Bangladesh Bank Governor Atiur Rahman yesterday presented the monetary policy stance for the second half of the fiscal year, which is reproduced below.
As is well known by now, these half-yearly statements are intended to anchor inflation expectations in the economy, signalling ex-ante the monetary stance for the next half year in light of the domestic and external developments.
1. While external influences on the economy from global developments remained broadly stable over the first half of the fiscal year, in the domestic scene we had to go through some tense, suspenseful spells of countrywide blockades and hartals in the later part of the first half of fiscal 2013-14. Economic activities and daily life were disrupted substantially, including our stakeholder pre-consultations on monetary policy stance. This time, we had to make do with only receiving views or suggestions online rather than the customary discussion meeting events.
2. It is very heartening that our entrepreneurs demonstrated exemplary resilience in protecting the momentum of economic activities from any serious impairment from the disruptions. Our exporters went to great lengths to fulfil delivery commitments to buyers abroad amid the political unrest. This is reflected most clearly in the healthy 18 percent year-on-year export growth in the first half. BB earlier announced a number of financial policy support measures to keep essential fund flows for real sector output activities unimpaired in the face of disruptions, including temporary relaxation in down payment requirement for loan rescheduling and temporary lowering of interest rate on EDF input procurement loans for exporters. These appear to have helped in upholding business confidence amid the uncertainty.
3. Other key domestic and external sector indicators of the economy (agricultural output outlook, inflation, exchange rate, foreign exchange reserve growth, money and capital market) were also broadly positive and stable in the first half. This gives us the confidence that our economy will be able to more than make up for the first half's disruption-related output losses in the second half, and that fiscal 2013-14's GDP growth will, therefore, hover around six percent, provided there is, of course, no major new disruptions again in the coming months.
4. Both broad money (M2) and domestic credit growth have remained below their projected ceilings, indicating easing of inflationary pressures visible in the declining non-food CPI inflation trend. Both private and public sector components of domestic credit remained below their programmed ceilings in the first half, but this does not in itself necessarily imply slackening of investment and output activities. However, both public and private sectors have accessed substantial volumes of lower cost short-term external trade credit and longer term external project financing, besides FDI and FPI inflows and equity investments from workers' remittance inflows. The external inflows and growing export receipts have kept net foreign assets (NFA) growth above the program path, sustaining appreciation pressure on taka despite BB's continual foreign exchange reserves build-up by purchases from interbank market.
5. Despite the declining trend in non-food CPI inflation, higher and edging food CPI inflation has kept headline CPI inflation on an upward trend in the first half. Monetary policies only have limited influence on demand for staple food items in the CPI basket, though BB's focused attention on farm credit promotion also makes some impact by helping augment supplies.
6. The new January 2014 issue of MPS keeps unchanged the target of seven percent annual average headline CPI inflation by June 2014. The GDP growth outlook for the fiscal year in the new January 2014 issue of MPS is also unchanged from the projections in the July 2013 issue. The fiscal 2013-14 monetary program therefore remains little changed in the January 2014 issue, with minor adjustments to external inflows-driven higher NFA growth and correspondingly lower net domestic asset growth. The unchanged ceilings for broad money and private sector credit growth are higher than their current levels and more than adequate to accommodate any plausible higher GDP growth scenario in the second half. BB's active engagement in the interbank taka and foreign exchange markets has kept taka interest rate and exchange rate stable with ample liquidity, rendering monetary stimulus by way of policy interest rate or easing of cash reserve and statutory liquidity ratios unnecessary. Besides, any such lowering would not be justified at this stage, with the CPI inflation still hovering above the targeted ceiling.
7. Although announcing no new monetary stimulus, the January 2014 MPS issue mentions the slew of BB's broad based measures on the financial policy side to support and further stimulate output activities in the economy to make good for output losses from disruptions in the first half. Besides the already mentioned temporary lowering of EDF loan interest rate, coverage of the facility has been extended to new export sectors like leather and ceramics. Agriculture, SME and other inclusive socially responsible financing is being robustly supported with revolving refinance lines funded by BB and development partners. Besides the earlier refinance lines supporting lending to sharecroppers, agro-based industries, SMEs and eco-friendly projects, new refinance lines are being introduced to support lending to new entrepreneurs including low-income individuals holding no-frills bank accounts opened with Tk 10 deposits. BB's promotion of mobile phone banking is paying rich dividends by facilitating reaching out to target borrowers of many of the above-mentioned initiatives cost effectively.
New financing has been lined up with JICA support to help upgrade garment factory buildings deficient in safety standards. A Tk 9 billion sum from BB profits transferrable to government is being utilised by BSEC to relieve interest burdens on merchant bank/brokerage house loans accounts of small stock market investors who have lost out in the 2010 stock market debacle. Our initiatives in coping with recent disruptions have been prompt, and we are promoting hands-on senior level engagement in guiding quick resolution of emerging issues instead of bureaucratic procrastination.
8. The January 2014 issue of MPS concludes by flagging some key issues to address in keeping the economy steady on an accelerating growth path. Macroeconomic stability matter the most, which is why the announced monetary stance remains cautious and voices caution against excessive government borrowing despite it not being any impending threat. Importance of financial stability is duly highlighted, for which BB is pursuing extensive agenda of continually upgrading financial sector regulation and supervision. Accountable, transparent corporate governance in banks and financial institutions will remain a high priority. Going forward, it will be desirable to see big corporates taking greater access to equity and debt issues in the capital market, leaving more of the banking system's resources for smaller borrowers. The recent weakened growth trend in remittance inflows is another important issue flagged as potential risk for external sector strength. The underlying causes of decline in manpower export are issues mainly to be addressed by the government. BB on its part is taking up an initiative of getting our banks actively engaged in promoting fully repatriable savings of NRBs in taka treasury bonds and bills that bear better returns than available in the countries hosting the NRB workers. Foreign institutional investors have already started holding taka treasury bonds in their asset portfolios, buying these through local banks.
9. Let me conclude on a note of healthy optimism that the entrepreneurial zeal awakened in our population will not falter in their aspirations for stable, steadily accelerating inclusive growth towards rapid poverty eradication and eventual prosperity. BB's monetary and financial policies will remain supportive of investment and growth while also being anchored to macroeconomic and financial stability.