Encouraging Prudent Growth

Review of Monetary Policy Statement, H2, FY 17-18

Much awaited robust pick-up in economic activities; Bangladesh Bank takes proactive cautious stance against credit growth to control unwanted inflation.

KEY THEME

  • GDP growth rate is projected to range from 7.1% to 7.4% in FY 2018 with 6% inflation target, assuming continued political stability.
  • Bangladesh Bank’s (BB) kept Repo (6.75%) and Reverse Repo rates (4.75%) unchanged with a provision to review the rates periodically and make necessary changes if needed.
  • Private sector credit growth (18.1% in December, 2017) exceeded the target growth (16.2%) mainly because of broad based growth where industry (21.4%), trade & commerce (18.7%) and construction (21.6%) were in lead (as of September, 2017). It is expected to decrease to 16.8% by June, 2018 as BB has taken different cautious measures. However, it is higher than 16.3% of target set in last MPS (July, 2017). Besides, Public sector credit growth (-9.3% in Dec, 2017) is expected to reach at 8.3% in June, 2018. Overall domestic credit growth is estimated to be 15.8% in June 2018.
  • Different initiatives to be introduced to curb unproductive lending, such as
        • Closer surveillance on adherence to prescribed Asset Liability Management (ALM) and Forex Risk Management,
        • New directive requiring banks to rationalize Advance Deposit Ratio (ADR),
        • Stricter surveillance on disbursed bank loan.
  • Broad money supply is expected to increase from current level (as of Dec, 2017) of 10.7% to 13.3% in June 2018 whereas reserve money growth is expected to decrease from 13.3% (as of Dec, 2017) to 12.0% in June 2018.
  • Corporate bond issuance in capital market has been preferred for medium to long term financing whereas Banks are encouraged to make interim bridge financing.  
  • Bangladesh Bank targets to keep average annual inflation around 6.0% in FY2018. It is to be noted that, based on econometric estimate, Bangladesh Bank projection shows annual average inflation for June 2018 to be around 5.7% to 6.0%. According to inflation expectation survey, one-year-ahead inflation expectation is from 6% to 7%.
  • Current account deficit increased to USD 4.4 billion (as of Nov, 2017). BB’s expectation is that there will not be any further deterioration and deficit will be 4.3bn by June, 2018. Export growth has been rejuvenated to 7.2% in FY18 (Jul – Dec) from 1.7% of FY17 and Remittance posted positive growth of 12.5% in FY18 (Jul – Dec) from negative 14.5% of However significant increase in import payment (27% YOY growth in Jul – Nov, 17) increased current account deficit.
  • BDT depreciated by 2.5% against USD driven by market forces in H1, FY18. The nominal depreciation of BDT and weakening of USD against other major currencies have increased export competitive edge of Bangladesh and worker’s remittance. At the same time BB is active enough to avoid any large volatilities in foreign exchange market.

** Annual Average Inflation Ceiling

In fiscal year 2017, Bangladesh achieved GDP growth of 7.28% driven by buoyant domestic demand led manufacturing and service sector growth, outperforming the average growth of 4.7% of emerging and developing economies. Despite some challenge (flood related loss) in beginning of the fiscal year, overall economic activity remained buoyant in first half of FY2018. Bangladesh Bank’s econometric model forecast a GDP growth rate in the range of 7.1% to 7.4% in FY18 considering recent economic developments, estimates and sectoral analysis.

Economic activities remain robust due to

  • Strong domestic demand
  • Robust private sector credit growth
  • Growing export and remittance

Inflation has been gradually edging up in recent months driven by increasing food prices, which is a result of both flood related disruptions and higher global commodity prices. Food inflation increased to 7.1% (point to point) whereas non-food inflation declined to 3.8% in same period making overall inflation to increase to 5.8% in December 2017.

  • Food Inflation edged up due to flood and higher global commodity price
  • Food inflation increased to 7.1% and non-food inflation decrease to 3.8%, making overall inflation (point to point) increase to 5.8% in December, 2017.

During the remainder of the fiscal year, food inflation pressure is expected to ease from imports and Boro rich harvest (in Bangladesh, rice constitutes 20% in national CPI basket). Bangladesh Bank targets to keep average annual inflation around 6.0% in FY2018. However, based on econometric estimate, Bangladesh Bank projection shows annual average inflation for FY2018 to be around 5.7% to 6.0%. According to inflation expectation survey, one-year-ahead inflation expectation for June 2018 is 6% to7%.

  • Boro rice harvest and higher import will ease down the inflation in second half of FY2018.
  • Bangladesh Bank targets to keep average annual inflation around 6.0% in FY2018.
  • Bangladesh Bank will be vigilant regarding any inflationary pressure arising from rising global commodity price, spillovers from food to non-food inflation from any undue exuberance in domestic credit expansion.

Bangladesh Bank has not made any changes in policy rates considering the trade of growth and inflation risk. However, it will review the rates periodically and make necessary changes if needed. The current Repo rate is 6.75% and reverse repo rate is 4.75%.

Broad Money (M2) growth has been targeted at 13.3% for fiscal year 2018 which was actually 10.7% in December 2017. The target has been set after taking the public and private sector credit growth into consideration. Bangladesh Bank thinks that M2 growth is expected to be adequate for supporting the growth and inflation target of Bangladesh Bank.

H2, FY 18 Target:

  • Broad Money target growth rate 13.3%
  • Reserve Money growth targeted at 12.0%

Private sector credit growth experienced moderate growth of 18.1% in December 2017 driven by large project related imports of construction and industrial raw materials. Bangladesh Bank has strengthened its supervision over credit disbursement in order to ensure that loan channels to productive sector. Besides, Bangladesh Bank has also intensified on-site and off-site supervision to mitigate any institution specific or system-wide risks. Public sector credit growth was negative in H1, FY2018 as government paid its debt through proceed from the larger-than-planned sales of NSCs.

Non-bank budget financing shifted from market-based tools (bank loans and government securities) to non-market instruments, e.g., National Savings Certificates (NSCs). It may be noted that, during July- Dec, FY18, net NSC sales, were BDT 238 billion.

H2, FY 18 Target

  •  Private sector credit growth target 16.8%
  •  Public sector credit growth target 8.3%
  •  Domestic Credit Growth 15.8%

  • Net NSC sales in 6 months of FY18 stood at BDT 238bn

 

During July-November, FY18, the current account balance recorded a deficit of USD 4.8 billion, deteriorated from a deficit of USD 1.5 billion in preceding fiscal year (FY 2017). Strong import growth of 27.6% caused current account deficit to widen despite uptick in export growth and rebound in remittance inflow. The current account deficit was compensated by favorable financial accounts (higher FDI and medium to long term loans (MLTs).

Current gradual depreciation of BDT against USD and depreciation of USD itself against other major currencies is enhancing export competitiveness and workers’ remittance inflows.

Current account deficit in FY 2018 triggered by

  • Higher Import growth (27.6%)
  • Moderate Export growth (7.2%)
  • Remittance moderate growth (12.5%)

Remittance inflow is expected to improve through

  • Depreciation of BDT
  • Rebound in economic activities in the Middle Eastern countries from higher oil price
  • Higher number of people going abroad

  • 8 Months of import payment can be made with this USD 2bn reserve

In FY2018 (Jul – Nov)

  • 30.1% growth in Manpower Export
  • Remittance up by 12.5%*

Bangladesh Bank thinks that bullish trend of capital market during July-December of 2017 was facilitated by positive macroeconomic outlook and increased participation by foreign investors. Bangladesh Bank considers recent fund raising through long-maturity bond issuance by the non-financial corporates much needed as such shift from bank loans to capital market fund raising would help develop the bond market.

  • Bullish trend in stock market during H1, FY’18 is mainly from positive macroeconomic outlook and increased foreign participation
  • BB cherishes fund raising through long-maturity bond for capital market development.

(The cover story is developed by IDLCSL Research Team)