Bangladesh Bank Governor Dr. Atiur Rahman said the financial sector in Bangladesh with its limited, regulated external exposure was virtually unaffected by the global crisis; remaining liquid, solvent and free of contagion from toxic assets.

Following the global crisis, regulatory oversight on risk management has been strengthened, compulsory stress testing routines have been introduced to bring out vulnerabilities. Banks are now under Basel II capital adequacy regime, with the Basel III modifications to be phased in duly.

The Governor said this while presiding over a session of the 2nd CUTS-CIRC International Conference on Reviewing the Global Experience on Economic Regulation- A Forward Looking Perspective held in New Delhi on Tuesday, according to a message received here yesterday.

But for the recent global financial crisis that markets and institutions in mature advanced economies are still to recover fully from, the title chosen for this session would probably have been disputed hotly; many would have complained about feeling of suffocation from over-regulation, he said.

Wide ranging as the post-crisis global financial sector regulatory reforms may seem, the actual changes are really incremental and marginal rather than very extensive or radical; some of the changes (like those in capital requirements) will be introduced gradually over a number of years.

Little has been done so far on important overarching issues like preventing buildup of global imbalances from persistent unbalanced domestic policies in major economies; and in reforming the global monetary order with a mechanism tethering global liquidity expansion to growth in real global output of goods and services, so as not to permit the financial sector run amok with speculative excesses.

While some regulatory deficit did exist in the run up to the global crisis, having a more complete regulatory toolkit with the deficits plugged in will not by itself make the financial sector more immune from future recurrence of crisis situation, said Atiur adding: “The main factor setting the global financial system on slippery path to crisis was not a deficit in regulation but gross neglect and lapse in compliance with regulations that existed, particularly in areas of risk appraisal and containment.”

“The problem is rooted deep in human nature. In good times we tend to disregard and cut corners around regulatory disciplines, to ignore looming buildup of risks until a crisis befalls, and sit down to rewrite cautious regulations afterwards,” he said adding: “The mood of caution does not last long after the crisis is over; when good times roll in things revert back to the old cycle of compliance lapse- risk buildup and crisis- regulatory revisions. We need to bear this reality in mind while attempting to chart safe and stable progress path for the financial sector.”

The main thrusts of post crisis regulatory reforms focusing on vulnerabilities of financial institutions and markets are broadly appropriate; but some promising approaches for better stability remain under-explored, said Atiur. “One of these is a drastic diminution of the heavy dependence of banks and financial institutions on deposits and debts repayable with interest at agreed rates, regardless of whether they sink or swim. In severe downturns and crisis situations this becomes a recipe for market collapse with chains of default,” he continued.

News: Daily Sun/ Bangladesh/ 21-Apr-2011

The growth in GDP (Gross Domestic Product) in the next financial year (FY) would cross 7 per cent and the real GDP achievement will be nearer to 7 per cent in the current FY, Bangladesh Bank (BB) governor Dr Atiur Rahman said on Tuesday. He said Bangladesh's macro economy now is in the 'qualitative growth phase' and it is standing on better foundation resulted from multiple initiatives including policy support jointly by the government and central bank.
"Our growth is participatory and sustainable," Dr Atiur claimed at a roundtable discussion on "Financing Agro-based Small and Medium Enterprises (SMEs)" organised by apex trade body Federation of Bangladesh Chambers of Commerce and Industries (FBCCI) at its conference room in association with BRAC Bank.
The governor said Bangladesh is likely to obtain the same ranking this year by the US-based Moody's Investors Service, one of the world's major global rating agencies which last year ranked Bangladesh as an emerging economy in Asia.
"Primarily, I have received indications that Bangladesh's ranking by Moody will not be downgraded this year. Vietnam was ranked above Bangladesh but the country likely to downgrade from its previous position," he said.
He said the rating is meant for Bangladesh's macroeconomic fundamentals were on better footing and it had less chance to encounter severe stress on
creditworthiness.
Terming the share market debacle and liquidity crisis as 'Growth Pains', the central bank governor in reply to a question by a discussant said, "Every growth has some pains and we must overcome the pains through patience and abiding by the rule of law."
"The prime concern of us right now is to create employment. We need 30 lakh employments every year to accommodate the jobseekers and only the manufacturing sector could play a big role in this regard," said the governor while commenting on flow of liquidity.
He said SME financing is important to create employment for elimination of income differences at the rural areas.
He said the central bank has achieved 65 percent of its total target to disburse agricultural credit for SMEs in the current FY. "The target this year was set to disburse Tk. 13,000 crore while the target last year was Tk. 11,000 crore," he said.
He said the country's agricultural sector is emerging as an industry. The central bank is in process to initiate several schemes for value addition to agricultural products by Asian Development Bank's association.
He also underscored the need to increase production of both the agricultural and industrial sectors in order to create employment. "We have to walk on both the legs. Agriculture and industry…..because manufacturing would play a big role to create employment," he said.
Regarding inflation, he said the central bank alongwith the government have been working together to keep inflation tolerable for poor.
"Inflation is the biggest enemy of the poor. We will pull it out and won't let it go up. Thus, we have to increase our manufacturing. The positive indicator is that our agriculture is once again likely to give us bumper harvest this year," he said.
He said Inflation in the neighboring country is high enough than Bangladesh. "Give us some time. I expect association from you (trade Bodies) all to step up with our own initiatives to control inflation," he said.
Speaking on rate of interest against industrial credit, Dr Atiur said the central bank as a regulator has limitations in curtailing the interest rate. "You have informed me about your concerns but I have limitations in this regard. However, it has creates a scope for mutual discussion in the coming days. Please send us notes of this meeting and I would discuss the issue with other high officials of the central bank and other banks to find way out what to do?," he said. He said, "The central bank, as a regulator, always played a role of a 'referee'. It couldn't play the role of an operator."
As chair of the roundtable, FBCCI president AK Azad expressed grave concern over uptrend of food price inflation.
"As latest reports till January, food price inflation reached 11.91 percent while non-food inflation was only 3.85 percent.
It is very disappointing," Azad told the meeting.
Azad has urged the BB governor to reintroduce the interest rate ceiling for industrial credit, taking into consideration the importance of expansion of the country's industry and investment.
"We cannot accept realisation of interest rate over 13 percent. Please, consider the demand of the business community as all of them are looking towards you," Azad told the central bank governor. "If needed, impose ceiling on the rate of interest for both the borrowing by banks and credit," he said.
The roundtable was addressed by joint secretary of agriculture ministry Md. Kaykobad, BRAC bank managing director Syed Mahbubur Rahman, FBCCI vice presidents Jashim Uddin and Mustafa Azad Choudhury Babu, FBCCI directors Abul Hossain and Golum Mostafa Talukder, BB general manager Sukumol Sinha Chowdhury, director of Bangladesh Chamber of Industries Priti Chatterjy, secretary of Bangladesh Fertilizer Association Abdus Salam Khan, former FBCCI president Akram Hossain and former vice presidents Dewan Sultan Ahmed and Abu Alam Chowdhury, among others.

News: Daily Sun/ Bangladesh/ 13-Apr-2011

Mamun Rashid

The other day an esteemed client and a leading businessman asked me -- how far will the dollar go against the taka? For him, the import cost is going up. Added to this is dollar liquidity shortfall in the market, thereby impacting timely settlement of import liabilities.

Primarily, a large increase in import payments and a slowdown in wage earners' remittance growth have deepened the dollar crisis in the country. Reduced foreign aid or delayed disbursement of foreign aid also contributed further to this. In the face of the crisis, the central bank has been releasing dollars to meet import expenses, especially for the essential imports in the public sector, which is creating pressure on the country's foreign currency reserve.

When the US dollar is weakening against other currencies around the world, it is getting stronger against the taka due to the demand-supply gaps for dollars. For obvious reason, many of our economists and bankers are raising their eyebrows. I have read a former central bank governor saying, "Even in Japan, which is struggling with tsunami and nuclear radiation, the dollar is not getting as strong against the yen as against the Bangladesh currency. If this continues, it will increase inflation." He also said the situation would increase business costs and reduce investment and ultimately lead to an increased rate of inflation.

The current exchange rate of the dollar ranges between Tk 72 and Tk 73, which was around Tk 69 a couple of months back. Taka lost 1.93 percent of its value in December 2010 from that in July 2010 and lost a further 2.50 percent of its value in January from that in December. The total foreign aid, including loans and grants, in the first eight months of the current fiscal year amounted to $400.60 million compared to $1.430 billion in the same period in FY 2010.

The export earnings of the country in the same period stood at $14 billion, posting a 40 percent rise from that in the same period of FY2009-10, and the import costs in the period amounted to $22 billion, marking a 41 percent rise from that in the July-February period of the last fiscal year. The amount of inward remittance in the period was $7.5 billion. At the same time, the country's foreign currency reserve depleted from $11.16 billion in February to $10.63 billion on March 22.

As mentioned above, banks are facing a severe dollar crisis along with a liquidity crisis faced by some banks, compelling them to express inability to open letters of credit for imports. What is worse is that it has become really difficult to get dollars even at that high price.

Some economists also felt, money was smuggled out of the country after being converted into dollar, which ultimately led to the present dollar crunch. The ongoing unrest in the Middle East was anticipated to worsen the problem. They also felt, making investment in productive sectors for employment generation, discouraging imports of consumer and luxury goods and investment in unproductive sectors would alleviate the problem.

Obviously it is well said than done. Bangladesh is an emerging economy. The policymakers have decided to err with even inflation than growth. The nature and composition of our import bills have warranted this on them. Our import bill says most of this is coming from capital machinery imports for readymade garments, textiles, pharmaceuticals and food processing industry or industrial raw materials or power plant equipment. Dollar price is rising. However, growth dynamics in the economy, along with fabulous increase in exports and good harvest seem to have provided a safety net. Serious interest in the external world for 'made in Bangladesh' goods as well as a significant rise in demand for consumer items in the domestic market is encouraging our business community to go for massive investment in the production lines. They don't mind paying 2-3 percent extra for a greenback, while the return on investment is very attractive in Bangladesh. I think there is sufficient space to absorb higher exchange rate as well as higher interest rate cost. This is a basic symptom of an economy, which is going to see some accelerated growth rate in the coming years. While I worry with the slowing down of remittances, I think the situation would get better. May be 20 percent growth is unrealistic, but it should settle around 5-10 percent. With oil price remaining high, job opportunities in Middle East would improve with more construction projects undertaken to pacify the people there. There may be a bit of time lag though. A recent calculation showed that even fuel price remaining at $150 for the rest of the year would only make the current account neutral from current surplus and even if the higher cost cannot be passed through, the budget deficit would increase from current 5 percent to 6 percent. Not really a desperate situation.

However, the regulators possibly need to work on the supply economics with an integrated approach. They need to maintain a healthy balance and at the same time ensure that the remitters and development partners are given enough incentives through their ardent commitment to continuous reforms. Delay in committing budgetary support, disbursement of balance of payment support or release of millennium challenge fund does not make us happy at all. If the development partners cannot be pacified, Bangladesh may explore commercial borrowing from external sources, in view of the better sovereign rating. While we are ready to settle with bit of extra price spiral, provided investment in growth driving sector continues with employment generation, we do not appreciate any supply side constraint or management debacles. While our exporters are facing a rise in import finance rate, they should be okay with dollar rate hike. However, regulators need to draw a balance between dollar price rise and price spiral, since most of our inflation is 'imported inflation' and our popularly elected governments are committed to save common people from the onslaught of excessive price spiral.

The writer is an economic analyst, and can be reached at:mamun1960@gmail.com. 

News: Daily Star/Bangladesh/ Mar-31-2011

The World Bank is going to review its US$3.6 billion lending schemes in Bangladesh next week amid concern that at least half of the 28 projects it is financing has failed to attain desired pace of implementation.

Officials said four of the projects have been singled out as "risky" and "problematic" and at least 11 others have "very high un-disbursed balances", raising fears the schemes may not achieve the desired results.

Finance ministry officials said the "implementation status" of all these projects and their bottlenecks will be discussed on Sunday when they meet representatives of World Bank Dhaka office in the planning commission.

"It's a crucial meeting. All the schemes being implemented with the World Bank's fund will be discussed there. They have raised some issues. We hope we can satisfy their queries," said an Economic Relations Division official.

The Washington-based bank is the country's largest donor. Annually it lends Dhaka $1.2 dollar in soft loans, which play a key role in Bangladesh's infrastructural, social, human and agriculture development.

The official said the World Bank would also review an "action plan", set jointly by the lender and the government in January to speed up the implementation of 28 projects, for which the lender has committed at least $3.6 billion.

According to the Bank, Bangladesh government's project executing agencies have been able to spend only $195.7 million loan during the first half (July-December) of the current financial year 2010-2011.

"We have identified the problematic and risky projects from the 28 ongoing schemes. These projects face slow disbursement of the funds and some other bottlenecks," a World Bank official in Dhaka office told the FE.

He spoke on condition of anonymity because he is not authorized to talk to the press.

The lender has identified avian influenza preparedness, water management improvement, disability and children at risk, and the enterprise growth and bank modernisation projects as "risky and problematic".

Besides, it has identified 11 others of the ongoing operational schemes, which have less than 50 per cent fund disbursement despite they have completed average two years project cycle since the loan agreements.

They include $350 million Siddhirganj peaking power plant, $149 million Dhaka water supply and sanitation, $184 million emergency cyclone recovery, $62.2 million clean and sustainable environment, $81 million higher education quality enhancement and $307 million investment promotion financing projects.

The Bank has said these projects face belated procurement and financial mismanagement, delay in setting implementation arrangements and complex government procedures.

A senior ERD official said since the government agencies have failed to implement the schemes in time, the Washington-based lender has cut back on the disbursement of the entire fund committed for the projects.

"The government agencies and the World Bank representatives will attend the next week's meeting. Our officials will explain the barriers in project execution as well as fund disbursement," he told the FE.

"I hope it will be fruitful meet and help us overcome the hurdles. Otherwise, some of these multi-million dollars schemes may face a bleak future," he added.

Source: The Financial Express, Bangladesh / March 11, 2011

Bangladesh Bank (BB) yesterday increased repo and reverse repo rates by 0.5 percentage points to slow credit growth in a bid to contain inflation.

The new move came a day after the central bank lifted the lending cap. Executives of commercial banks and a former governor of the central bank have backed the move.

The central bank increased the interest rate on repo to 6 percent, which was 5.5 percent earlier.

The repo rate is the interest rate at which the central bank lends money to commercial banks. The reverse repo rate is the return banks earn on excess funds parked with the central bank.

The rate of interest on reverse repo was hiked by 0.5 percentage points to 4 percent. A central bank circular said the new rates of interest will come into effect from Sunday.

On Sunday the BB withdrew 13 percent lending cap on the rate of interest on credit.

The bankers said the moves will make credit costlier. In January the BB in its Monetary Policy Statement (MPS) indicated repeatedly that it will hike the policy interest rate to contain inflation.

The MPS said: "All central banks in our immediate neighbours and in the fast growing emerging economies of the East Asia are acting decisively to curb inflationary pressure from excessive monetary expansion, with repeated rounds of hikes in both policy interest rates and Cash Reserve Requirement (CRR)".

The MPS also said the recent rates of growth in the credit to the private sector are high and well out of line with likely growth trend in nominal GDP (gross domestic products).

It said, getting to a firmer grip on monetary expansion is an unavoidable necessity.

In the recent times, inflation is rising in almost every month. In January, alongside food inflation, non-food inflation started going up, ringing an alarm bell in the BB.

In July last year, in the first MPS of the current fiscal year, the BB set a target of cutting down private sector credit growth to 16 percent by June next from 24 percent in June. But instead of coming down, the credit flow went up every month and in December the private sector credit growth stood at 27.58 percent.

Earlier the BB increased repo rate in September last year, and in December it hiked CRR to bring down the rate of credit growth.

Association of Banks, Bangladesh President K Mahmud Sattar said, after the central bank gave a contractionary signal in the market, the repo rate had to be increased. He said the withdrawal of the lending rate cap is a good decision on the part of the central bank.

Former BB governor Salehuddin Ahmed said the BB will have to remain alert so that the banks after borrowing through repo do not use the money in unproductive sector.

Source: The Daily Star/March 11, 2011