Monetary policy targets macroeconomic stability

The monetary program for FY16 and the policy stance for first half of FY16 outlined in this MPS are based on our review of the expectations and outcomes of the policy stance pursued in FY15, as also on views and suggestions gleaned from our usual pre-consultations with erudite experts, business leaders and other stakeholders.
Let us begin with the projections and actual outcomes of the monetary program of FY15, the preceding financial year. The objective of bringing down 12-month average CPI inflation under 6.5 percent besides keeping it downward edging was attained by May 2015, coming down further to 6.4 percent in June 2015. However, point-to-point headline CPI inflation edged up slightly to 6.25 percent in June 2015 from 6.19 percent of May. Nonfood, nonfuel core CPI inflation has also remained upward edging in May and June, indicating that the task of bearing down on inflation expectations is not yet over.
Infrastructural inadequacies impeding investments, tepid global output growth, and disruptions to economic activities from political turmoil kept FY15 credit growth from domestic banking system at 10.4 percent up to May 2015, much below the 17.4 percent growth projection for the entire FY. Domestic credit growth is expected to pick up somewhat in June, but is likely to remain under or around 11 percent; particularly as growth of credit to public sector remained negative up to June. Credit growth to the private sector is estimated to remain around 13.6 percent by June, against the initial projection of 15.5 percent. It should be noted however that both public and private sectors have drawn upon financing from local non-bank sources and external sources as necessary, suffering no financing constraint. Output activities of farm, off farm MSMEs initiatives remained proactively supported by the ongoing inclusive financing drives, and haven’t faced financing constraint either.
The estimated 6.51 percent real GDP growth attained in FY 15 is substantially higher than the preceding year’s 6.06 percent growth and in line with BB projections; although lower than the initial target mentioned in FY15 national budget. Growth performance would clearly have been better had the economy not faced the disruptions from political unrests.
Sustained GDP growth for several years at rates well above the global output growth rates enabled Bangladesh to cross two important milestones in FY15. The first one is the upgrading to lower middle income country group from the low income country group, and the second one is the upgrading in OECD Export Credit eligibility ranking to group 5, one notch below India but ahead of all other South Asian neighbors. Besides these new attainments, consolidation of macroeconomic stability, foreign exchange reserve growth and poverty decline have maintained pace in FY15, setting stage for transition to a higher growth trajectory.
Some quarters hold the view that setting high targets for credit expansion is needed for stimulating higher rates of GDP growth. However, pumping in excessive liquidity in absence of progress in addressing the infrastructural adequacies and other well known investment impediments will only stoke inflation and worsen social inequity by encouraging unproductive speculative pursuits. We have therefore been taking care in adopting cautious, restrained monetary stance ensuring adequacy of credit growth but at the same time avoiding undue excessive expansion. This stance is serving our economy well in maintaining inflation moderation and stability on a sustained basis.
BB has of course no disagreement whatsoever with the desirability of transition to a higher growth trajectory for Bangladesh economy; which is why BB’s monetary and financial policies provide proactive policy support for financing of all productive initiatives, large or small, in all sectors. The export sector is accessing low cost foreign exchange financing from BB’s USD2.0 billion Export Development Fund (EDF). Non exporter manufacturing undertakings are also being allowed access to low cost long and short term external financing for import of capital equipment and production inputs. Domestic savings are as a result flowing in larger volumes into financing of MSME output initiatives. Banks and financial institutions are drawing on low cost refinance windows at BB against their financing of MSME output initiatives and environmentally benign green projects. The WB supported Investment Promotion & Financing Facility (IPFF) window at BB is providing low cost refinance against long term infrastructure sector lending.
All the above mentioned support initiatives will continue in FY16, when and two new support windows will also be opened. The first is a USD 300 million WB funded medium to longer lending window in foreign exchange for project investment in manufacturing units; and the second is a BB funded USD 200 million window for refinancing against medium term lending in foreign exchange to export oriented manufacturing units in the textiles, apparels and leather sectors specifically for ‘greening,’ i.e., for transition to environmentally sustainable output processes and practices. Steps are also on for renewal of the IPFF with an enlarged size after its expiry in December 2015.
We believe that all these policy measures facilitating output initiatives accommodated in BB’s FY16 monetary program and its H1 FY16 monetary policy stance will support and advance the momentum of inclusive, equitable and environmentally sustainable growth, further consolidating inflation moderation and macroeconomic stability. The FY 16 monetary programs projects 16.3 percent domestic credit growth against preceding year’s 10.4 percent actual; to accommodate 7.0 percent real GDP growth with 6.2 percent inflation. Within this, private sector credit growth is projected to grow by 15.0 percent in FY 16, against 13.6 percent of FY15. The projected 23.7 percent FY 16 public sector credit growth looks high mainly because of negative growth in FY15. Broad money (M2) growth is projected at 15.6 percent for FY16, against actual 13.1 percent of FY15. BB’s reserve money growth is projected at 16.0 percent in FY16 against actual 14.3 percent of FY15. Stronger domestic investment momentum will cause FY16 net foreign asset growth to slow down to 5.2 percent; the momentum of foreign exchange reserve growth will also slacken in FY16. Deficit in BOP external current account balance will also widen, but at around two percent of GDP will cause no major concern.
While the monetary program for the new financial year is designed to contain credit growth within limits consistent with real sector output growth, BB will have no hesitation in considering easing of the repo, reverse repo policy interest rates to appropriate extent immediately as headline p-to-p and core CPI inflation assume clear downward edging turn.
The H1 FY16 MPS underscores the need for BB’s heightened supervisory attention on the financial sectors efficiency in inclusive channeling of financing flows to productive undertakings, in terms of credit discipline, risk management, corporate governance and accountability. The MPS also clearly underscores BB’s statutory mandate and responsibility of supporting inclusive, environmentally sustainable growth in its developmental central banking role. BB’s initiatives in these directions are attracting widespread external attention; particularly as these are being employed in Bangladesh in a manner enhancing rather than eroding price and macroeconomic stability.
-Bangladesh Bank