Global competitiveness scale

Global competitiveness scale

Bangladesh's ranking needs improving

IT is like moving up and down a slippery slope. One year we go up by a notch or two, another year we slide down. In the main, it remains an uphill task to better our previous standing in terms of global competitiveness. All this is because in the vital areas we are largely stuck up.

It is little solace that the Geneva-based World Economic Forum-2014 report places Bangladesh 109th on the competitiveness scale out of 144 countries. This means 45 countries are below while 108 are above us. If it's any psychological cheer that is only nominal, but enough to shed our complacence to improve markedly in a highly competitive business world.

In the last six years infrastructure has fallen in the 'worst' category due to limited road transport, even though electricity supply has improved significantly. Look at the four-lane Dhaka-Chittagong highway which has hovered as a dream far too long. It is felt infrastructure uplift should be focused towards development of supply chain.

A significant deterioration has been marked in key indicators centred around government and public institutions during the last two years. Government effort to combat corruption and bribery have been largely ineffective, according to CPD analysis.

While noting improved macro-economic management and a leap in financial market development, business-government relationship has fallen short of creating an adequately enabling business environment. We endorse the economists' call for access to public utilities and to credit at an affordable rate of interest.

While we offer opportunities for investment we must underpin it through raising our competitiveness levels.

Monetary Policy July-December 2014: A review

Monetary Policy July-December 2014: A review

Saleh Akram


Monetary Policy Statement (MPS) for July-December 2014, as unveiled by Bangladesh Bank recently, shows certain encouraging developments during the last six months, but few vital questions still remain unanswered. The MPS for January-June 2014 was based on certain key assumptions and policy directions. A review of developments over the past six months, as claimed by Bangladesh Bank, reveals that most of the assumptions materialised and considerable progress was made towards achieving the key goals. In the last MPS, projected growth rate was from 5.8 to 6.1 per cent and according to figures released by Bangladesh Bureau of Statistics (BBS), growth achieved is 6.1 per cent.

An overview of the new monetary policy reveals that it is actually a continuation of the just expired MPS and as Bangladesh Bank governor declared, it has been prepared with the same cautious and investment-friendly outlook as the last one, which means there is nothing new about it and no significant policy shift is noticeable. Bangladesh Bank has shown controlled ambition in keeping with the ground reality. Credit limit for the private sector has been reduced.

It appears that Bangladesh Bank has made provisions for higher government borrowing. It is difficult to predict at this stage if the government will be able to keep its borrowing within the budgeted limit. In 2013-14 fiscal, the government financed most of its credit requirement by collecting money from public through savings certificates. It remains top seen whether the same thing will happen during this period too.

Provision for availing foreign private loans has been retained and the reason thereof is obviously low rate of interest. But Bangladesh Bank has admitted that increased foreign private loans could not have substantial influence on the interest rates. On the contrary, there has been a reduction in interest on deposits. In that case, it is difficult to figure why foreign credit shall be welcome and what is the benefit to be derived out of it.

Some people allege that monetary policy has affected price inflation of non-food items, while others contradict this view opining that stable exchange rate, depression in consumption and price situation in world market have played a greater role in this respect.  

The Banking system of the country was struck by major disasters in the form of unforeseen corruption and financial malpractices over the last couple of years, so much so that Bangladesh Bank looked helpless at times. The Banking sector has never experienced such disasters before, which left the whole system in tatters. The crumbling banking system itself dealt a big blow to investment in the private sector, as a result of which interest against loans is not coming down. Media covered the issue extensively and there had been public uproar. At times, the government also appeared toeing a tough line in bringing the criminals to book. But in the end, the realisation and initiative required to tackle the issue is hardly noticeable.

Cases of Hallmark and Destiny are unique examples of plundering public money perpetrated by customer-banker nexus, while the Basic Bank tragedy is the outcome of syndicated crime by bank officials.  On the other hand, capital market which is a major money supplier for private sector investment was destroyed by unscrupulous manipulators. All these caused a landslide erosion of public confidence and trust in the banking system - a situation that the economy is yet to recover from. The matter deserves to be investigated by an independent review commission. The new monetary policy does not have much to offer to win back the eroded public trust.  

The last MPS explained that policy rates were being kept unchanged due to the risks of inflationary pressures, but in order to support economic growth, prudential policies and other incentives would be used. This does not appear to be a good enough explanation for keeping the interest rates unchanged, because there are accepted methods pursued by countries around the world to combat inflation and at the same time foster growth. As we know, inflation means increase in money supply and rising prices is the effect of inflation. When it comes to protecting investment from the ravages of inflation, there are several popular strategies. First and foremost is the stock market. Rising prices tend to be good news for equities. For fixed-income investors, seeking an income stream that keeps pace with rising prices, Treasury Securities are a common choice. These government-issued bonds come with a guarantee that their par value will rise with inflation, as measured by the Consumer Price Index (CPI), while their interest rate will remain fixed. Thankfully, the government negotiated the line recently and was largely successful in undershooting bank borrowing targets. Whether it succeeded in controlling inflation is another matter that needs to assessed separately. It is true, if inflation is controlled and at reasonable levels, the economy may prosper. With controlled lower inflation, employment increases, consumers have more money to buy goods and services, and the economy benefits and grows. However, the impact of inflation on economic recovery cannot be assessed with complete accuracy.

Reserve money and broad money are two important components of a monetary policy. The monetary authority of Bangladesh has gone on to explain that the last MPS aimed to contain reserve money growth to 16.2 per cent and broad money growth to 17.0 per cent by June 2014. Latest data for the second half of 2014 fiscal year (H2FY14) shows that reserve money growth and growth of net domestic assets of Bangladesh Bank remained within programme ceilings. Typically, a growth in reserve money is useful because it helps keep prices stable as productivity increases in the system. But during times of serious inflation, the money growth needs to slow to control it. Here again, inflation remains to be an important element.

Reserve Money is sum of a country's currency in circulation and banks deposits with the Central Bank. Bank's deposits are reserves maintained as cash reserve ratio by banks in the current account with the central bank. It forms the basis on which money supply builds and circulates in the system. When BB creates reserve money, it provides liquidity into the banking system which thereby supplies money to the economy. Thus BB infuses liquidity by increasing reserve money. Reserve money is also known as high powered money, monetary base and base money.

Broad money means money in any form including bank or other deposits as well as notes and coins. Broad money can also include Treasury Bills and gilts. These financial securities are seen as 'near money'.

The latest MPS reveals that broad money grew at 15.2 per cent in May 2014 which undershot programme ceilings due both to lower public and private sector borrowing from the banking sector. BB's facilitation of private sector trade credit from abroad led to lower overseas financing cost with overall private sector credit growth, from both local and foreign sources, amounting to 15.7 per cent in May 2014. Domestic retail interest rates declined during these six months but the spread between lending and deposit rates rose indicating that lending rates have declined by less than deposit rates.

The MPS H2FY14 has embodied a commitment that it will be supportive of the capital market through on-going deeper regulatory coordination and policy support. The capital market of the country was subjected to indiscriminate manipulations by unscrupulous stock traders that pauperised innocent investors. How BB offers itself to be supportive of these primary investors needs elaboration. This means, a little more than opening of no-frill 10 taka accounts is required. Review of rules governing private equity begun by BB should be concluded in quick time.

In MPS, July-December 2014, BB has set up a 2 billion taka refinancing facility via micro-finance institutions, to provide small loans to those lower-income rural households. This is being hailed as a positive move which will help contain or may even bring down average inflation alongside ensuring that credit growth is sufficient to stimulate inclusive economic growth.

While it is officially recognised that the persisting inflationary pressures over the past few months has made achieving the FY15 inflation target challenging, significant liquidity in the banking system has led to a sharp rise in reverse repo operations with consequent costs to BB and ultimately the taxpayer.

BB's ongoing financial inclusion campaign, coupled with recent issuance of agent banking guidelines, are designed to extend the outreach of financial services into remaining pockets of exclusion in under-served areas and among under-served clients.

Mobile phone financial services are growing with 16.1 million account holders in May 2014. This is a fast growing sector, but its outreach is limited to payment services to individuals only. BB has rightly decided to promote the use of mobile phone services for government and business payments, as well as broadening this into a wider range of banking services.

Bangladesh has excelled in production of food items over the last few years and has reached close to being self-sufficient in this sector. Creation and introduction of a separate agri loan structure incorporating provisions for loans at softer and easier terms to agriculturists, will help attain complete food autarchy in quick time and reduce dependence on import of food items significantly. It would have been better if monetary policy of H2FY14 had included similar provisions.

Saleh Akram is a TV personality and writes on economic issues. saleh.akram26@gmail.com

Monetary Policy Statement: Is it growth supportive?

Monetary Policy Statement: Is it growth supportive?

Shamsul Alam


The Bangladesh Bank (BB) announced on January 27 the Monetary Policy for January-June, 2014 period. Taking recent economic and financial sector developments into account the Monetary Policy stance in H2 FY14 (half two of FY 14) emphasises much on controlling inflation instead of growth, and targets a monetary growth path that aims to bring average inflation down to 7 per cent. To achieve the goal of sizing inflation BB aims to contain reserve money growth to 16.2 per cent, broad money growth to 17 per cent and private sector credit growth to 16.5 per cent as important monetary tools.

FEATURES OF MONETARY POLICY STATEMENT OF CENTRAL BANK: The major points set in the monetary policy are as follows:

* To manage the persisting inflationary pressures:

* Keeping policy rates unchanged.

* In the context of ample liquidity in the banking system reserve requirement ratios will not be eased further.

* Contain reserve money growth to 16.2 per cent. 

* Broad money growth to 17 per cent. 

*  To attain inclusive growth:

* Private sector credit growth of 16.5 per cent.

* Advising to lend only to creditworthy clients for productive purposes.

* These ceilings are flexible and the monetary program can be recalibrated.

* Government borrowing from the banking sector will remain around the FY14 budgetary figure of 260 billion taka.

* In order to stimulate entrepreneurship among low-income rural households who have opened 10-taka accounts, BB is launching a new Tk 2.0-billion refinancing facility to be implemented by Micro-Finance Institutions.

* In order to cushion the impact of recent domestic disruptions on businesses, BB has taken a number of important policy steps: 

* Broadening the scope of the Export Development Fund.

* Reducing the borrowing costs (but how not devised).

* Instructing banks to offer loan rescheduling facilities to genuine borrowers facing cash flow difficulties, especially SMEs who are temporarily affected by the recent strikes and disruptions.

* Effective transmission of monetary policy requires strengthening credit and debt markets and this will remain a key focus for H2FY14:

* In order to spur secondary market activity BB has recently embarked on secondary trading in Treasury bonds and will continue to do so in H2FY14.

* A new Islamic bond of 3-month tenure is expected in H2FY14 which will contribute to better liquidity management of Islamic banks.

* While not directly under the purview of BB, various monetary- and financial sector-related actions are expected to have contributed to stabilising the capital market:

* BB will continue to collaborate with Bangladesh Securities and Exchange Commission (BSEC).

* 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.

* to preserve the country's external sector stability bb wished: 

* Further building-up of foreign reserves in FY14 though at a more moderate pace than FY13.

* To ameliorate the projected decline in remittances, it is imperative that manpower exports resume its growth.

* Opportunities such as investments in government securities are marketed to non-resident Bangladeshis (NRBs), so that remittances can remain an important part of medium-term external balance.

* BB will continue to support a market-based exchange rate while seeking to avoid excessive foreign exchange rate volatility.

REVIEW OF THE MONETARY POLICY STATEMENT: Monetary Policy Statement is aimed at tapering off inflation expectations and influencing policy rate to soothe the market and business activities by eliminating uncertainties about the policy change.

In the policy brief of the Planning Commission's General Economics Division (GED) titled "Review of the Monetary Policy Statement of 2013 and the Next Monetary Policy Stance", it was suggested that the upcoming monetary policy stance should target achieving higher economic growth rather than managing mainly inflation while a new government is in place. It means that, the broad money growth (M2), inflation, reserve money growth, private sector credit growth, public sector credit growth, government borrowing etc. should be targeted to achieve the growth of around 7.2 per cent and not to achieve only the primary target of bringing the inflation down to 7.0 per cent. Higher growth at the cost of mild inflation is more acceptable than lower growth with lower inflation. In confronting inflation phenomenon, Monetary Policy stance remained as continuation of the earlier stance rather than redesigning it towards a more growth supportive stance.

The Perspective Plan (2010-2021), the aim of which is to promote Bangladesh as a Middle Income Country within 2021, has been prepared. For this, the government has been implementing Sixth Five Year Plan (SFYP) for FY11-FY15 in order to accelerate GDP (gross domestic product) growth. Sustained growth is the key factor of generating employment and reducing poverty. Monetary Policy should also be supportive of accelerating growth in line with the national plan document (SFYP) and the Vision 2021. It is understood that in any election year monetary policy should be driven to contain any threats of inflationary pressure (as done in MPS H1) but which is over now. A new euphemism would emerge or demand will grow for higher growth now for a new government. That is the reason for which we suggested a more growth-supportive policy stance.

If we analyse the performance of the monetary sector in the first half of the current fiscal year, it can be seen that, the Broad Money Growth (M2) was around 16-17 per cent, as targeted in the last monetary policy statement of the central bank. But private sector credit growth hovered at 11 per cent for the last six months, while as it was expected to be at 16 per cent. Domestic credit growth has fallen from 13-14 per cent of the FY13 to 10-11 per cent in first half of FY14. Targeted credit growth was 15.2 per cent but it is at 10.7 per cent currently. It seems that as one of the two components of M2, which are Net Foreign Asset (NFA) and Net Domestic Assets (NDA), NFA has grown more than targeted and was the major actor behind the high-powered money or M2 growth of 17 per cent. Ultimately the M2 expansion was due to NFA increase rather NDA, which comprises public sector credit, private sector credit and other net assets. One of the reasons for private sector low credit growth is relatively higher interest rate. Apparently, nothing has been suggested about lowering or facilitating low interest rate regime in the new policy stance.

Domestic credit (public and private) growth may be hampered with the recent political unrest. In order to widen the scope of investment and open up the economic activities, domestic credit needs to be expanded by M2 expansions. If we set the same M2 target in second half of FY14 it would not create enough liquidity for the domestic credit expansion. Though the government borrowing from the banking system was significantly lower in the first half of the FY14, it will certainly increase in H2FY14 as the major portion of the Annual Development Programme (ADP) expenses is done in that period. As liquidity is available in the market, private sector will not be hindered if government borrowing is increased. More government spending is needed to cover up the losses made owing to political turmoil and to make the economy buoyant.

Currently the growth path is not on proper track to reach the targeted average growth of 7.3 per cent as expected in the Sixth Five Year Plan. So we need to review the credit expansion policy for boosting investment which will help growth. Investment as percentage of GDP has been hovering around 27-28 per cent for last couple of years. If we analyse the previous data we can find that M2 growth was 22 per cent and 21 per cent in FY11 and FY12 respectively, which supported the government's fiscal expansion by increasing public investment. Public investment, including ADP, as percentage of GDP increased from 5.01 in FY10 to 6.50 in FY12 and estimated to be 7.05 in FY14. Fiscal expansion is envisaged for meeting heightened investment need to support economic growth.

On the other hand, we are currently experiencing 17 per cent M2 growth since last fiscal year which is tightening the economy to contain inflation which is the major task of the central bank. But to have growth-supportive monetary policy, it should seek the path for encouraging investment-friendly credit expansion. Global growth is also an important factor for growth in Bangladesh. As the global growth prospects for 2014 (3.6 per cent) is higher than the previous two years (3.2 per cent in 2012 and 2.9 per cent in 2013), the trend of global demand will also be upward. To utilise the scope of export, more investment is needed. To boost up investment, credit facilities to the investors need to be enhanced by easing the credit procedure and lowering the interest rate which is not overtly reflected in BB's current MPS.

Inflation has declined from double-digit figure to 6.8 per cent in FY13. The nature of inflation was not only 'demand pull' type, it was also, more or less, 'cost push' inflation, due to higher price level in the rest of the world. In that connection, the central bank has well managed its floating exchange rate in the last fiscal year. In support of that, we can see that the local currency has been appreciated in last fiscal year too. US dollar has been exchanged for around Tk 77 per USD. Of course, this managed exchange rate helped contain the imported inflationary pressure at tolerable level on the domestic economy. But that was also not so congenial to reap the benefit of competitive export advantage.

Under the current circumstances, inflation would apparently be a little bit higher than the last fiscal year. It was 7.53 per cent in the past month which is higher than last fiscal year average inflation of 6.78 per cent. Present situation demands a higher M2 growth to open up the economy to grow at a faster rate to go closer to the targeted growth rate. The reasons relate to higher transportation costs due to the frequent nationwide strikes, and the fact that Indian food inflation has also risen sharply which is also correlated with Bangladesh food inflation. As domestic political situation is improving (the country is in election mode at least for next six months), it can be expected that inflation will be moderate because of relaxed supply constraints. That's why emphasis needs to be given on growth instead of curbing inflation. Economy can bear the inflationary pressure for the upcoming days, as it would not be that much high in the present world economic scenario. Imported inflation is not going to harm the economy that much, as the local currency has already been appreciated and there is more than USD 18 billion foreign exchange reserve. To promote exports (increasing competitiveness) and to encourage remittance receipt, a slight devaluation of Taka could also be considered. Accumulating big reserves may rather create inflationary pressure even in whatever way we want to desist.

Private sector credit, particularly credit to the small and medium enterprises (SME) is required to grow above 18 per cent for FY13-FY15 to achieve the target growth of SFYP. M2 growth, along with the private sector credit, could have been targeted to grow at higher rate in the monetary policy statement of the Bangladesh Bank, for revamping the economy in the second half of FY14 with a growth-supportive monetary policy rather than a tightening one. Monetary policy should be a dynamic and accommodative one to embrace the new economic opportunities and political demands of higher growth and income at the beginning of a new government.

Prof. Shamsul Alam is Member, General Economics Division (GED), Planning Commission, Ministry of Planning, Government of the People's Republic of Bangladesh. Syed Ali Bin Hassan, Shimul Sen and Sheikh Mainul Islam Main, Assistant Chiefs   at the GED provided support in preparing this policy brief. sabau47@yahoo.com

Monetary policy: Bangladesh experience

Monetary policy: Bangladesh experience

Atiur Rahman


The mainstream monetary policy approaches of developed economies seek to impact real sector economic activities primarily by influencing financing costs and occasionally also by influencing liquidity volumes. It leaves sectoral flows of financing to be decided by markets according to prevailing risk-return trade-off preferences. 

Recurring cycles of financial instability and attendant spells of financial exclusion show this mainstream monetary policy approach to be sub-optimal for both growth sustainability and stability. In macroeconomic policy, laxity-driven liquidity surfeits like in the run-up to the last global financial crisis, profit-focused markets tend to siphon off financing away from lower return SME (small and medium enterprises) and green initiatives, hurting sustainable growth, towards speculative price bubble creation in commodity and asset markets, impairing stability.

Also, entrenched interests in traditional polluting output practices always try to resist re-channeling of financing flows into adoption of new green alternatives.

The Bangladesh Bank (BB), the central bank of a low income developing economy, has opted to deviate from the mainstream monetary policy approach of developed economies. It deliberately imparted some directional bias in monetary and financial policies towards supporting inclusive, sustainable growth. The growth supportiveness mandate in BB's charter lends legitimacy to this approach, backed by the government's inclusive and sustainable growth strategy, underpinned further by a broad social consensus for equitable, sustainable development.

The BB's inclusive and growth sustainability supportive monetary policy approach is serving the Bangladesh economy well in upholding growth and stability. This was evidenced in decades of steady growth performance and macro financial stability amid domestic shocks and external turbulences, including the last global financial crisis and the subsequent global growth slowdown.

Six-plus per cent real annual GDP (gross domestic product) growth trend is continuing for well over a decade now with CPI (consumer price index) inflation remaining in single digits, and fiscal deficit remaining under four per cent of GDP. Double-digit export growth and workers' remittance inflows have kept balance of payment current account in healthy surplus with rising foreign exchange reserves already adequate for six months' imports and exceeding 20 per cent as cover of broad money base. Steadily rising GNI (gross national income) per capita has crossed (lower) middle income country group threshold by June 2013, and quite a few MDGs (Millennium Development Goals) including headcount poverty reduction have been attained well ahead of timeline.

Mandatory environmental risk assessment routines in loan appraisal processes take account of sustainability concerns. Promotion of SME and green financing is supported by low cost refinance lines within monetary and credit growth envelops of price and macroeconomic stability focused annual monetary programmes.

Green financing promotion efforts have already yielded substantial progress in solar and bio-mass based renewable energy generation, installation of industrial effluent treatment plants, replacement of traditional polluting brick baking  kilns with energy efficient modern ones, and so forth.

Inclusive financing is bolstering financial stability by widening and diversifying the asset and deposit bases of lending institutions, reducing their credit and liquidity risk exposures. Inclusive financing shielded small farms and businesses in Bangladesh from any credit crunch in the last global financial crisis. When needed, the financial sector in Bangladesh was able to help out export manufacturing and other sectors affected by the global crisis. Domestic demand driven output activities remained well supported by inclusive financing, compensating for growth sluggishness in exports.

 Embedding of inclusive, sustainability supportive aspects in the BB's monetary policies and programmes came about in a consistent package of steps. Starting with setting mindsets and motivations right by instilling in the financial sector the ethos of socially responsible financing focused towards supporting environmentally sustainable output activities and away from financing of speculative profit seeking or wasteful ostentation. This has successfully enthused banks and financial institutions into spawning new initiatives of reaching out with financial services supporting productive and green initiatives in underserved communities and sectors. They  used cost-efficient mobile phone/smart card and other off branch service delivery channels enabled by a BB-led massive upgrading of the financial sector IT infrastructure.

Environmental risk assessment guidelines introduced by the BB promotes green financing by putting lower risk weights on the green options than on their polluting alternatives. This is supplemented further by modest macro-prudential policy tweaks favouring green financing, like mandatory high margin requirement on financing of personal cars etc., leaving mass transit vehicles free of such conditionality.

The BB is engaging intensively with relevant domestic authorities and external development partners in devising feasible and appropriate support schemes for various inclusive and green financing initiatives. Further, the BB is participating proactively in international forums advancing the causes of inclusivity and environmental sustainability like the AFI (Alliance for Financial Inclusion), UN Global Compact, UNEP (UN Environmental Programme) etc. for mutual learning and experience sharing.

In fact, the BB's monetary policies and programmes explicitly include aspects supportive of inclusive and green output initiatives. These are something the central bank sees as essential in managing climate change related and environmental degradation related risks. Results thus far are positive and encouraging with regard to upholding of price and macro financial stability. Monetary policy approaches of central banks of many other developing economies have variants of similar inclusiveness and sustainability supportive aspects.  Mainstreaming of this approach in monetary policies of developed economies as well may be warranted by the imperative and urgency of environmental sustainability.

The article is adapted from the statement Dr Atiur Rahman, Governor of  Bangladesh made at a high-level Advisory Council Meeting as a member of the Advisory Council of 'UNEP Inquiry into the Design of a Sustainable Financial System' held in Washington DC on April 09, 2014.