Change in monetary policy last 5 years in Bangladesh

Change in Monetary policy last five years in Bangladesh

perspective

Monetary policy 2011

Monetary policy 2011 (January-June)

The key objective of this monetary policy is to support government’s goal of faster inclusive

economic growth and poverty reduction, besides maintaining monetary and price stability. So

this is a expansionary monetary policy.

Monetary Policy Approaches

BB’s monetary policy 2011(Jan-Jun) affects consumer price levels by influencing both key

financial sector prices and broad money (M2) growth. For influencing broad money growth,

they changes reserve money as an instrument. Due to changes in day to day cash money, cash

reserve and statutory liquidity requirements (CRR, SLR) are adjusted occasionally for

influencing the broad money growth path. It is also targeting to retain money stock relevance.

Effectiveness of monetary targeting decreases with increasing openness of capital account.

The expansion of money stock gets prevented by funds flows into or out of the domestic

market.

Impacts of Monetary Policy: The effect of monetary policy is as followings:

1. Agriculture sector’s output activities are blooming in spite of harmful weather

conditions, due to timely access to inputs and financing support.

2. Exports returned strongly with 41 percent growth during July-December 2010, due to

increase in shipments to both traditional and newer destinations.

3. Quantum index of medium and large scale manufacturing increases 15.3 percent in

July 2010and small scale manufacturing weakened 9 percent because small

manufacturers cannot afford captive power generators to cope with supply disruptions

from the national grid.

4. Growth in workers’ remittance inflows weakened to a mere 0.21 percent H1 FY11.

5. Domestic credit growth kept on gaining pace in H1 FY11, rising to 24.2 percent in

November 2010 from 17.6 percent of June 2010. Growth in credit to public sector

remained small at 9.6 percent in November 2010, with credit to government and

credit to other non-financial public sector increasing 5.4 percent and 29.9 percent.

6. Global output growth in 2011 is somewhat less rising than earlier above four percent

growth. External sector risk factors and prospects for growth of Bangladesh in 2011

remain unchanged.

7. Rising trends in global prices of food, energy and industrial commodities remain the

near term external source of concern impacting domestic inflation in H2 FY11.

8. Tax revenue collections by NBR during July- November 2010 grew by a

24.81 percent with slower 8.3 percent. Non tax revenue receipts representing income

surpluses of SOEs reportedly declined 26.3 percent in H1 FY11, mainly due to FY10

profit fall of BB and low revenue earnings of BTRC.

Monetary policy 2011 (July -December)

The key objective of this monetary policy is to expand the short term development in

domestic and global scenes and anchor the inflationary expectations of economic sectors and

general public. So this is a restrictive monetary policy.


For influencing real sector price level by financial sector prices BB apply policy interest rate

interventions and quantity based money stock targeting. Monetary policy plan to achieve

target growth path for broad money and implemented by day to day management of growth

paths of reserve money. This approach is not succeeded due to inadequate well-functioning

transmission channels of transmitting financial prices to real sector prices in the domestic

market.


1. Output and investment activity in the economy is increasing substantially.

2. GDP growth is 6.66 percent for FY11which is very much close to target of 6.70

percent and following 6.07 percent growth in FY 10.

3. Industrial sector’s growth increasing from 6.49 percent in FY 10 to 8.16 percent in

FY11.

4. Service sector growth ups to 6.63 percent from previous year 6.47 percent.

5. Agriculture sector growth decreases from previous growth 5.24 percent to 4.96

percent in FY11.

6. The inflation increased in FY10 by 6.45 percent and in FY 10 1.47 percent. The

annual inflation rose to 8.80 percent that was targeted 8 percent by national budget.


Monetary policy 2012 (January – June)

The key objective of this monetary policy is to anchor inflationary expectations and provide

households and firms sufficient information to plan their savings and investment decisions.

So it is a restrictive monetary policy.


The monetary will take recent economic developments into account and pursue a restrained

monetary growth path in order to decrease inflationary and external sector pressures and

ensuring adequate private sector credit to stimulate inclusive growth. This monetary policy

aim to bring inflation to single digits and stop foreign reserve depletion. Bangladesh Bank

focuses on govt. borrowing from banking system so that they cannot crowd out liquidity from

commercial bank. Bangladesh bank also aims to contain reserve money growth to 12.2% and

broad money growth to 17.0% by June 2012. Credit to the private sector is considered to

remain at a healthy 16.0% well in line with growth targets.


1. Global growth expectations in 2012 remain highly uncertain in key trading partner

countries due to increasing debt crisis in several countries and the increasing related

risk of a global recession.

2. Domestic growth was projected at 7% in the FY12 Budget assuming stable domestic

and global economic conditions.

3. Agricultural output as well as indicators of industrial and service sector performance

suggests that if there is no change in the global environment then we could be

achieved targeted growth rate.

4. Inflation is 7.5% in the FY12 that was lower than 10.7% projected in budget speech in

FY 11.

5. The external sector is facing a challenging environment which addressing this is an

integral part of Bangladesh Bank’s monetary stance.

6. Import growth more than export growth and this gap in the current account balance

cannot be fully met by remittance inflows.

Monetary policy 2012 (July to December)

The key objective of this monetary policy is to maintaining inflation at moderate levels and

supporting inclusive growth objectives of the Government. So it a restrictive monetary

policy.


The monetary will take recent economic developments into account and pursue a restrained

monetary growth path in order to decrease inflationary and external sector pressures and

ensuring adequate private sector credit to stimulate inclusive growth. Bangladesh bank’s

monetary program aims to contain reserve money growth to 14.5% for FY 13 and broad

money growth to 16% by December 2012. Credit to the private sector is considered to remain

at a healthy 18%, above other countries in the region, and enough to accommodate the FY13

GDP growth targets. . Bangladesh Bank focuses on govt. borrowing from banking system so

that they cannot crowd out liquidity from commercial bank.


1. Domestic output growth was projected at 7% in the FY12 Budget assuming stable

domestic and global economic conditions. Economic growth is 6.32% in FY12 which

is lower than 6.71% in FY11due to slowing of agricultural growth which has slowed

from 5.13% in FY11 to 2.53% in FY12.

2. Industrial growth is estimated at 9.47% in FY12 higher than the 8.20% in FY11due to

easy access to timely credit.

3. Service sector growth of 6.06% in FY12 was lower than the 6.22% achieved in FY11.

4. In June 2012, inflation was 8.56%, and average inflation was 10.6% both of which

therefore remain higher than the 7.5% targeted in the 2011/12 Budget speech.

5. Export growth in FY12 remained in positive territory with 5.93% growth and was

helped by the depreciation of the taka.

6. The sharp slowdown in import growth (7.2% between July-May compared to the

same period last year, and a 6.3% fall in import L/C openings) and the healthy growth

in remittances (10.3% estimated in FY12) has improved the current account balance

in the past few months especially since the import slowdown is from a larger base.

7. Remittances have been sustained by larger numbers of Bangladeshi workers moving

abroad over the past year and may have been helped by the depreciation of the Taka.

Remittance growth of 10.3% in FY12 is significantly higher than the 6% growth in

FY11.


Monetary Policy Statement (January to June 2013)

This issue of the Bangladesh Bank (BB) half yearly Monetary Policy Statement (MPS)

outlines the monetary policy stance that BB will pursue in H2 FY13 (January-June 2013),

based on an assessment of global and domestic macro-economic conditions and outlook. This

MPS was preceded by productive consultations with a range of key stakeholders and web-

based comments were also received.

Impacts of Monetary Policy

Inflation

Data for the first half of FY13 suggest that the achievement of these objectives is largely on

track. Average inflation has been declining steadily over the past nine months, from a peak of

10.96% in February to 8.74% in December and within reach of the FY13 CPI inflation target

of 7.5%.

In food inflation fell from 10.9% in January 2012 to 5.57% in October 2012 though over the

past two months it has crept back up again to 7.33% in December 2012. In non-food

inflation has declined from a peak of 13.96% in March 2012 to 8.43% in December 2012 and

average non-food inflation is following this trend with a lag having peaked in October 2012

at 11.81% and gradually falling to 11.45% in December 2012. Based on current trends the

FY13 CPI average inflation target of 7.5% announced in the FY13 Budget appears

achievable, though risks remain. These risks stem from volatile global commodity prices and

particularly the pass-through to food prices, any further administered price increases in the

energy sector, as well as the sharp increase in remittance inflows in H1FY13 (22%) which

will put upward pressure on asset prices and non-food inflation.

Impact of GDP Growth

While BB forecasts that GDP growth in FY13 will be in line with the previous ten years

average, it will likely fall short of the 7.2% target set in the FY13 Budget.

In industrial sector growth at between 7.25-7.5% in FY13, in line with historical averages,

but less than the 9.5% in FY12. This slowdown is also reflected in the breakdown of import

data. While there is positive growth in capital machinery imports between July-November

2012 of 2.5% compared to a year earlier, there was a 5.2% decline in industrial raw materials,

3.2% decline in intermediate goods imports and 1.6% decline in machinery for miscellaneous

industries. In Service sector growth in FY13 is projected at 6.2-6.5% which is higher than the

6.1% growth in FY12 due to sharp increase in bank lending for key service sub-sectors as

well as insights from various service sector related proxy indicators in H1FY13. These sector

al assumptions lead to our forecasted output growth range of 6.1-6.4% for FY13. In 2013,

global growth is expected to be 3.6% with the average for developing countries is projected at

5.6%and high income countries at 1.5%.

Target Adjustments in MPS 7.7% from 16.5% in H1 FY13

target reset at 16.1% from 13.8% earlier

growth

mestic Credit growth target revised Upward to 18.9% from earlier 18.6%

reallocation

agro and SME

Expectations (MPS) H2 FY13

-7.5%

OBSERVATIONS:

be a more realistic expectation

however, increased Net

Foreign Assets may push inflation up if monetary targets overshoot further

budget limit

Reduction in repo rate is expected to bring down interest rate further, thus stimulating

credit growth. However, actual growth will largely depend on change of lending appetite

among financial institutions

Deferred implementation of loan classification and provisioning guideline within 2013 will

keep bank profitability low in the year

however, contradicts to credit growth targets, as it requires stronger control over loanable.

Monetary Policy Statement (July to December 2013)

This issue of the Bangladesh Bank (BB) half yearly Monetary Policy Statement (MPS)

outlines the monetary policy stance that BB will pursue in H1 FY14 (July-December 2013),

based on an assessment of global and domestic macro-economic conditions and outlook.


Inflation

Average inflation, has been declining steadily over the past fifteen months, from a peak of

10.96% in February 2012 to 7.70% in June 2013 within reach of the FY13 CPI inflation

target of 7.0% because Nevertheless, the central bank believes that existing aggregate

demand pressure coupled with expected wage increase and possible supply side disruptions in

times of nationwide strikes will make it very difficult to achieve the target.

GDP growth GDP Growth target of 7.2%.However, BB remains skeptical as to target growth achievement

under present economic conditions. BB expects the growth not to deviate from the last 10

years average of 6.2%.

Target Adjustments in MPS

Broad money growth target reset to 17.2% from 17.7% in H2 FY13

Presently growth is 18.1%, hence BB is aiming to reduce it.

Reserve money growth target reset at 15.5% from 16.1% earlier

Domestic credit growth target set to 19.3%

Private sector growth target of 15.5% from previously targeted 18.5%, with growth

reallocation.

The Monetary Stance in H1 FY14

Takes these recent economic developments into account and will target a monetary

growth path which aims to bring average inflation down to 7%

They aim to target contain reserve money growth to 15.5% and broad money growth

to 17.2% by December 2013.

The space for private sector credit growth of 15.5% has been kept well in line with

growth targets and higher than the average of ‘emerging’ Asian economies.

The monetary stance also assumes government borrowing from the banking sector

will remain around the FY14 budgetary figure of 260 billion taka.

OBSERVATIONS

Monetary policy stance of H2 FY13 was largely kept ‘Unchanged’ with some

adjustments in targets.

GDP Growth target of 7.2% is highly unlikely under present circumstances.

BDT is expected to appreciate during H1 FY14.

High credit growth target compared to current (May 2013) growth aimed for H1

FY14, signs stronger borrowing intent of the govt., which might affect interest rate

and crowding out effect.


Monetary Policy Statement 2014(January to June)


Inflation

The July 2013 MPS explained that policy rates were being kept unchanged due to the risks of

inflationary pressures stemming from wage increases and supply-side disruptions. The last

MPS also aimed to contain reserve money growth to 15.5% and broad money growth to

17.2% by December 2013. It also predicted that actual private sector credit growth may not

use up all the space provided in the monetary program in the lead-up to the national elections.

Latest data for H1FY14 shows that reserve money growth and growth of net domestic assets

of Bangladesh Bank remained within program targets, despite a surge in Net Foreign Assets

(NFA) arising from robust exports and sluggish import growth. Broad money growth of

16.7% in November 2013 was close to program targets. BB’s facilitation of private sector

trade credit from abroad led to some switching to lower cost overseas financing with overall

private sector credit growth, from both local and foreign sources, amounting to 13.8% in

November 2013. Domestic retail interest rates declined during these six months with the

spread between lending and deposit rates dipping below 5% and its trend indicating that

lending rates have declined faster than deposit rates.

Adherence to the monetary program non-food point-to-point inflation falling from 7.40% in

July 2013 to 4.88% in December 2013. However supply bottlenecks along with rising food

prices in India led to point to point food inflation rising from 8.14% to 9.0% during the same

time period. Average inflation rose from 6.99% to 7.53% during H1FY14 driven by these

higher food prices.

Monetary policy stance

The monetary stance in H2 FY14 takes these recent economic and financial sector

developments into account and will target a monetary growth path which aims to bring

average inflation down to 7%, while ensuring that credit growth is sufficient to stimulate

inclusive economic growth. This would require a monetary program framework that limits

reserve money growth to 16.2% and broad money growth to 17% by June 2014. BB will have

a ceiling on net domestic assets as a key operating target. The ceiling for private sector credit

growth of 16.5% has been kept well in line with economic growth targets.

First, BB will continue to focus on achieving its inflation targets 7% while providing

sufficient space in its monetary program for lending to activities which support broad-based

investment and inclusive growth objectives. BB will use both monetary and financial sector

policy instruments to achieve these goals

Second, BB has already taken a number of important financial sector policy steps which will

continue during H2FY14:

BB is willing to increase the size of the EDF if the current $1 billion fund is fully

utilized.

Banks were instructed to offer loan rescheduling facilities to genuine borrowers who

were temporarily affected by the recent disruptions

Third,

The H2FY14 monetary program assumes that unanticipated spending pressures arising from

the provision of ‘incentive packages’ to 14various industries affected by recent disruptions

will be accommodated within the sizeable (260 billion taka) borrowing limit.

Forth, Strengthening financial inclusion and diversification-

Overall there has been a greater emphasis on providing services to rural clients by enforcing a

1:1 rural – urban new branch ratio (which was 1:4 prior to 2012) and this is reflected in a

larger share of rural deposits (18% of total deposits in 2013 compared with 13% in 2010) and

loans to rural areas (10% share in 2013 compared with 8% in 2010). BB is also setting up a 2

billion taka refinancing facility to provide small loans to those lower-income rural households

who have set up ‘ten-taka’ accounts.

Analysis of the economic purpose of outstanding loans

The share of loans to agriculture sector (from 5.5% in March 2013 to 5.8% in March

2014)

Trading activities has increased from 36.4% in March 2013 to 39.0% in March 2014

Industrial total outstanding credit decreased from 22.0% in March 2013 to 16.4% in

March 2014.

The share of working capital financing has grown (from 13.2% to 18.0% during this

period).

The share of construction loans has remained unchanged (at 9.5%) compared to a year

earlier.

Monetary Policy Statement 2014(July to December)


Inflation

A review of developments over the past six months suggests that most of these assumptions

materialized and solid progress was made towards achieving the key goals. The January 2014

MPS projected that economic growth would range from 5.8%-6.1% and BBS’s preliminary

estimate released recently suggests that growth for FY14 was 6.1%. The last MPS also aimed

to contain reserve money growth to 16.2% and broad money growth to 17.0% by June 2014.

Latest data for H2FY14 shows that reserve money growth and growth of net domestic assets

of Bangladesh Bank remained within program ceilings. Broad money growth of 15.2% in

May 2014 undershot program 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

some switching to lower cost overseas financing with overall private sector credit growth,

from both local and foreign sources, amounting to 15.7% 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.

Adherence to the monetary program contributed to non-food point-to-point inflation falling

from 9.09% in January 2013 to 5.16% in May 2014 though it rose to 5.45% in June 2014.

Point to point food inflation rose steadily from 5.02% to 9.09% during January 2013-May

2014 but fell to 8.00% in June 2014. Overall average inflation declined from 7.60% to 7.35%

during H2FY14 largely driven by the decline in non-food inflation.

Monetary policy stance Reverse repo operations grew significantly in the last few weeks of H2FY14 following a

Government decision to temporarily suspend Treasury Bill auctions .As a result, and in light

of persisting inflationary pressures, BB decided to raise the Cash Reserve Ratio from 6% to

6.5% in June 2014. Domestic credit growth fell short of the anticipated rate due to shortfalls

in both private and public sector credit growth.

First, The persisting inflationary pressures over the past few months with the risks ahead

related to the inflation outlook (described earlier) imply that achieving the FY15 inflation

target of 6.5% will be challenging. As such BB has decided to keep policy rates unchanged.

The Cash Reserve Requirement (CRR) was raised in June 2014 by 50 basis points to absorb

part of the excess liquidity and help contain inflation – this remains unchanged.

Second, in order to support economic growth, BB has already taken a number of important

policy steps which will continue during H1FY15:

• The size of the Export Development Fund was raised from $1.2 billion to $1.5 billion and

this will be reviewed periodically in line with demand and productive use of these funds.

Moreover the single party ceiling was raised from $12 million to $15 million.

• As an investment incentive, foreign investors are now allowed to source term loans from

local banks and access working capital as an interest free loan from their parent company.

Third, Fiscal-monetary coordination will continue among senior policymakers with regular

meetings of a Coordination Council and at the operational level where one key coordinating

body is the Cash and Debt Management Committee which meets quarterly.

Fourth, effective transmission of monetary policy requires well-functioning, broader and

deeper credit and debt markets. This in turn has a number of dimensions:

• Promoting interest rate flexibility by tackling asset quality issues – A number of steps were

taken in H2FY14 and will continue in the coming months to strengthen the financial system

and improve asset quality

• Strengthening financial inclusion and diversification - Mobile phone financial services are

growing with 16.1 million account holders in May 2014. However these are largely limited to

payment services among individuals and going forward BB would like to promote their use

for government and business payments, as well as broadening this into a wider range of

banking services. Overall there has been a greater emphasis on providing services to rural

clients by enforcing a 1:1 rural – urban new branch ratio (which was 1:4 prior to 2012) and

this is reflected in a larger share of rural deposits (18.2% of total deposits in March 2014

compared with 13% in 2010) and loans to rural areas (10% share in March 2014 compared

with 8% in 2010). 14 million no-frill ’10 taka accounts’ have been opened by the end of June

2014 compared with 13.2 million at the end June 2013. BB has also set up a 2 billion taka

refinancing facility via micro-finance institutions, to provide small loans to those lower-

income rural households who have set up ‘ten-taka’ accounts.


Monetary policy 2015 (January-June)

The key objective of monetary policy H2 of FY 2014 is to make some adjustments in

targets to address reality and expectations with a focus on growth. It is an expansionary

monetary policy.


The monetary policy of FY 2015 is comprised of strategy like an inflation controlling

money growth strategy, an internal demand boosting monetary plan, an investment

friendly monetary path and an inclusive growth framework. Simply high growth cannot

be considerable for an emerging economy like Bangladesh. Growth must be sustainable

to ensure development of economy. Growth must be long-lasting to fight poverty and to

take the economy to the middle income bracket by 2021. The activity base of growth

must be expanded by empowering the masses.

Policy Instrument:

Liquidity support for banks through applicable policy instruments

Policy interest Rates

Policy Goals:

GDP Growth estimate of 6.5-6.8%

Keep inflation to 6.5%

Actions: The following actions are taken by central bank to achieve their monetary

policy goals

Bangladesh Bank aimed at increasing supply of reserve money from 15.5% to

15.9% and broad money from 16% to 16.5% at the end of FY2015

Bangladesh bank aimed at reducing the growth of private sector from 16.5% to

15.5% at the end of FY2015.

Public sector credit (including Govt.) is targeted to increase from 12.9% to 25.3%.

Domestic credit growth target is increasing from 13.8% to 17.4%.

Banking governance will be increased further to minimize loan fault.

Bangladesh Bank will try to smoothing excessive fluctuations in the exchange rate

which will remain largely market based.

The central bank will continue to maintain sufficient amount of foreign currency

reserves to cover imports of 5 to 10 months

Impacts of Monetary Policy: The impact of monetary policy is as followings

1. GDP growth was over 6% that is very much close to target but cannot achieve

target.

2. Inflation decline 7.3% to 7% but remain above target 6.5% due to increase in

inflation of non-food item.

Monetary policy 2015 (July-December)

The key objective of monetary policy H2 FY 2015 is moderation and stabilization of CPI

inflation alongside supporting output and employment growth. This is a restrictive

monetary policy.


The monetary policy of H2 2015 is composed of strategy like stabilizing inflation at

moderate level and other macroeconomic policy pronouncements, supporting the public

policy objectives of inclusive, environmentally sustainable growth and maintaining

orderliness in transition of domestic currency exchange rate to new market equilibriums

in response to pick up in investment.

Policy Instrument:

Liquidity support for banks through applicable policy instruments

Policy interest Rates

Policy Goals:

GDP Growth target of 7%

Keep inflation to 6.2%

Actions: The following actions are taken by central bank to achieve their monetary policy

goals

1. For providing adequate support to achieve targeted growth and inflation central

bank tries to grow reserve money 16 percent and broad money 15.6 precent.

2. Domestic credit will try to grow up to 16.5, private sector credit up to 15 and public

credit up to 23.7 at the end of fiscal year 2016.

3. This is not only a cautious but also a explicitly pro-growth monetary policy stance

that support the 7 percent growth target and the 6.2 percent inflation target for the fiscal

year 2016.

4. Policy interest rates will remain unchanged, but change will be happened when

general inflation and core CPI inflation decline at a substantial level.

5. Bangladesh Bank's supervisory vigilance on banking governance will be hardened

further to minimize on loan fault.

6. This is a growth supportive monetary policy that increases the level investments

through the strategy of selective easing.

Impacts of Monetary Policy: The effect of monetary policy is as followings

GDP growth was 6.5% that cannot achieve target due to slower growth of service

sector.

Inflation decline from 7% to 6.4% that is close to target but cannot achieve target

due to average increase in core inflation.

Iftekar Uddin Al Mahmmud Tanim

MBA 15

Bangladesh University Of Professionals

Economy & Finance

Change in monetary policy last 5 years in Bangladesh