bangladesh’s monetary policy 2010
TRANSCRIPT
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Ban ladeshs Monetar Polic 2010
Dr. Atiur Rahman
Governor, Bangladesh BankEmail: [email protected]
Luncheon Meet in of
Embassy of t he Federal Republi c of Germany
13 April, 2010
Dhaka
Outline
Introduction
Objectives of Monetary Policy in Bangladesh
Monetary Policy Framework in Bangladesh
Formulation of Monetary Policy
Near Term Growth and Inflation Outlook
Monetar Polic Stance for H2 FY 10
2
Targeted Versus Actual Growth Paths of Monetary Aggregates
in FY10
Sovereign Rating: Stable Outlook for Bangladesh
Concluding Remarks2
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Introduction Monetary policy, both in developed and developing
economies, seeks to maintain price stability
accompanied by sustained output growth in the face of
internal and external shocks faced from time to time.
For developing economies like Bangladesh with
significant underemployment/under exploitation of
production factors, supporting higher output growth is an
.
Monetary policy of Bangladesh Bank (BB) therefore aimsat maintaining price stability while permitting monetary
expansion needed to support output growth at sustained
high rate.
33
Evolution of Monetary PolicyFormulation in Bangladesh
In the 1970s and 1980s, monetary policy in Bangladeshwas conducted with full direct control over the
interest rates and exchange rates and also on the
volumes and directions of credit flows.
The situation began to change in the 1990s with the
abolition of directed lending and gradual liberalization
of interest rates. The regime of flexible exchange rate
s ar e rom .
From then on, interest rate and exchange rates arelargely market driven with occasional central bank
interventions to maintain stability and to address
consumer protection concerns.44
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Objectives of Monetary Policy in
Bangladesh Maintaining domestic price stability, external sector
v a y;
Supporting inclusive, broad-based economic growth.
55
Formulation of Monetary Policy:Current Practices in BB
Since 2006, BB has been announcing half-yearlyMonetar Polic Statements MPS to anchor inflation
expectations of economic agents and the general
public.
For the first time, drafting of the Monetary Policy
Statement for H2 FY10 was preceded by extensivestakeholder consultations from the grassroots level up
6
o e eve o exper ence pro ess ona s nc u ngpast Finance Ministers /Advisers / Governors, think
tanks and trade bodies.
6
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Monetary Policy Framework in
BangladeshPol icy I n st r u m en t s: Goals: Targets :
CRR and SLR
Open Market O perations
withdrawing or injecting
liquidity
Changes in policy interest
rates (bank rate, repo,
reverse repo rates)*
Price Stability
Economic Growth
Financial Stability
( i ) Ope ra t ing Ta rgets
Reserve Money
( i i ) I n term edia te Targets
Broad Money
Po l ic y D ec is io n : I n f o r m a t io n V ar i ab l es :
77
Based on market
information and value
judgment of the policy
makers
Foreign Reserves
Short-term Interest Rates
Liquidity Situation
Domestic Credit
Information and Exchange Rates
* In addit ion to poli cy interest r ate changes fr om monetar y policy perspect ive, int erventions onspecifi c lending rates occur sporadically t o rectif y aberrant tr ends like excessive inter mediat ionspread.
Policy Approaches and Tools BB mainly uses monetary targeting to influence
CPI, drawing up monetary programs each financial year
with target growth path for broad money (M2) that
accommodates monetary expansion commensurate with
the projected real GDP growth, inflation, and the likely
change in income velocity of money.
Reserve Money (RM) growth path is the operating target
used by BB to influence the M2 growth path (the
8
,CPI, the final target.
Changes in key policy interest rates (repo, reverse repo
rates), Cash Reserve Requirement (CRR) and Statutory
Liquidity Ratio (SLR) are also employed as necessary, in
support of the monetary programs.8
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Near Term Growth Outcome & Outlook Domestic demand remains robust, well supported by
growing workers remittance inflows and budgetary
stimulus outlays including higher social safety net
spending.
After a slower first quarter, manufacturing output and
investment activities accelerated from Q2 FY 10.
During July-March 2009-10, opening of import LCs
9
grew by around 22%.
Following 10.3% y-o-y growth in FY 09, exportsweakened in FY 10 (4.7% y-o-y decline during July-
January 2010) due to weak growth recovery in marketsabroad.
9
Near Term Growth Outcome..(Contd) The agriculture sector output activities are responding
robustly to market price incentives and support
measures provided by the GoB and BB.
During July-February FY 10, the growth of agricultural
credit disbursement was recorded at 21% against 7.2%
during the same period of FY 09 .
Output activities in the service sector are
10
correspondingly vibrant; Capital market activitiesremain buoyant.
BBs monetary program for FY 10 is designed to
accommodate 6% real GDP growth.
10
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Growth Outlook
1111
Near Term Inflation Outcome & Outlook
Rate of Inflation CPI inflation(12 month average)
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
%
2 00
4.00
6.00
8.00
10.00
12.00
%
1212
Jan-0
9
Feb-0
9
Mar-0
9
Apr-0
9
May-0
9
Jun-0
9
Jul-0
9
Aug-0
9
Sep-0
9
Oct-0
9
Nov-0
9
Dec-0
9
Jan-1
0
12 Month Average Point to Point
.
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
General Food Non -food
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Near Term Inflation Outlook..(Contd) Point-to-point and 12-month average CPI inflation in
Bangladesh were both on declining trend in FY 09 from
Q2 onward, driven by decline in global commodity and
fuel prices and bumper domestic output of the bororice crop.
In FY 10 CPI inflation has been edging upwardslowly, driven mainly by rising import prices of
commodities.
13
The 12-month average CPI inflation is projected to beat or under 6.5% at end June 2010.
13
Fiscal Developments Revenue receipts in H1 FY 10 registered 16.8% growth
over the same period of previous year with high
growth in income tax offsetting the low growth in
custom duty receipts.
The 28.2% utilization of ADP of the annual allocation
of Taka 305.0 billion during H1 FY10 was better thanthe 23.0% utilization during the same period of FY 09.
14
High net sales of NSD instruments and substantialbudget support from ADB drove down bank borrowing
for deficit financing into negative; leaving greater
room for expansion of credit to the private sector.
14
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Developments in External Sector Export shipments declined in FY 10 due to weak
demand recovery in markets abroad with 4.7% y-o-y
decline during July-January 2010.
There are indications of incipient recovery in export
growth; Order books of exporters in the apparel sectorare reportedly full with shipments to new destinations
in East Asia beginning to offset demand weakness in
traditional markets.
15
Opening of LCs for imports of inputs by the apparel
sector are on increasing trend. Opening of LCs forinputs of capital goods have lately on rising trend,indicating restoration in new investment momentum.
15
Developments in Money and Credit Slow off-take of bank credit from deposits and soaring
workers remittance inflows led banks to leave large
excess balances in their Taka and foreign currency
accounts with the BB in H1 FY 10, causing high growthin reserve money.
The liquidity surge in H1 FY 10 has declined in H2 FY
10, with pick up in imports and with BBs active use ofreverse repo tool.
1616
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Monetary Policy Stance: Jan-Jun 2010 The latest issue of BBs half yearly Monetary Policy
Statement MPS outlines the monetar olic stance
to be followed in H2 FY10.
The MPS for H2 FY10 stresses on support for sustained
high broad-based economic growth in the unfolding
internal and external context, while containing
inflation within tolerable moderate levels.
17
BB will continue a supportive monetary stance until
fuller restoration of investment confidence in thedomestic economy and with firmer demand recovery
in the export markets recovering from the global
recession.17
Broadening Financial Inclusion
Monetary policies of BB seek to support enhancementnot onl in uantum but also in ualit of rowth
measured in terms of inclusiveness and environmental
sustainability.
Therefore, BB has recently embarked on campaign-like
thrust on broadening financial inclusion, and haslaunched several refinance support lines for increased
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en ng o sec ors e:
agriculture, SMEs, effluent/waste disposal, solar/
biogas/other renewable energy projects.
18
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Broadening Financial Inclusion..(Contd) The Agricultural Credit Program announced by BB for
FY 10 en oins all banks to en a e in lendin for a
comprehensive range of on- and off-farm rural
economic activities.
A first ever Taka 5.00 billion refinancing line against
loans to landless sharecroppers.
19
Bank accounts for farmers at only Taka 10.
Motivating banks and financial institutions to expand
lending to under-served sectors both as business caseand as CSR obligation.
19
In FY 10, Actual Growth Paths of Monetary AggregatesRemain Close to Their Programmed Paths
3600
Broad Money (M2)
2072
2453
2566
2722
2754
2915
30643174
3274
1,806
2,114
2,487
2,668
2,719
2,782
2,964 2,9803,035
3,1193,1253,229
3,280 3,279
1800
2000
2200
2400
2600
2800
3000
3200
3400
InBillionTaka
Prog. Actual
2020
1276
1481
17301,297
,
1000
1200
1400
1600
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Domestic Credit3092
3258
3200
3400
1675
1973
2350
2492
2668
2735
2892 2899
2982
1746
1997
2433
2576
2639
27012818 2833 2836
2895
2927
2950
1600
1800
2000
2200
2400
2600
2800
3000
InBillionTaka
Prog. Actual
2121
1152
14021231
1444
1000
1200
1400
Credit to Private Sector
24532543
23142373
2437 24642550
1261
1492
1749
1951
20882116
2234
2249
2393
1120
1323
1522
1901
1996
20452102
2179 2196
2229
1350
1550
1750
1950
2150
InBillionTaka
Prog. Actual
2222
889
1086959
750
950
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Reserve Money and Net Domestic Assets
611.3
679.1629.1 673.9
651.8 649.7 649.7 642.7700
. . .. .645.0 645.0
.
237.0277.8
300
400
500
600
BillionTaka
Reserve Money
Net Domestic Assets
2323
228.0
201.8189.5 168.1
152.4 154.5 156.0 142.6
147.8
216.2
157.3 145.0
188.8
100
200
Jun.-09
July-09
Aug.-09
Sep-09
Oct.-09
Nov.-09
Dec.-09
Jan.-10
Feb.-10
March-10
07April-10
Jun.-10
RM Actual RM Prog. NDA Actual NDA Prog.
Sovereign Rating: Stable Outlook forBangladesh
Sovereign rating for the first time Country S&P Moodys
agencies- Standard and Poors
(S&Ps) and Moodys regarded
Bangladesh as a reliable
destination for international
creditors and investors.
In the lobal financial arena the
n a - aa
Bangl ade sh BB - Ba3
Pakistan B- B3
Sri Lanka B NR
Indonesia BB Ba2
Thailand BBB+ Baa1
Vietnam BB Ba3
24
BB- and Ba3 sovereign credit
ratings by S&P and Moodys
respectively, ranked Bangladesh
only behind India in South Asia.
24
Malaysia A- A3
Cambodia B+ B2
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Sovereign Rating: Major Observations Resilience of Bangladesh economy to domestic and
external shocks with stable economic growth over the past
decade.
Macroeconomic and price stability underpinned by prudent
economic management.
Strong and resilient RMG sector and robust inflow of
workers remittances maintaining external sector viability.
25
Domestic demand underpinned by strong remittances, MFI
activities and social safety net payments.
Narrow revenue and export base seen as ratings
constraints.25
Concluding Remarks Supportive monetary condition will be maintained in FY
10 to help the recovery of exports and new investment
activities get firmer traction.
Successful spurring of growth will keep inflationary
pressures in check by maintaining benign situation onthe supply side.
Efficient and expeditious ADP implementation will
26
create conditions crowding in private sectorinvestments, facilitated by congenial monetary regime.
BB has taken recent steps to deepen and broaden
secondary trading in treasury securities to eliminate
settlement risks.26
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Concluding Remarks..(Contd)
BB has introduced mandatory Basel II based capitalrequirements for banks from 2010 to enhance banks
capacity of handling intermediating large financial
flows.
Steps have also been taken to develop and strengthen
risk assessment capacities including forward looking
stress testing in the banks as well as in BB supervision
27
.
In conclusion, BB stands ready to respond promptlywith appropriate modification in monetary stance
required by any exigency in unfolding developments
in the domestic and external scene.
Many thanks
2828