governor was cushioned with the already restored political, economic and social stability by the newly elected government under the leadership of Prime Minister Sheikh Hasina. 
The current macro-economic situation has so far remained largely favourable to BB for announcing a monetary policy stance in line with the previous ones. The rate of inflation, which is the major objective of the BB's policy stance, came down to 25-month low at 6.11 per cent in December, very close the target, set out in the last MPS. The last MPS targeted bringing the average inflation down to 6.5 per cent by June 2015, with ensuring that credit supply to private sector stimulates inclusive economic growth. 
The emerging downside risks from the ongoing political violence, however, warrant a contingency plan from Rahman who was recently honoured with the prestigious "Central Banker of the Year 2015" for the Asia-Pacific region by the London-based magazine The Banker.
The governor already pointed out the downside risk factors on different occasions. He told a conference of the BB's general managers on Sunday that the political violence would hinder the economic progress. He said the political trouble began when the investment trend was regaining, with import-export, remittance and foreign exchange reserve surging coupled with low rate of inflation.
Despite the recent risk factors, the governor will be comforted by the strong trend in the economy, which already achieved a 6.12 per cent growth rate against all political odds when the per capita income rose from $1044 in 2013-14 financial year (FY14) to $1190 in FY15.
In the last MPS, BB expected 6.2 to 6.5 per cent growth of GDP (gross domestic product) in the end of FY15 provided that there would be no disruption to the economy.

Beximco Pharmaceuticals will borrow about $51.6 million from Frankfurt-based BHF-Bank Aktiengesellshaft to expand its production.

The local drug maker, a unit of business conglomerate Beximco Group, struck a loan deal with the German bank, according to a posting on the Dhaka Stock Exchange website yesterday.

Beximco Pharma has also received approval from the Board of Investment of Bangladesh to raise the fund, which will be utilised to partially finance a new plant and machinery purchase.

The loan will come at an interest rate of 2.25 percent a year in addition to Libor (London interbank offered rate), which is lower than the local interest rate. The loan will be guaranteed by Hamburg-based Euler Hermes, a German export credit agency.

“The loan, which is secured on the plant and machinery being purchased, will be drawn down in four tranches,” Beximco Pharma said. Repayment will be made over five years in 10 semi-annual installments.

The loan will have a significant impact on Beximco Pharma's balance sheet, BRAC-EPL Stock Brokerage said in an analysis.

As of September 30 last year, the company's total interest bearing debt was Tk 480 crore. Its debt-to-equity ratio -- a measure of financial leverage -- was 23.5 percent.

The foreign loans will nearly double the gearing of the company and lower the cost of debt significantly, BRAC-EPL said.

Over the past four years, the cost of debt averaged 16.1 percent while debt-to-equity averaged 22.7 percent. “The new loan, financed at a low single digit rate, will sharply reduce the financing cost of the company. Both a lower cost of debt and higher debt ratio will lower the weighted average cost of capital of Beximco Pharma,” it said.

Beximco Pharma has yielded a very low return on capital over the years, it added. “Return on invested capital has been only 7.5 percent on average in the past three years.

The low return is evident in the multiple in which the stock is trading in the market,” BRAC-EPL said.

Beximco Pharma's net profit rose to Tk 115 crore in the nine months through September last year from Tk 108 crore in the same period the previous year.

Each share of the drug maker listed in the stockmarket in 1986 traded between Tk 57 and Tk 58.6, before closing at Tk 57.3 on the Dhaka bourse yesterday.