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 under employment/ under exploitation of production factors, supporting higher output growth is an overriding priority. Monetary policy is the process by which the central bank of a country controls the supply of money, the availability of money, and the cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the economy. Fiscal policy induced “demand management” approach as propagated by Keynes, which was popular in the post-Great Depression period, later made way to monetary policy led “stabilization” approach in the period of high inflation of 1970s. While traditional fiscal policy solutions were useful in confronting unemployment by increasing spending and cutting taxes, counter-acting inflation entailed reducing spending or raising taxes. The growing importance of monetary policy and the diminishing role played by fiscal policy in economic stabilization efforts may reflect both political and economic realities. Monetary and fiscal policies differ in the speed with which each takes effect as the time lags are variable. Monetary policy is flexible (rates can be changed each month) and emergency rate changes can be made, whereas changes in taxation take longer to organize and implement. Also, considerable time may pass between the decision to adopt a government spending programme and its implementation. During the period of “Golden Growth” covering late 1980s till the recent past, in the mix of macroeconomic policies, monetary policy continued to reserve a place of prominence. However, in the backdrop of global financial meltdown and subsequent confusion in macroeconomic theories, a new quest has emerged in redefining the role and instruments of macro-economic policy in fostering economic development.
Evolution of Monetary Policy Formulation in Bangladesh
In the 1970s and 1980s, monetary policy in Bangladesh was 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 started from 2003.
For the first time. the final target. drafting of the Monetary Policy Statement for H2 FY10 was preceded by extensive stakeholder consultations from the grassroots level up to the level of experienced professionals including past Finance Ministers /Advisers / Governors. high capacity utilization to sustain a low rate of unemployment and a high trend of economic growth and effective exchange rate management to maintain stability between exporters‟ and consumers‟ interest. 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. Explicit articulation of monetary policy at the behest of an independent central bank ensures transparency in the economic policy making and has become popular in managing expectations of the major stakeholders.
. BB has been announcing half-yearly Monetary Policy Statements (MPS) to anchor inflation expectations of economic agents and the general public. inflation. Supporting inclusive. interest rate and exchange rates are largely market driven with occasional central bank interventions to maintain stability and to address consumer protection concerns. It may be recalled that the main objectives of a classic monetary policy are to maintain a stable and low rate of inflation. think tanks and trade bodies.From then on. external sector viability.
Formulation of Monetary Policy
Since 2006. Reserve Money (RM) growth path is the operating target used by BB to influence the M2 growth path (the intermediate target) for this in turn to influence target). and the likely change in income velocity of money.
Objectives of Monetary Policy in Bangladesh
Maintaining domestic price stability. broad-based economic growth.
Policy Approaches and Tools
BB mainly uses monetary targeting to influence CPI.
In Bangladesh.24 percent to lower but still strong and above trend 4. to glean their perceptions about policy outcomes in the preceding period.66 percent (very close to initial projection of 6. based on its assessment of the developments over the preceding period. attaining the
.07 percent growth in FY10. The ex ante announcements of monetary policy stance are intended to anchor inflation expectations of economic agents and the general public. the twelfth issue of Bangladesh Bank half yearly Monetary Policy Statement was announced for July-December FY2011-12 (FY12) period. Given the prevailing robust investment and growth momentum in the real economy.70percent).
Near Term Growth Outcome & Outlook
Output and investment activities in the economy paced up substantially in FY11 after a couple of years in post global crisis relative slowdown. drafting of this issue was preceded by rounds of consultations with stakeholder including trade body representatives.63 percent in FY11 from preceding year‟s 6. Service sector output growth edged up to 6. reverse repo rates). 2011. Industry sector had the strongest growth gain from 6. Changes in key policy interest rates (repo. Agriculture sector output growth eased down from the FY10 high of 5.16 percent in FY11. on July 27. as also about the challenges and priorities for the way forward. Monetary Policy Statement (MPS) was first issued by the Bangladesh Bank (BB) in January 2006. Cash Reserve Requirement (CRR) and Statutory Liquidity Ratio (SLR) are also employed as necessary. This (twelfth) issue of Bangladesh Bank‟s (BBs) half yearly Monetary Policy Statement (MPS) outlines the monetary policy stance that BB will pursue in H1 FY12 in the context of unfolding near term developments in the domestic and global scenes. The Bangladesh Bureau of Statistics (BBS) estimates real GDP growth for FY11 at 6.96 percent growth in FY11.49 percent of FY10 to 8. senior professional an academics. The intention was to present information on Bangladesh Bank's outlook on real sector and monetary developments over the immediate future and the monetary policy stance it will pursue. past finance ministers/finance advisers/BB Governors. in support of the monetary programs. while progress of the gas subs Sector needs further attention. Power sub sector output improved. supported by strong growth exceeding 40 percent both in exports and imports. In continuation to this tradition. As with the previous recent issues of MPS. following6.47 percent.
0 Percent real GDP growth in FY12 are likely to continue much the same demand pressure in local Taka and foreign exchange markets as in FY11.7.
Inflation outcome and outlook
The uptrend in CPI inflation from the global slowdown induced low of FY09 continued inFY11. While point to point CPI inflation increased in FY10 by as
.00 percent real GDP growth targeted in the FY12 national budget would not appear to be very arduous.6 percent in June 2011. and is projected to decline to about 27.75 billion). Growing financing needs of public and private sector investment activities in pursuit of the targeted 7. This unavoidable necessity meant reserve money growth path hovering quite often above the FY11 program levels.29 percent in May 2011 after peaking off at 29.
Monetary and external sector outcome. particularly in H2 FY11.91billion) at close of FY11 than at the opening (USD 10. while pursuing FY11 monetary program objectives with 50 basis point CRR enhancement once and repo. In this situation. The Intended impact of BB‟s monetary policy actions on monetary expansion showed up distinctly in Q4 FY11. pickup in output and investment activities escalated demand pressure in domestic Taka and foreign exchange markets rather sharply in FY11. but less steeply so than in FY10. which however was helpful for the recovery in flagging workers‟ remittance inflows. widening trade deficit from strong import growth. outlook for FY12
Broadly as foreseen in the MPSs for FY11. while slowdown in workers‟ remittance inflows. Foreign exchange reserves ended up slightly higher (USD10. with major progress in easing of the power and gas supply shortages. BB had also to inject Taka repo funds virtually on a daily basis. unless external capital account inflows improve substantially.18 percent in April. with growth of domestic credit easing to 28. The pressure on exchange rate of Taka was eased partly by BB‟s USD sales (totaling net USD 962 million) from reserves. from both public and private sectors. subject of course to Internal and external environment remaining benign and stable. reverse repo interest hikes totaling 225 basis points in four steps. With this partial easing. to limit inflationary consequences of excessive Taka depreciation. and declining capital account inflows built up substantial stress on liquidity in Taka and foreign exchange markets.6 percent in FY11. so that liquidity crunch does not bring Markets to grinding halt. Taka depreciated against USD by 6.
The annual average non food CPI inflation (which can be considered as „core‟ inflation. the increase in FY11 was 1. down to 4.80 percent.80 percent by the end of FY11.
Monetary policy stance for FY12
Domestic credit growth at rates well over 25 percent prevailing in FY11 clearly was out of line with the modest 13. limiting of demand pressures from excessive liquidity expansion. as officially set fuel prices in Bangladesh are not volatile) remained low and declining however. The national budget for FY12 projects decline of the annual average CPI inflation to 7.45 percent at the opening.47 percentage points. trade and other services. as before selectively bearing down on unproductive and high risk uses of credit while also ensuring adequate credit flows for productive pursuits in manufacturing.5 percent in FY12 will thus be subject to moderation in global commodity price trends. even assuming that some output from FY11 investments will show up later rather than in the same year. Increase in domestic non food CPI inflation from possible upward revision of subsidized user prices of gas. The annual average (headline) CPI inflation rose to 8.25 percent. and stable benign domestic environment with no major supply side disruption. despite good domestic harvest and absence of any major supply chain disruption.much as 6.45 percentage points from the FY09 low of 2. to 10.5 percent in FY12 from the end FY11 levels well above 8. BB will adopt such further policy steps in consultation in lending banks as are found necessary to discourage credit flows to unproductive
. well above the 8.17 percent. Monetary policies in FY 12 will therefore need to continue in a restraining stance in respect of domestic credit expansion. Observers expect moderation in global commodity price volatility in FY12 from the recent widespread adoption of fiscal and monetary restraints both in the advanced mature economies and the fast growing emerging economies. These remain high and rising under influence of global price trends.42 percent nominal GDP growth of the economy estimated by BBS.15 percent at close of FY11 from 5. agriculture. from inflation and financial stability concerns. Non food inflation being already low.00 percent level projected in the revised FY11 national budget. power and fuel oil may however offset some of the easing of domestic food CPI inflation in line with the expected moderation in global commodity prices. mainly due to high and volatile food and non food commodity prices in global markets. attaining the projected CPI decline will depend mainly on moderation of domestic food prices. Attainment of the projected decline of domestic CPI inflation to 7.
To this end. balance of payment adversities. money stock targeting is feasible in economies like Bangladesh
. and liquidity difficulties of lenders from asset liability maturity mismatch are to be avoided. monetary programs chalk out target Growth paths for broad money (M2) and its sub aggregates. BB‟s monetary policies seek to influence real Sector prices also via quantity theory based money stock targeting. The gradual phasing out of lending interest rate caps to restore full interest rate flexibility. BB‟s financial inclusion drive will continue spearheading widening of credit access for underserved productive sectors. This kind of demand pressure on domestic credit must ease if excessive Taka depreciation. and also because unlike Economies fully open on capital account. Consultations on modalities of activation of inter bank market for funds of Islamic bank shave been initiated. This approach is felt necessary because of inadequacy of well functioning transmission channels from financial prices to real sector prices in domestic markets still at early stage of development. activation of such a market window will enhance utilization efficiency of these funds. guidelines will be developed in consultation with lending banks requiring major portion of capital costs of industrial projects to be borne from owners‟ equity. capital market debt issues and external term loans.will be accompanied by simultaneous tightening of close monitoring on rates of interest and charges/fees on banking services from competition and consumer protection View points. implemented by day to day management of Growth path of reserve money (RM. much of which are normally expected to be financed with term borrowing and/or equity from external sources.
Policy approach. currency in issue and balances of banks with BB). FY11outcome. outlook for FY12
Policy approach: Besides employing policy interest rate (repo. In FY11 the modest pool of predominantly short term domestic savings was strained heavily by spurting longer term credit demand for new private and public sector capital investments. initiated inMarch2011.and high risk uses. reverse repo rate) interventions to Influence real sector price levels via financial sector prices. Steps redressing constraints in activation of secondary markets in Treasury and corporate securities will be hastened.
Brief observations on these issues will be in order here. the inflation levels to be targeted are set by governments answerable to their electorates. these are outcomes of careful inter agency deliberations actively participated inter alia by relevant BB staff. Empirical
. even in the advanced economies where Central banks are specifically mandated to pursue inflation targets. just as in Bangladesh. In stakeholder consultation sessions on monetary policy stance questions were raised about why BB Does not set low inflation targets on its own instead of adopting the rather high inflation projections of national budgets. IMF and other multilateral agencies report inflation levels separately for these two country groups. the other compelling reason for not choosing Lower single digit inflation targets is that in developing economies such low inflation levels are growth Inhibitive rather than growth supportive. The rising trends in prices of non tradable will keep Inflation in developing economies higher than in advanced economies until full convergence with the stable but higher price levels of the latter. price levels of non tradable (such As personal and professional services etc. Growth of Bangladesh economy in the early low inflation years of this century was not spectacular. developing economy inflation levels are in general substantially higher than in mature advanced economies. not by the central banks themselves. The annual average CPI inflation level projected for a fiscal year in the annual national budget is taken as the target real sector price level for monetary policies. In other words. questions were raised about relevance of the methodologies now in use. Besides this inherent divergence in inflation dynamics.) are still on path of gradual convergence. those central banks enjoy operational independence but not goal independence. Trade globalization has by now broadly Equalized prices of tradable in developed and developing economies.Maintaining controls on capital flows. Also. As regards why BB doesn‟t set inflation targets on its own. in the backdrop of monetary growth and inflation outcomes persistently exceeding program targets in recent periods. it needs to be noted that within the „global‟ composite. As for why inflation targets thus chosen are on the high side compared to global inflation. while the economies of China and India worrying over high and rising inflation continue on roaring growth pace. Inflation levels projected in the annual national budgets are not numbers drawn off the cuff. rising from the much Lower levels in developing economies.
This was compounded further by weakness in net capital account inflows.
Overview of macroeconomic developments and monetary policy actions in FY11: Output and Investment activities in the economy pace dup inFY11 rather faster than anticipated. remaining near zero or even negative in early months but recovering later to modest 6.studies with cross country data find moderate inflation growth supportive up to a certain inflexion point. far exceeding the initial projections of 9. Imports remained output and growth oriented in FY11. Trade deficit kept widening despite strong export Growth from a lower base. particularly in the second half as power supply shortages started easing. Both exports and imports maintained growth rates above forty percent. in reversal of preceding year‟s trend. the evidence of declining non food CPI inflation and slower rise of headline CPI inflation inFY11 indicate continued relevance and effectiveness. As to whether the monetary programming exercise now in use in Bangladesh is any longer relevant Given the over shoots of both monetary growth and inflation beyond targeted levels in successive recent periods. due to sharp decline in government‟s net external borrowings and to the private sector‟s tendency of leaning heavily on domestic savings for financing investments rather than at least partly accessing foreign debt or equity for this purpose.7and17. On the contrary.03 percent annual growth for FY11 against initial projection of 17. with attendant high demand for trade financing. production inputs and capital goods. Remittance inflows from workers abroad that more than made up for trade deficits in recent years decelerated in FY11 faster than expected. During such Episodes when other imperatives override monetary program objectives.5percent respectively. beyond which further rise in inflation starts hurting growth. it may be noted that these recent periods were not quite the normal trend periods when Monetary and other programs based on many simplifying assumptions produce expected outcomes. the remainder being fuel oil. only about one seventh of total imports were of food grains and other consumption goods.6percent. The significant growth slowdown of FY09 and the recovery speeding up sharply in FY11 required policy interventions of opposite kinds towards relieving the stresses and maintaining balance.
. overshoots from programmed monetary and inflation targets are unsurprising and do not necessarily indicate loss of relevance of Monetary programming exercises.The consequent depletion in current account surplus created depreciation pressure on Taka.
Therefore. Bank accounts for farmers at only Taka 10. MFI activities and social safety net payments.Broadening Financial Inclusion
Monetary policies of BB seek to support enhancement not only in quantum but also in quality of growth measured in terms of inclusiveness and environmental sustainability. BB has recently embarked on campaign-like thrust on broadening financial inclusion. SMEs. the BB. ranked Bangladesh only behind India in South Asia. Narrow revenue and export base seen as ratings constraints.
. Macroeconomic and price stability underpinned by prudent economic management. In the global financial arena.
Sovereign Rating: Major Observations
Resilience of Bangladesh economy to domestic and external shocks with stable economic growth over the past decade. The Agricultural Credit Program announced by BB for FY 10 enjoins all banks j to engage in lending for a comprehensive range of on.and off-farm rural economic activities. Domestic demand underpinned by strong remittances.and Ba3 sovereign credit ratings by S&P and Moody‟s respectively. effluent/waste disposal. and has launched several refinance support lines for increased lending to sectors like: agriculture.00 billion refinancing line against loans to landless share croppers.Motivating banks and financial institutions to expand lending to under-served sectors both as business case and as CSR obligation.Standard and Poor’s (S&Ps) and Moody’s regarded Bangladesh as a reliable destination for international creditors and investors. A first ever Taka 5. Strong and resilient RMG sector and robust inflow of workers‟ remittances maintaining external sector viability.
Sovereign Rating: Stable Outlook for Bangladesh
Sovereign rating for the first time by two international rating agencies. solar/biogas/other renewable energy projects.
Efficient and expeditious ADP implementation will create conditions crowding in private sector investments. 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 departments. facilitated by congenial monetary regime. BB has introduced mandatory Basel II based capital requirements for banks from 2010 to enhance banks‟ capacity of handling intermediating large financial flows.Conclusion
Supportive monetary condition will be maintained in FY 10 to help the recovery of exports and new investment activities get firmer traction. BB stands ready to respond promptly with appropriate modification in monetary stance required by any exigency in unfolding developments in the domestic and external scene. Successful spurring of growth will keep inflationary pressures in check by maintaining benign situation on the supply side.
. In conclusion. BB has taken recent steps to deepen and broaden secondary trading in treasury securities to eliminate settlement risks.