The Bangladesh Bank (BB) launched on July 30 the Monetary Policy Statement (MPS) for the period of July-December 2015. It follows the expected approach of supporting government's development goals, maintaining reasonable level of inflation and ensuring financial stability. This approach started in early 2006, and the current MPS is the 20th half-yearly MPS. The MPS was drafted after consultations with stakeholders, including economists, academicians, professionals and trade body representatives.
The structured MPS contains information about BB's outlook on the real sector and monetary developments of the past, and the strategy to pursue to attain the targeted levels. In setting the targets, the monetary policy authority considered trends and achievements of the previous monetary growth targets. It is observed that most of the targets in the previous MPS were on track. Average inflation was very much at a comfortable level and exchange rate was stable. The current MPS (July-December, 2015) has accommodated policy initiatives and strategies to create a more investment-friendly environment and stabilise inflation to spur economic growth and development. In the MPS, reserve money is projected to grow at 16 per cent and broad money (M2) at 15.6 per cent considering the targeted growth and inflation. The central bank targeted 16.5 per cent private sector credit growth at the end of 2016 in line with the output growth target of 7.0 per cent and inflation target of 6.2 for the fiscal year 2016.
BB's initiative to divert credit from the unproductive sectors to the productive ones in recent years is really commendable. In the MPS, BB has reiterated its stand to lend only to the creditworthy borrowers in the productive sectors. The targeted private sector credit flows, if productively used, should be sufficient to attain the targeted level of growth. Though general inflation rate has gone down, core point-to-point inflation has increased that demands cautious approach on the part of the Bangladesh Bank. The MPS targets to promote investments through the strategy of selective easing. The developmental central banking initiatives received renewed impetus in the MPS.
Different views have been expressed following the announcement of the MPS. According to some, it is cautious and growth supportive whereas there are some opinions, according to which, the monetary policy is conservative and may not support adequately to attain the growth target. The question is: should the MPS need a branding like conservative, contractionary, expansionary, and accommodative or so? I think, not essentially. In connection with some micro components of the monetary policy, there could be an expansionary approach or for others there might be a cautious or conservative approach. I think, a dual tactic is evident in the current MPS that combines expansionary and cautious approaches, not very different from the previous one. Considering the outcomes of the monetary policies in the recent times, we should not have expected much surprise in the monetary policy targets and strategies.
Current credit and financial challenges are well-known. At present, most banks are having excess liquidity and the government borrowing from the banking system is much low. It is well-known that limited borrowing by the government from the banking system could be crucial for achieving the inflation target. This also offers a great opportunity for the banks to lend to the private sector. Though deposit and lending rates fell and interest spread on average decreased between July 2014 and May 2015, it is yet to reach the targeted bracket for all banks of the country. BB will continue its efforts to reduce this spread to ensure greater efficiency, as stated in the MPS. There is no doubt that it is mainly the quality of the credit that matters most in promoting sustainable banking and economic growth of the country.
In recent years, availability of different tools like Credit Risk Management manual, Credit Risk Grading manual, online Credit Information Bureau, legal support, accessibility to tailored software brought positive changes in the credit operation of commercial banks. However, several governance issues and political stability are clearly out of the reach of the central bank.
In this connection, the recent rise in non-performing loans in a few banks is really a matter of concern. Observing the development, Bangladesh Bank has already undertaken some corrective measures. There is no doubt that pushing private investment through improving private credit demand is a critical area to address. For that matter policy supports are there and seem to be adequate. I think, the situation is improving, and a stable business and political environment is expected to help build investors' confidence further in the near future. The new MPS reiterated BB's commitment to strengthen the financial system and improve asset quality.
Financial stability through inclusive and developmental measures received due attention in the MPS. As expected, the declared MPS started strengthening inclusive and green activities of banks for ensuring macroeconomic and financial stability. It is well-known that BB has undertaken a comprehensive financial inclusion campaign to reach out underserved people by making availability of banking services to farmers, low-income people, students, physically handicapped people, hardcore poor, unemployed youth, freedom fighters, etc. Banks are participating in agriculture/rural credits; putting emphasis on financing women entrepreneurs; developing ICT solutions for inclusive banking; encouraging creative partnership between banks and MFIs; introducing financial inclusion oriented CSR, etc. All banks that are in operation in the country, local and foreign, private and state-owned, have more or less come forward in the financial inclusion drive in response to the central bank's policies. Actually, these developmental initiatives of Bangladesh Bank have already started offering positive outcome and thus contributing to financial stability.
In fact, ensuring 'financial stability' as one of the core objectives of the monetary policy received renewed recognition following the most recent global economic crisis. The renewed recognition of the importance of maintaining financial stability is entirely appropriate and perhaps long overdue. Some central banks of developing countries like Bangladesh Bank have opted to deviate from the mainstream monetary policy approach of developed economies. These central banks have been following monetary and financial policies towards supporting inclusive and sustainable growth. BB's monetary policy approach attempts to serve Bangladesh economy in upholding growth and stability and the economy has been experiencing macro financial stability amid domestic shocks and external turbulences. Based on the experiences of several developing countries, it can be stated that price stability, the primary objective of monetary policy, does not occur in isolation and financial stability is an important requirement for ensuring price stability.
The Central Bank's developmental role in Bangladesh is expected to act as an in-built stabiliser of the financial system. Designing target-specific products and strategies for groups like women, farmers, small enterprises, sharecroppers, etc., are working for Bangladesh. Besides the ongoing inclusive financing, a financing windows totaling USD500 million will be operationalised in the fiscal year 2016 for financing socially desirable and green initiatives. It is evident in the MPS that alongside targeting and attaining conventional monetary targets, Bangladesh Bank has been working for mainaining financial stability through inclusive measures.