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A theory is appropriate as long as it fits into the fact; when a theory doesn't fit in the fact, it's wise to walk with the fact.

Saturday, March 31, 2012

BB Governor on macroeconomy: Part 2

The second part of Governor speech published in the Financial Express.

Friday, March 30, 2012

BB Governor speech on macroeconomy!

Dr. Atiur Rahman, Bangladesh Bank Governor made a presentation at FICCI focusing on 'Current Economic Situation of Bangladesh.' Because it is rare to listen from our policymakers on major economic issues with good substances, the speech of BB Governor should be taken seriously while tracking the path of economic situation.


In most of speech, he said, what he has done (or, he could do) as a Governor of a central bank. He said rightly on the exchange rate issues when the central bank quietly had to intervene to stop the dramatic pace of currency depreciation. And the foreign exchange market is currently enjoying a stability.

One issue he didn't say right.  As he says, ''the central bank will also encourage all commercial banks to maintain market-determined lending and deposit rates to facilitate monetary transmission and properly price risk.'' To be honest, the central bank never did so and won't be able to do so until it is not confident enough about the efficiency and competitiveness of the banking system in the country. It seems that he was misguided on this issue

Power tariffs go up, again!

Due to higher prices of oil in the international market, the government increased power tariff again effective from March 1. This rise in power tariff is the fourth time in a year! Although the attempt will reduce the subsidy amount of the government for this sector, however, it will surely add up to ongoing higher inflation regime experiencing by the whole economy.

So, consumers will be warmed up by higher prices of electricity surely, although it's not sure whether they will be cooled down by higher supply of electricity.

Here is the link of the news.  

Thursday, March 29, 2012

Debate on interest rate continues...

Professor M.A. Taslim writes in favor of a competitive interest rate regime in the banking sector of Bangladesh and criticizes BB's policy in this regards. He supports a view that letting interest rate to rise under a competitive market regime will bring the objective of the central bank's money supply squeezing.

Here is the link of his opinion.

Comment: If we compare the interest rates now and a few months back, the answer is – ‘yes, the interest rate is currently higher than what it was previously.’

Is our banking sector is competitive enough to enjoy a competitive interest rate regime? The straight answer is ‘NO’. If a competitive market sets a high price for consumer, then why not the authority will interfere in the market? It’s just like another market. As we know all know, higher prices (in this case, it is higher interest rates) are detrimental for consumers, then it is kind of duty of the authority (in this case, it is the central bank) to control that price, exactly what has been doing by Bangladesh Bank.

What we will achieve through letting the interest to rise (or, a competitive one)? Money supply will reduce so that inflation will reduce also. What percentage of inflation rise is determined by money supply rise? Do we know this? But we know clearly that local investors take 33% of their working capital and 30% of their capital for new investments from financial institutions; in the case of foreign investors, these ratios are 43% and 31%, respectively (Please see the report of the World Bank and Bangladesh Enterprise Institute (2003): ‘Improving the Investment Climate in Bangladesh: An Investment Climate Assessment based on Enterprise Survey’). What does it mean when interest rate rises? These will raise the cost of funds, which will eventually increase the general inflation.

What about our goal for inclusive growth? Shrinking money supply through letting interest rate rise will achieve this goal? No way. Investment will decline, so output will be less, growth will decline and if output declines, it will also affect the price level negatively.

So, suggesting interest rate to rise to control inflation (or, whatever) will basically raise the price level if we consider the supply side effect of interest rate rise is more dominant that its demand side effect, which basically the case is. The Bangladesh economy is not a developed one, rather a developing economy. Market based theories rarely work here.    

Wednesday, March 28, 2012

Higher govt. borrowing from banks!

The government is going to increase its borrowing from banks to Tk294 billion in FY12, up from its revised budget target of Tk279 billion. The original budget target of bank borrowing was only Tk190 billion.

Why? Higher subsidy requirements in energy, power and agriculture sector and lower foreign aid flow have compelled the government to borrow aggressively from the banking system. However, higher import of fuel has particularly put pressures on the government expenditure patterns.

1. More liquidity shortage in the banking system;
2. Less money left for the private sector;
3. Less investment both from the government and private sectors;
4. Less growth in the current fiscal;
5. Higher debt for the future.

Here is the link on the news.

Tuesday, March 27, 2012

Inflation update

The inflation data in February 2012 reveals that

(i) Food inflation slowed to single digits (8.9% on a point-to-point basis) for the first time in 15 months because of harvesting and winter season and fall in the international prices;
(ii) Non-food inflation keeps rising and maintaining a high level of double digit level (13.6% on a point-to-point basis)

Here are the news links on this:
a. Food inflation eases into single digits
b. Non-food inflation goes up further

Total aid use is 3-years low

The government was able to spend only 7.3% of foreign aid in the first seven months of FY2012, which is the lowest in the last three fiscal years. Based on this outcome, the government is going to sit with donors tomorrow to discuss where is the actual problem of slow progress in aid disbursement.

Here is the report of the Daily Star on the issue.

Sunday, March 18, 2012

Trade gap rises...

Despite slower import growth compared to a year earlier, trade deficit rose to $5.0 billion in the first seven months of FY12, up from $4.3 billion in the same period of FY11 due to higher import growth (15.5%) as compared export growth (14.7%).

Here is the news link.

Wednesday, March 14, 2012

FM vs. EM

Sam Vecht, head-emerging markets, BlackRock, find that frontier markets (FM) including Bangladesh are more attractive than emerging markets (EM) because of better demographics, lower debt, high dividend yield and low valuation.

Here is the link of his interview. 

Tuesday, March 13, 2012

Banks' profitability declines...

The average profitability of commercial banks working in Bangladesh declined moderately in 2011 due to, mainly, reduced income from stock market trading.

Here is the news link of the Financial Express. 

Monday, March 12, 2012

Review of Macro Performance, CPD

The Centre for Policy Dialogue (CPD) unveils its flagship publication 'Analytical Review of Bangladesh's Macroeconomic Performance in Fiscal Year 2011-12' with latest macroeconomic update and policy suggestions to the government.

Here is the link of the report.

Some newspaper articles based on this report:
1. BD's inflation rate is highest in S Asia
2. Policy mismatch slows investment 

Sunday, March 11, 2012

Import growth declines

The import growth rate came down to 13.6% during July-January FY2012 from about 44.0% during the corresponding period of FY2011.

1. Lower imports of food grains (good harvest and higher food grain stock, especially in the public sector)
2. Lower imports of consumer items, particularly non-essential ones (impact of Bangladesh Bank's instructions?)
3. Slower growth in industrial raw materials import. 

Here is the news link.

Sunday, March 4, 2012

Finance & Development (March 2012)

The International Monetary Fund (IMF) publishes it quarterly Finance and Development (F&D), March 2012 edition with a few good articles.

Here is the link.

Thursday, March 1, 2012

Disputes on interest rates...

During the last couple of months, debates among the central bank, bank association and business communities have been growing on the interest rate hikes in the banking sector and, no wonder, the International Monetary Fund (IMF) joined in the race. So, what are the positions of these market agents on this particular issue?

Bankers: The Association of Bankers Bangladesh (ABB) decided to offer an interest rate of 12.5% on deposits and charge 15.5% for industrial term loans and working capital to check unhealthy competition in the market. However, loans for consumers, home loans and credit cards will be out of purview. 

Businessmen:  Businessmen want banks to bring down interest rates further on term loan and working capital.

Bangladesh Bank: On January 4, the central bank withdrew the 13.0% interest rate limit on bank loans, prompting the private banks to increase their lending rates. After the limit was withdrawn, many banks increased the interest on industrial loans and working capital.

The International Monetary Fund: IMF has expressed dissatisfaction as the country’s private commercial banks self-imposed a cap on lending and deposit rates to prevent unhealthy competition in the banking system.

Here are the news links related to recent debate:

1. BB to take actions against banks violating declared interest rates.
2. BB for rational behaviour about fixing lending and deposit rates.
3. BB show-cause notices on three banks.
4. Businesses want further cut in lending rate.
5. Banks cut deposit rate but charge high interest on loans.
6. IMF unhappy over self-imposed cap on interest rates.