The new monetary policy for the second half of the current fiscal year will boost investments and business activities that were severely hurt by political unrest in the past few months, Bangladesh Bank said yesterday.
The central bank also said it would go on with a cautious stance to ensure macroeconomic stability and contain government borrowing and inflationary pressure.
BB Governor Atiur Rahman announced the half-yearly Monetary Policy Statement (MPS) at his office in the city.
“We have kept the structure of this policy the same with the previous one, but many new initiatives have been included this time to help the economy recover,” the governor said.
BB Chief Economist Hassan Zaman said the monetary policy framework seeks to reduce inflation while at the same time leaves sufficient space for a recovery in credit demand in the second half.
“In addition, we are using macro-prudential and other policies to provide various temporary breaks to the businesses affected by the disruptions of the last few months so that the growth momentum can resume.”
The MPS said the central bank would continue to focus on achieving its inflation targets while providing sufficient space in its monetary programme for lending to activities which support broad-based investment and inclusive growth objectives.
"The BB will use both monetary and financial sector policy instruments to achieve its goal on inflation as well as ensure credit growth which is sufficient to stimulate inclusive economic growth."
The central bank would target bringing down the average inflation rate to 7 percent.
But the persisting inflationary pressures over the past few months with the risks ahead related to the inflation outlook imply that achieving the inflation target will be challenging. As such the BB has decided to keep policy rates unchanged.
The statement said, as there is ample liquidity in the banking system, an easing of reserve requirement ratios is also unnecessary.
Limiting government borrowing from the banking sector is important for achieving inflation targets and providing the space for banks to lend to the private sector.
Unanticipated spending pressures arising from the provision of 'incentive packages' to various industries affected by recent disruptions will be accommodated within the sizeable of Tk 26,000 crore borrowing limit, the MPS said.
“This is likely to be possible given the low borrowing levels in the first half.”

The central bank slightly revised up its forecast for the growth in gross domestic product (GDP) to 5.8 percent-6.1 percent for the current fiscal year, from 5.7 percent-6 percent earlier.
It said, due to sluggish services and construction sectors and negative growth in remittances resulting in lower aggregate demand, the economy will grow by closer to 6 percent in the current fiscal year if there is no major disruption in the remaining months.
Though the government had targeted a 7.2 percent GDP growth at the beginning of the current fiscal year, Finance Minister AMA Muhith has recently hinted to bring down the target to 6.3 percent.
To achieve the desired GDP growth, the BB has set a target for private sector credit growth at 16.5 percent, though the growth was 11.1 percent in November.
"This level is sufficient to accommodate any substantial rise in investment and trade-finance over the next six months."
"BB views these figures as indicative ceilings -- banks continue to be advised to lend only to creditworthy clients for productive purposes and whether this ceiling is reached or not depends ultimately on investor appetite and the bank's assessment of project viability."
The monetary policy also aims to further consolidate the country's external sector stability.
The central bank anticipates further build-up in foreign reserves in the second half of the current fiscal year though at a more moderate pace than the first half due to the balance of payments assumptions.
While the decline in remittances will not adversely affect external stability, it is imperative that manpower exports resume its growth, so that remittances can be an important part of medium-term external balance.
The BB will continue to support a market-based exchange rate while seeking to avoid excessive foreign exchange rate volatility.
Average inflation rose from 6.99 percent to 7.53 percent in the second half of the fiscal year driven by higher food prices.
Domestic retail interest rates declined during the first half due to lower cost of funds for banks, lower demand for credit as well as due to increasing competition from overseas lenders whose lending rates are in single digits.
The central bank also said it would continue to collaborate with Bangladesh Securities and Exchange Commission to stabilise the stockmarket.
The BB is launching a new Tk 200 crore refinancing facility to stimulate entrepreneurship among low income rural households who have opened Tk 10 accounts. The initiative will be implemented by micro-finance institutions.
The central bank will increase the size of the Export Development Fund if the current $1 billion fund is fully utilised, according to the MPS.

News:The Daily Star/28-Jan-2014

As is well known by now, these half-yearly statements are intended to anchor inflation expectations in the economy, signalling ex-ante the monetary stance for the next half year in light of the domestic and external developments.
1. While external influences on the economy from global developments remained broadly stable over the first half of the fiscal year, in the domestic scene we had to go through some tense, suspenseful spells of countrywide blockades and hartals in the later part of the first half of fiscal 2013-14. Economic activities and daily life were disrupted substantially, including our stakeholder pre-consultations on monetary policy stance. This time, we had to make do with only receiving views or suggestions online rather than the customary discussion meeting events.
2. It is very heartening that our entrepreneurs demonstrated exemplary resilience in protecting the momentum of economic activities from any serious impairment from the disruptions. Our exporters went to great lengths to fulfil delivery commitments to buyers abroad amid the political unrest. This is reflected most clearly in the healthy 18 percent year-on-year export growth in the first half. BB earlier announced a number of financial policy support measures to keep essential fund flows for real sector output activities unimpaired in the face of disruptions, including temporary relaxation in down payment requirement for loan rescheduling and temporary lowering of interest rate on EDF input procurement loans for exporters. These appear to have helped in upholding business confidence amid the uncertainty.
3. Other key domestic and external sector indicators of the economy (agricultural output outlook, inflation, exchange rate, foreign exchange reserve growth, money and capital market) were also broadly positive and stable in the first half. This gives us the confidence that our economy will be able to more than make up for the first half's disruption-related output losses in the second half, and that fiscal 2013-14's GDP growth will, therefore, hover around six percent, provided there is, of course, no major new disruptions again in the coming months.
4. Both broad money (M2) and domestic credit growth have remained below their projected ceilings, indicating easing of inflationary pressures visible in the declining non-food CPI inflation trend. Both private and public sector components of domestic credit remained below their programmed ceilings in the first half, but this does not in itself necessarily imply slackening of investment and output activities. However, both public and private sectors have accessed substantial volumes of lower cost short-term external trade credit and longer term external project financing, besides FDI and FPI inflows and equity investments from workers' remittance inflows. The external inflows and growing export receipts have kept net foreign assets (NFA) growth above the program path, sustaining appreciation pressure on taka despite BB's continual foreign exchange reserves build-up by purchases from interbank market.
5. Despite the declining trend in non-food CPI inflation, higher and edging food CPI inflation has kept headline CPI inflation on an upward trend in the first half. Monetary policies only have limited influence on demand for staple food items in the CPI basket, though BB's focused attention on farm credit promotion also makes some impact by helping augment supplies.
6. The new January 2014 issue of MPS keeps unchanged the target of seven percent annual average headline CPI inflation by June 2014. The GDP growth outlook for the fiscal year in the new January 2014 issue of MPS is also unchanged from the projections in the July 2013 issue. The fiscal 2013-14 monetary program therefore remains little changed in the January 2014 issue, with minor adjustments to external inflows-driven higher NFA growth and correspondingly lower net domestic asset growth. The unchanged ceilings for broad money and private sector credit growth are higher than their current levels and more than adequate to accommodate any plausible higher GDP growth scenario in the second half. BB's active engagement in the interbank taka and foreign exchange markets has kept taka interest rate and exchange rate stable with ample liquidity, rendering monetary stimulus by way of policy interest rate or easing of cash reserve and statutory liquidity ratios unnecessary. Besides, any such lowering would not be justified at this stage, with the CPI inflation still hovering above the targeted ceiling.
7. Although announcing no new monetary stimulus, the January 2014 MPS issue mentions the slew of BB's broad based measures on the financial policy side to support and further stimulate output activities in the economy to make good for output losses from disruptions in the first half. Besides the already mentioned temporary lowering of EDF loan interest rate, coverage of the facility has been extended to new export sectors like leather and ceramics. Agriculture, SME and other inclusive socially responsible financing is being robustly supported with revolving refinance lines funded by BB and development partners. Besides the earlier refinance lines supporting lending to sharecroppers, agro-based industries, SMEs and eco-friendly projects, new refinance lines are being introduced to support lending to new entrepreneurs including low-income individuals holding no-frills bank accounts opened with Tk 10 deposits. BB's promotion of mobile phone banking is paying rich dividends by facilitating reaching out to target borrowers of many of the above-mentioned initiatives cost effectively.

New financing has been lined up with JICA support to help upgrade garment factory buildings deficient in safety standards. A Tk 9 billion sum from BB profits transferrable to government is being utilised by BSEC to relieve interest burdens on merchant bank/brokerage house loans accounts of small stock market investors who have lost out in the 2010 stock market debacle. Our initiatives in coping with recent disruptions have been prompt, and we are promoting hands-on senior level engagement in guiding quick resolution of emerging issues instead of bureaucratic procrastination.
8. The January 2014 issue of MPS concludes by flagging some key issues to address in keeping the economy steady on an accelerating growth path. Macroeconomic stability matter the most, which is why the announced monetary stance remains cautious and voices caution against excessive government borrowing despite it not being any impending threat. Importance of financial stability is duly highlighted, for which BB is pursuing extensive agenda of continually upgrading financial sector regulation and supervision. Accountable, transparent corporate governance in banks and financial institutions will remain a high priority. Going forward, it will be desirable to see big corporates taking greater access to equity and debt issues in the capital market, leaving more of the banking system's resources for smaller borrowers. The recent weakened growth trend in remittance inflows is another important issue flagged as potential risk for external sector strength. The underlying causes of decline in manpower export are issues mainly to be addressed by the government. BB on its part is taking up an initiative of getting our banks actively engaged in promoting fully repatriable savings of NRBs in taka treasury bonds and bills that bear better returns than available in the countries hosting the NRB workers. Foreign institutional investors have already started holding taka treasury bonds in their asset portfolios, buying these through local banks.
9. Let me conclude on a note of healthy optimism that the entrepreneurial zeal awakened in our population will not falter in their aspirations for stable, steadily accelerating inclusive growth towards rapid poverty eradication and eventual prosperity. BB's monetary and financial policies will remain supportive of investment and growth while also being anchored to macroeconomic and financial stability.

News:The Daily Star/28-Jan-2014

Bangladesh Bank (BB) will continue to collaborate with Bangladesh Securities and Exchange Commission (BSEC) in stabilizing the capital market, said Governor Dr Atiur Rahman on Monday.

“While not directly under the purview of BB, various monetary and financial sector related actions have contributed to stabilizing the capital market, and BB will continue to collaborate with BSEC in this regard,” he said while announcing monetary policy for the second half of the current fiscal year (H2FY14).

He said the BB would continue to encourage larger borrowers to access the capital market as banks will need to comply with the recently revised regulation on single borrower exposure limits for business groups.

“BB will continue to encourage larger borrowers to access the capital market given single borrower exposure limits for banks,” he said.

While primarily an SEC issue, the BB will be supportive of the capital market through ongoing deeper regulatory coordination and policy support, Atiur said. Moreover, in order to fill the gaps in the financial landscape, the BB will facilitate the role of private equity/venture capital sources of finance, he added.

Effective transmission of monetary policy requires strengthening credit and debt markets and this will remain a key focus for H2FY14, the governor said, adding that in order to spur secondary market activity the BB has recently embarked on secondary trading in Treasury bonds and will continue to do so in H2FY14.

He said devolvement of these securities has also fallen from 34 per cent in FY13 to 26 per cent in H1FY14 and this trend is expected to continue in H2FY14.

A new Islamic bond of three months’ tenure is expected in H2FY14 which will contribute to better liquidity management of Islamic banks, the governor added.

News:Daily Sun/28-Jan-2014

Bangladesh Bank (BB) is set to announce its Monetary Policy Statement (MPS) for the second half (H2) of the current 2013-14 (FY14) financial year on January 27, a BB official said.

One of the major focuses of the new MPS would be expansion of the private sector credit, but with a balanced policy approach, economic adviser of the central bank Dr Md Akhtaruzzaman told BSS earlier.

He said considering the trend of the economy and the political situation, the central bank is preparing its MPS for January-June 2014 period, which is expected to help increase credit flow to private sector with effective move to accelerate economic growth and maintain inflation.

The MPS for July-December 2013 cut the private sector credit growth to 15.5 per cent till December 2013 and 16.5 per cent till June 2014 from 18.5 per cent of January-June of 2013 only to arrest soaring inflation during this period.

News:Daily Sun/21-Dec-2013