The half-year Monetary Policy announced by Bangladesh Bank (BB) governor Dr Atiur Rahman
on Sunday last has shed light how the central bank helped recovery momentum in the economy.
The MPS, as the Monetary Policy Statement is called, said, recovery momentum in economic activities materialized in H1 FY11 as expected, aided by demand recovery in external markets, government’s fiscal stimulus package and BB’s supportive monetary policy measures. The agriculture sector output activities are buoyant in overall benign weather conditions, supported by timely access to inputs and financing.
Exports rebounded strongly with 41 per cent growth y-o-y during July-December 2010, with increase in shipments to both traditional and newer destinations.
Quantum index of medium and large scale manufacturing (available only up to July 2010) moved up 15.3 per cent y-o-y in July 2010, the first month of FY11.
Quantum index for small scale manufacturing weakened 9.2 per cent y-o-y in Q1 FY11 however, presumably because small manufacturers cannot afford captive power generators to cope with supply disruptions from the national grid.
Import payments increased 41.9 per cent y-o-y during July-October 2010 with 35.6 per cent increase in capital machinery imports and about 43 per cent increase in import of production inputs including fuel oil. Opening of new import LCs increased strongly by 43.8 per cent y-o-y in H1 FY11.
Growth in workers’ remittance inflows weakened to a mere 0.21 per cent y-o-y in H1 FY11.
Weak growth of inflows alongside high outflows for strongly rising imports and other commercial payments abroad generated depreciation pressure on Taka and rendered the local inter bank market net buyer from rather than net seller to BB by December 2010. Exports have grown as strongly as imports, but the import base being larger than export base, the trade deficit has widened in H1 FY11.
Taka depreciated against USD, with the weighted average inter bank rate at Taka 70.75 per USD as of 30 December 2010, against Taka 69.44 per USD as of 30 June, 2010. The inter bank market was net seller of USD funds to BB in Q1 FY11, but with rising import payment pressures turned into net buyers from BB in Q2.
Overall, the inter bank market bought USD 400.0 million from and sold USD 316.5 million to BB in H1 FY11.
Because of the emerging balance of payments pressures the government is looking for concessional assistance from official external donors including IMF and IDA; to finance higher public expenditure needed for the aspired leap forward to a high growth trajectory, and to widen foreign exchange availability for increased private sector investments.
BB’s monetary policies and programmes have sought to impact consumer price levels both by influencing key financial sector prices (policy interest rates, viz., repo and reverse repo rates) and by influencing broad money (M2) growth with changes in reserve money (RM, currency in issue plus balances of scheduled banks with BB) as instrument. Besides day to day changes in reserve money, cash reserve and statutory liquidity requirements (CRR, SLR) are also adjusted occasionally in influencing the M2 growth path. Money stock targeting retains relevance in economies with external capital account controls like Bangladesh. Effectiveness of monetary targeting diminishes with increasing openness in capital account, efforts to contract or expand money stock get counteracted by fund flows into or out of the domestic market; the reason why advanced open economies no longer use money stock targeting and resort solely to price based interventions.
Financial inclusion promotion measures in credit policies, alongside discouragement of financing for wasteful unproductive uses are the growth supportive features of BB’s monetary policy stance.
Domestic credit growth kept on gaining pace in H1 FY11, rising to 24.2 per cent y-o-y in November 2010 from 17.6 per cent of June 2010.
Growth in credit to public sector remained small at 9.6 per cent in November 2010, with credit to government and credit to other non financial public sector increasing 5.4 per cent and 29.9 per cent y-o-y (credit growth to SOEs that performed poorly in the past may again become cause for concern unless the new fund infusions yield the hoped for positive results).
Credit to the private sector has expanded even faster; growing 27.8 per cent y-o-y in November 2010 against 24.2 per cent of June 2010. Credit to private sector has thus been expanding much in excess of what may be reasonably needed for attaining the targeted real and nominal GDP growth.
The 38.3 per cent y-o-y rise in industrial term loan disbursements, 42.9 per cent rise in outstanding SME loans, and 18.8 per cent rise in outstanding agricultural loans apparently portray healthy composition of productive lending, but sample probes into actual loan utilization unearthed instances of diversion of industrial term loans into capital market (unavailability of new power and gas connections may have acted as inducement for diversion of loans drawn from banks negligent in end use tracking).
Credit growth faster than deposit growth (28.4 and 21.6 per cent y-o-y respectively as of December 2010) indicated lax attitude of banks in H1 FY11 in expanding lending commitments; time deposits growing slower than demand deposits (20.6 & 42.4 per cent y-o-y in November 2010 respectively) signified high liquidity preference amongst the public, presumably for engagements in capital market, evidenced by hectic trading in the stock exchanges.

News: The Independent / Bangladesh/ Feb-02-2011