Monetary Policy Statement for FY 2012 (January-June)

Presented by Md. Mostafizur Rahman & Shah Md. Noor

What is Monetary policy?

Policies that affect the supply of money and credit and the term on which credit is available to borrowers. Through monetary policy Bangladesh Bank regulates: the supply of money interest rate exchange rate Thus it tries to maintain reasonable price level.It regulatesthe cost and availability of domestic credits to the priority sector.

Present Economic Condition

Global Growth: Overall the growth prospects for 2012 in advanced
economies remain weak (due to the unfolding sovereign debt crisis in several countries and the increasing related risk of a global recession) and there have also been downward growth adjustments for developing countries (from 6% in 2011 to 5.4% in 2012) including India and China.

Domestic growth: Domestic growth was projected at 7% in the FY12 Budget assuming stable domestic and global economic conditions weak aid inflows, slowing imports and moderating credit growth will limit aggregate demand. As such BB is projecting growth in the range of 6.5-7.0%. External sector: Export growth (14.7% between July-December 2011 compared to the same period last year) lags behind import growth (22% between July-November compared to the same period last year) partly due to the projected 57% increase in petroleum imports in FY12 compared to the previous year. Capital account: The capital account has worsened significantly partly due to very low aid inflows ($69 million in 2011)

 A key indicator new Letter of Credit (LC) openings has fallen by 8% in

January 2012 relative to a year ago. A more restrained domestic credit environment is expected to limit import growth further. Exchange rate depreciation: As a result of these pressures, the Taka/US dollar exchange rate has depreciated by about 15% in the twelve months leading to mid January 2012 and foreign exchange reserves have also fallen from US$10.1 billion to 9.2 billion during this period.
Figure 2: Inflationary situation in Bangladesh

Inflation
In FY 2011-12, the general inflation rate might be 12.27 percent. The government projected inflation to be 7.5% in the current fiscal year but if this situation holds further, this projection will remain in oblivion.

Monetary Policy Statement (January-June 2012)

This issue of the Bangladesh Bank (BB) half yearly Monetary Policy Statement (MPS) outlines the monetary policy stance that BB will pursue in H2 FY12 (January-June 2012), based on an assessment of global and domestic macro-economic conditions and outlook. To anchor inflationary pressure and expedite the expected level of growth Bangladesh Bank has announced its half yearly Monetary Policy for January-June, 2012.

Objectives

To curb inflationary and external sector pressures (to bring inflation to single digits. Limiting depletion of foreign exchange reserves and establishing external sector equilibrium. Supporting GDP growth of 6.5 - 7.0% in the current fiscal year (FY).

Key Policy Measures Under this Program

To contain credit growth BB has increased the REPO rates by 100 basis points for the second half of FY 2011-12 From 50 basis points in the first half of FY 20112012. Increasing private sector credit growth for productive investment (Credit to the private sector is envisaged to remain at a healthy 16.0%) . Reduction in growth in credit to the public sector. Limiting public sector borrowing from the banking sector can be achieved by increasing interest rates on savings certificates, through greater external and domestic resource mobilization and by rationalizing public expenditures. CLR and SLR has been determined respectively 6 percent and 19 percent in the Monetary Policy of December 2010. But in the recent monetary policy, CRR and SLR have not been determined specifically. At the same time interest rate spreads will be closely monitored, and apart from specific sectors such as SME and consumer lending, BB has advised banks to keep these in lower single digits (below 5%).

Specifically BB 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 envisaged to remain at a healthy 16.0% well in line with growth targets. The Bangladesh Bank emphasizes on the sufficient credit availability for agriculture, small and medium enterprises, renewable energy and other productive sectors.

Impact on Banking Sector

The proposed instruments in recent policy statement such as hikes of repo rates may dampen investment by increasing the cost of capital, as the banks will keep borrowing at higher rates. The rate of return on deposits is not high enough to attract savings from the public, in spite of the double-digit inflation. And at the same time, the central banks expectation of reduction of pressure on liquidity may not be materialized as high inflationary pressure may crowd out the attempt to increase the savings rate.

 For the increased food consumption in FY 2010-11, domestic savings as percentage of GDP falls to 19.6 percent whereas it was 20.1 percent in FY 2009-10. National saving also falls as the remittance inflow decreases in this fiscal year, which was 28.4 as percent of GDP.

Figure 4: Components of Savings

Source: National Accounts wings, Bangladesh Bureau of Statistics (BBS), 2012

Government has increased the rate of return on its various public savings instruments. This will have some adverse impact on deposits with the banks. In that event, this might lead to more strains for the banks in order to meet their own liquidity requirements and to provide credits to the private sector.

Policy Recommendation

Central Bank should reschedule the CRR and SLR rate so that Banks can keep sufficient fund in their hand for maintaining liquidity. BB should keep the rate on savings certificate competitive to the financial market. Also banks should ensure better service excellence to the customers and reduce its operating costs in unproductive sectors. Government should take proper steps to attract the inflow of foreign fund in the country. Industrialization in Bangladesh is still in its infancy. Worldwide governments are helping local producers by offering them tax breaks, cash incentive, subsidy etc. So cost of capital should be reduced.s

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