What is your outlook for economic growth this year given all the difficulties we have faced?
Our current forecast is that economic growth is likely to range between 5.8%-6.1%. Setting growth target is the Ministry of Finance’s prerogative during the annual budget but it is good to have a range of professional economists engaged in growth forecasting during the year, whether they are in different government agencies or in thinktanks.
That is why the Bangladesh Bank is now investing in growth forecasting – just like other central banks have their own growth forecasts which are often different from other government agencies. It is then useful for policy purposes to have coordination meetings between Ministry of Finance, BB, Planning etc, which we have quarterly to share these forecasts and views on economic trends.
In general, as we look to Bangladesh becoming a middle income country, it will be important to strengthen analytical capacity within key government institutions, as people in the information age will increasingly want to see the rationale behind policy and spending decisions which are being financed out of their tax resources.
What does the current outlook for the economy mean for the performance of the financial sector?
The financial sector has faced a number of issues over the past year. Firstly, the BB has tightened loan provisioning and classification standards to make them consistent with international standards and thereby improving the transparency of the industry. This has led to a one-off jump in the gross non-performing loans (NPL) ratio by 2-3 percentage points. Secondly, financial scams within specific banks have led to a rise in NPLs - mainly in the state-owned banking sector. And thirdly, recent blockades have made it genuinely difficult for businessmen to operate and repay their loans.
Following the scams, BB has tightened performance agreements with the state-owned banks to set specific targets for net loan growth and strengthen internal controls in order to lower their NPLs and also to serve as the basis for fresh capital injections.
Turning to the impact of the recent disruptions, we have asked banks to make concessions in the form of rescheduling and restructuring of loans where otherwise sound businesses are facing cash-flow difficulties. We are aware that there will be some who take unfair advantage of this facility, but we felt it is important to give some breathing space to the many genuine businesspersons who were adversely affected.
Finally, BB has also tried to strengthen its supervisory capacity by investing in technology. We can now get information from banks within a 24-hour timeframe that previously would have taken 3-4 months to collect. This has allowed us to follow up with specific banks and problem branches. It has sent the signal that we are now on top of these issues and the banks are somewhat more careful as a result. Obviously, the main responsibility is with the banks themselves.
We are regulators, not a fraud detection agency. These IT systems are a step in the right direction but are not a solution to issues of governance in bank boards, which are a critical area of reform. Let’s be clear, there is no magic bullet.
Turning to monetary policy do you not consider limiting inflation your most important priority?
We are always trying to juggle between limiting inflation, avoiding excessive exchange rate volatility, and trying to support economic growth. They call this the “impossible trinity” because you cannot achieve all three of these objectives at once – something has to give, as there are trade-offs.
That said, in general, reining in inflation is BB’s most important priority. After all, inflation hits the poorest the most – especially those on fixed incomes. We are aiming to keep inflation around 7% this fiscal year (2013 14).
However, there are many factors beyond monetary policy which affect inflation on which we have little influence – in fact, food prices are typically determined by other factors. We have more of a role in determining non-food inflation, which currently is at a reasonable level, averaging below 5%. At the same time we have tried to do our bit to cushion the impact of the recent shutdowns on businesses through a range of measures as part of our growth-supportive role.
Is the BB’s focus on maintaining a relatively weaker Taka against the US dollar leading to greater inflation, especially food price inflation, given our reliance on food imports from countries such as India?
We have experienced some loss in external sector competitiveness over the past year due to a 5% appreciation in the real exchange rate, especially with the slide of the rupee value. However, if we had not intervened in the foreign exchange market and bought close to $8bn in the last 18 months there would have been a much greater appreciation of the Taka and the exporters would have encountered serious losses.
The trade-off is that a larger appreciation of the exchange rate would have made imported goods cheaper. We have analysed the components of the CPI (Consumer Price Index) basket to assess which items are affected by the exchange rate and our conclusions were that the changes in the exchange rate we have seen over the past year did not greatly affect CPI. More importantly there are few items in the typical consumption basket of the poor whose price was significantly affected by keeping the exchange rate where it is now.
The bottom line is that we think the loss to exporters if, for example, the exchange rate were to appreciate from its current level of Tk77 per US dollar to Tk70 per US dollar will be much greater than the loss to consumers because of the incremental inflation it would generate.
The Governor of the Reserve Bank of India (RBI) recently announced that the RBI was looking to set up currency swap lines with other central banks.
Is the BB interested in establishing such a swap facility?
There is already an agreement among SAARC central banks for this sort of swap facility, which could be useful during periods of external stress. Right now, of course, we are accumulating reserves rapidly and potentially we could be lenders in this facility. A somewhat related point worth mentioning is that BB has expanded access to foreign currency loans for importers and exporters.
Moreover there is a Board of Investment term loan facility which allows foreign funds to be brought in with final approval coming from the BB Governor. Total capital inflow approved under this facility in the past fiscal year (2012-13) was US$1.8bn.
One of the reasons why private sector credit from domestic sources has slowed to 11% is because more people are now using lower cost borrowing from abroad and when you include those figures private sector credit growth is around 13.8%.
The feedback from the market is: a lot of the US dollar financing obtained from overseas markets is being facilitated by foreign banks based in Bangladesh.
Does that put domestic banks at a competitive disadvantage?
Many local banks have provided financing under the Buyer’s Credit facility for importers with US$2 bn in loans outstanding at the end of November 2013. With respect to the Discounted Export Bills facility for exporters, it is mainly the foreign banks that have provided the financing, which amounts to a total of US$130mn at the end of November 2013.
So it is a misperception that domestic banks are at a disadvantage because the bulk of the trade financing in foreign exchange is under the Buyer’s Credit facility.
The IMF recently reported that the BB has committed to further capital account liberalisation over a period of time.
What are the next steps the BB is likely to undertake by way of reforms?
We have taken a series of steps over the past year with the aim to gradually liberalise capital account restrictions. The critical thing here is that all organisations, including the IMF, agree that a sudden opening up of the capital account is very dangerous for any economy. A gradual move is always recommended.
Having built our foreign exchange reserves to a more comfortable level, we are now in a position to relax foreign exchange restrictions further. Over the past year, we have taken several important steps, including greater flexibility in the use of the Exporters Retention Quota, raising yearly repatriation of foreign employees salaries from 50% to 75% and delegating some approval responsibilities of forex transactions of commission agents, representative offices etc to banks from BB.
We have also setup an internal committee to thoroughly review our foreign exchange rules. We are first assessing whether further liberalisation is needed in the current accounts, as well as things like foreign currency limits for travelling. We are going through a systematic review process and I do not want to pre-empt that process by stating what the exact next step will be.
We are also jointly reviewing the Foreign Exchange Regulation Act (Fera) with the Ministry of Finance.
What is your view on the medium run outlook for Bangladesh?
I think the data speaks for itself. Over the past twenty years, poverty has halved, infant mortality has dropped by a third, and female literacy rates have doubled – we have surpassed India in most of these indicators and prestigious publications like the Lancet and the Economist have covered this angle. Bangladesh has averaged over 6% growth over the past decade, its GDP of around $150bn has more than tripled since 2000 and the volatility of its growth is one of the lowest.
So when you see this level of progress, it's hard not to be optimistic about the next 10-20 years. I also see from close quarters that there are a lot of competent, motivated young people in the public sector who with the right mentoring will be able to develop and implement sensible public policy in the years ahead.
That said, optimism shouldn’t mean that the various parts of society which have contributed to this success, be it Government, NGOs, the private sector, development partners etc, shouldn't be complacent as there are also challenges ahead – immediate ones like infrastructure and skill deficits and medium run ones like climate change and a new demographic which will eventually see fewer working age people. But there is no reason why these challenges can’t be addressed; overall I’m optimistic about our prospects.
