The country's foreign currency reserves yesterday crossed $11 billion thanks to slowing imports and steady remittance growth, officials said.

The foreign currency reserves went down below $11 billion last week when the country paid $70 million to Asian Clearing Union as debt servicing.

A central bank official said the reserves stood at $11.1 billion now and the banking regulator hopes to cross $12 billion in the next two to three months.

The steady flow of remittance and declining imports contributed to the rise in reserves.

Non-resident Bang-ladeshis send $1.167 billion in remittance in August, up by 6 percent over the same month last year.

This is the ninth consecutive month that Bangladesh has received over one billion dollar in remittance.

The remittance in the first two months of 2012-13 rose by 11.9 percent over the same period a year ago.

News: The Daily Star/Bangladesh/13-Sep-12

Rejaul Karim Byron

The surplus capital in banks stands at Tk 4,218 crore, setting them at good stead for the Basel III preparations starting next year.

Of the country's 47 banks, all except five have surplus capital as per the international Basel II standards, which stipulate, as a rule of thumb, a capital base of 10 percent of the bank's liabilities.

As of June 30, the banks had a total capital of Tk 56,201 crore, whereas the capital requirement was Tk 51,983 crore, according to central bank statistics.

Of the 30 private commercial banks, three have a capital deficit: Bangladesh Commerce Bank of Tk 177 crore, First Security Islami of Tk 136 crore and ICB Islami Bank of Tk 1,192 crore.

Of the specialised banks, Krishi Bank and Rajshahi Krishi Unnayan had capital deficits -- of Tk 4,100 crore and Tk 359 crore respectively.

“Most of the commercial banks do not have capital deficits,” said a central bank official, asking not to be named.

“The few who do are problematic banks to begin with. Various measures are being taken to improve their capital adequacy.”

From 2015, the banks will have to maintain capital as per Basel III requirements, preparation of which will start next year, the official added.

The Basel Committee, named after the city of Basel in Switzerland, consists of central banks of 27 countries, including India, and sets the international standard for capital requirement.

“Globally the preparation for capital requirement as per Basel III has already started, but in Bangladesh it will start in the beginning of next year,” said Helal Ahmed Chowdhury, vice chairman of the Association of Bankers Bangladesh.

“The global financial of 2007-08 has compelled the Basel III to incorporate many risk factors in setting the capital requirements,” said Chowdhury, also the managing director of Pubali Bank.

Given the rise in loan defaults in Bangladesh, Bangladeshi banks would face many challenges to meet the Basel III requirements, he thinks.

“However, as per the Bangladesh Bank guidance most of the banks do not have any capital deficit. As a result, most of the banks will be able to maintain their capital to Basel III standards,” said a hopeful Chowdhury.

News: The Daily Star/Bangladesh/09-Sep-12

While monetary policy is regarded as the most important economic guideline in developed countries, it is treated as a complementary promise to fiscal policy in most developing countries. In Bangladesh, the scenario is even worse. Here the finance minister, as a fiscal-policy leader, dictates explicitly what Bangladesh's monetary policy should be -- exhibiting the total absence of monetary-policy independence.

Bangladesh Bank, as the central bank of the country, announced its monetary policy in July this year as it does every year. Interestingly, the central bank's restrained stance on monetary policy this July was no surprise, because the finance minister had clearly signalled the stance of the upcoming monetary-policy in his budget speech that was made public in June. The finance minister explicitly declared that the upcoming monetary policy will be 'restrained,' making the monetary-policy statement simply a 'compliance report' by the central bank. While the influence of the government on the central bank is well known, particularly in developing countries, this type of predetermination lacks respect to the monetary authority, and is never seen in neighbouring countries such as India and Pakistan.

Given the coverage of its operation, the central bank is the most powerful economic institution even in a developing country like Bangladesh. For example, the amount of banking-sector loans is almost 52 percent of total national output, whereas the fiscal budget covers only 18 percent of national income. Of course, that 18 percent is very crucial to mobilising outstanding loans of 62 billion dollars, but it must not be ignored that the central bank plays a gigantic role in growth by involving the largest segment of national workforce of the economy. As the monetary-policy statement of 2012-2013 asserts, the two main objectives of the central bank include controlling inflation and fostering economic growth. This dual mandate of Bangladesh Bank becomes hard to accomplish when the finance ministry targets high growth but low inflation. High growth is often inflationary and high inflation is always detrimental to growth. In the last fiscal year, Bangladesh had achieved economic growth of 6.4 percent, while inflation was slightly above 10 percent. For the fiscal 2012-2013, the government aims at achieving growth of 7.2 percent but targets inflation at 7.5 percent, making the task of the central bank tougher than before. Since moderate inflation is the prime goal of any monetary policy, Bangladesh Bank is left with no option but to adopt a restrained monetary policy that limits broad-money growth to 16 percent and reserves money growth to 14.5 percent for fiscal 2013.

The government's excessive influence on the central bank is a sign of authoritarian economic management that contradicts public policy on deregulation and the market economy. We have a bad tradition of seeing the central bank as an accommodating institution to fiscal desperation that usually originates from short-term political priorities. That is why money supply grows so fast in Bangladesh and hence inflation hovers over the double-digits. This tradition must be changed. The central bank must be empowered with greater monetary policy independence to bridle inflation and ensure macro-stability to eventually stimulate growth.

If money-velocity growth is assumed to be constant and economic growth turns out to be 7 percent, money growth of 16 percent will bring inflation down to around 9 percent, which is still above the targeted inflation of 7.5 percent. Hence, money supply must be more conservative than it is now, but that stance may reduce the growth of private credit, which again will lower economic growth. Thus, Bangladesh Bank is forced to operate in a difficult zone when inflation is already of double digits.

The scenario becomes even worse when the government spells out a long-term inflation rate of 5 percent in the budget speech of 2012-2013. We are not sure where this magic number of 5 percent comes from, but we are sure that the government wants moderately low inflation for the long run to make economic growth sustainable. If that is the case, Bangladesh Bank must continue its conservative stance on money growth until inflation drops down to 5 percent. Neither reserve-money growth of 14.5 percent nor broad-money growth of 16 percent looks conducive to long-term inflation of 5 percent. Money growth should fall below 15 percent in a gradual fashion, and that might temporarily lower output growth.

We have to accept this tradeoff to make Bangladesh Bank function as per long run goals of macro-stability and sustainable growth. Then monetary policy surely requires independence. Various studies show that a higher degree of monetary-policy independence is associated with a lower inflation across the globe. The government's expectations on Bangladesh Bank are too high to accomplish. It wants that the central bank will kill two birds with one stone every time. If low inflation is a priority, as it should be the case for the sake of sustainable growth, the government has to compromise on ambitious growth targets at least in the short run.

Inflation tormented the global economy over the 1970s. Paul Volcker, the Federal Reserve chair, realised that controlling inflation must be the first priority for a central banker. He tightened money supply to an extreme point even knowing that it will lower output growth. America experienced its first manmade recession in history in the early 1980s, but the scenario eventually took a positive turn. Not only did inflation come under control, but the US economy also entered the long boom for 17 years until the end of the 1990s.

Volcker was able to accomplish his goals in a sequential fashion because he could work independently. He shot one bird at a time without any concession to inflation. Time has come for our central bank to act first on inflation in the similar fashion. Are we ready to make our governor accountable directly to people and parliament, rather than compliant to the fiscal desperation? The central bank, the main anchor of the economy, must work independently to ensure macro-stability and respectable growth in an emerging economy.

The writer is an associate professor of economics at the State University of New York at Cortland. He can be reached at biru.paul@cortland.edu.

News: The Daily Star/Bangladesh/06-Sep-12

The month of August saw non-resident Bangladeshis send $1.167 billion in remittance, down by 2.84 percent from July's receipts of $1.201 billion, the central bank said yesterday.

The figure, however, is 6 percent higher than the $1.102 billion recorded for August 2011.

This is the ninth consecutive month that Bangladesh has received over one billion dollar in remittance.

The remittance in the first two months of 2012-13 rose by 11.9 percent over the same period a year ago.

Bangladesh's more than 7 million migrant workers sent home $12.84 billion in fiscal 2011-12, 10.32 percent higher than the previous fiscal year.

Along with the rebound in garment exports, the healthy flow of remittance has boosted the country's foreign exchange reserves. The reserves, which rose for the third month in a row in August, as of yesterday, stood at $11.44 billion.

August's remittance was the third highest recorded since January, as migrant workers sent more money to their relatives on the occasion of Eid-ul-Fitr.

News: The Daily Star/Bangladesh/04-Sep-12

Scope for legalising black money last fiscal year brought the government only Tk 38 crore in taxes, the lowest in four years.

"It is a very negligible figure. The collection of such an amount is just an hour's business for the National Board of Revenue (NBR)," said Ahsan H Mansur, the executive director of Policy Research Institute.

Only Tk 382 crore was legalised in fiscal 2011-12, and that too after a mere 82 people decided to do so by parking money in stocks.

"[The provision to legalise black money] creates moral hazard. Honest and regular taxpayers will be discouraged to comply with the law," said Mansur, a former economist of the International Monetary Fund.

"The whole thing is unjustified on the economic ground. It also has no revenue justification," he said, stressing the need for stricter governance.

The revenue authority incorporated a provision in the law, under which a person will be able to legalise undisclosed money by paying 10 percent penalty in addition to paying normal tax.

The provision has been added in the Income Tax Ordinance 1984, widening areas for investment for undeclared money-holders, said a senior official of NBR, requesting not to be named.

In the past the NBR used to give the scope through statutory regulatory orders.

The areas where black money can be legalised via investment include the stockmarket, real estate, industry and BMRE (Balancing, Modernisation, Rehabilitation and Expansion).

The rationale behind the inclusion of the clause, the official said, is that a provision in law would encourage more people to come forward to declare their undisclosed wealth.

"Stability of law gives confidence to people. Anyone can disclose undeclared income anytime," said the official.

Towfiqul Islam Khan, a senior research associate at the Centre for Policy Dialogue, however, is sceptical of the success of the NBR provision.

"It fails to have a special impact if the opportunity is given every year.”

He feels the past low responses suggest the inclusion of a permanent provision in the law would hardly lead to better outcomes.

In recent memory, the NBR logged in Tk 803 crore as taxes in fiscal 2007-08 after 16,664 people legalised a staggering Tk 8,895 crore fearing anti-corruption crackdown by the then caretaker government.

The number of people declaring their undisclosed incomes since then has been on the wane, with the figures being 14,258 and 1,923 in the successive fiscal years of 2008-09 and 2009-10.

The tax receipts registered for fiscal years 2008-09 and 2009-10 were Tk 108 crore and Tk 121 crore respectively.

"Rather, the NBR should improve its law enforcement and increase administrative reach to net more taxpayers," said Khan.

News: Daily Star/Bangladesh/28-Aug-12