The economy, decoded
Hassan Zaman, chief economist at Bangladesh Bank, speaks on economic trends
Hassan Zaman
The last quarter of 2013 has been unusual for Bangladesh, as the economy took a terrible beating ahead of the national elections. In such a testing period, all major indicators are now under the microscope for analysis, to see how they fared. With economists making assumptions of their own, it is time to look at the fine print on the macroeconomic fundamentals. The Daily Star caught up with Hassan Zaman, chief economist at Bangladesh Bank, to get insights into economic goals.
The Daily Star (TDS): How do you evaluate the post-election economic situation in Bangladesh?
Hassan Zaman (HZ): The services sector is about 50 percent of our economy and the recent return to normal business activity is vital for this sector as trading, transport, education, health and personal services are all dependent on having people go about their normal lives. As for manufacturing, impressive export performance this year suggests that existing capacity is being utilised effectively, though there is still a bit of a 'wait and see' sentiment related to making major new investments. We are however seeing signs of greater optimism with a slow uptick in credit demand and potential foreign investors resuming visits. Our current forecast is that economic growth is likely to range between 5.8 percent and 6.1 percent with the assumption that January-June will partially make up for losses suffered in the first half of the fiscal year, especially in the services sector.
TDS: What would explain the difference in growth forecasts by the central bank and the finance ministry?
HZ: There is an important difference between a growth target set at the beginning of the year, which is the finance ministry's prerogative, and a growth forecast that is a prediction typically updated regularly during the course of the year. It is good to have a range of professional economists engage in growth forecasting, whether they are in different government agencies or in think-tanks. 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 finance and planning ministries and the central bank to share these forecasts and views on economic trends.
HZ: There is an important difference between a growth target set at the beginning of the year, which is the finance ministry's prerogative, and a growth forecast that is a prediction typically updated regularly during the course of the year. It is good to have a range of professional economists engage in growth forecasting, whether they are in different government agencies or in think-tanks. 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 finance and planning ministries and the central bank to share these forecasts and views on economic trends.
TDS: How do you explain this year's drop in remittances from last year?
HZ: First of all, there has been a 36 percent drop in the number of new migrants going abroad in fiscal 2013 compared to the previous year. So, this is a key factor. However, this could have explained a lower growth in remittance this year, but the fact that remittance growth has so far been negative must also mean that the existing stock of migrants are sending back less money through official channels. This may have been due to pre-election jitters, which might be reversed in the months ahead. We need a few more months before we draw definite conclusions on this. Currently, our external balances are very comfortable, but in the medium term, we obviously need remittance growth to resume and need relevant authorities to step up efforts to send people abroad. Meanwhile, BB will seek to make it more cost-effective to use official remittance channels.
TDS: What's your view on a think-tank's recent predictions for double-digit inflation in Bangladesh by the middle of the year?
HZ: Inflation is currently at around 7.5 percent and I doubt it will be double-digits by the middle of the year. However, with proposed hikes in electricity prices and wages in both the public and private sectors, there are inflationary risks ahead as the Monetary Policy Statement (MPS) pointed out.
HZ: Inflation is currently at around 7.5 percent and I doubt it will be double-digits by the middle of the year. However, with proposed hikes in electricity prices and wages in both the public and private sectors, there are inflationary risks ahead as the Monetary Policy Statement (MPS) pointed out.
TDS: What's your take on some economists expressing that the central bank should have set the inflation target at 6 percent for the current fiscal year and 5 percent two years later?
HZ: Inflation hits the poorest the hardest, particularly those on fixed incomes. I therefore agree that progressively over the next two years, we should reduce our inflation targets to the range you indicate, though this is done in consultation with the finance ministry during the budget process. We did not want to bring our inflation target to lower than 7 percent in fiscal 2014, as it would have implied putting the brakes on monetary expansion, which in turn would have dented the prospects of economic recovery.
TDS: How do you describe the latest monetary policy statement—contractionary, accommodative or traditional?
HZ: I think there is little point to giving a one-word adjective to a monetary policy statement. The point of a monetary policy statement is to review the progress we have made over the past six months and then provide clear signals as to the priorities Bangladesh Bank sees looking forward over the next six months and the medium term. Specifically, the MPS shares some key monetary growth numbers, which we believe will contribute to national inflation and growth objectives as well as articulate priorities in the areas of exchange rate management, financial markets and monetary-fiscal coordination.
TDS: The central bank has announced a monetary policy following severe political unrest, but no changes were made to the policy rates. As a result, there are no differences between the new and old policy statements. Was there scope for change?
HZ: We did not lower the policy rates as average inflation has been creeping up in the last few months, and there are inflation risks ahead. So in many ways, there is policy continuity. However, in our most recent MPS we emphasised some areas that are different from the previous one. For instance, we showed that in addition to the monetary policy, the central bank has other policy instruments in the area of financial sector regulatory and promotional policies, which can be used to support economic growth. These were used to give businesses badly affected by the recent shutdowns more time to repay loans; various export-promotion incentives were enhanced as well, especially through the Export Development Fund.
TDS: What are the hurdles to formulating a monetary policy?
HZ: There are actually not too many hurdles as such; the good thing is that we are given the independence to devise what we feel is the right monetary stance, and we do not get directed by any other part of the government, except of course, the extent of government borrowing from the banking system is set at the start of the year. In general, we take into account external opinions and people will have different views on our monetary stance, our exchange rate interventions, financial sector policies and they are typically voiced around the time of our twice-yearly MPS. We know that not everyone will be happy with the directions we choose to take but we are not here to win popularity contests, and we do what we think is best for the economy.
TDS: The Federation of Bangladesh Chambers of Commerce and Industry has said that it sees no instructions in the MPS on cutting interest rates? What's your reaction?
HZ: We can only directly bring down the rates, which we lend to other banks, but we cannot set retail interest rates, as that is the bank's decision. Despite a fair amount of liquidity, bank-lending rates are only coming down slowly due to a number of reasons. The impact of a few high-profile scams lingers over the industry with unsettled claims still being resolved. Other poor lending decisions taken earlier have also unfortunately limited the space banks have to lower rates. BB is working with the banks on the unsettled bills issue and in general, on improvements to the loan approval process. Second, competing interest rates, such as savings certificates and government treasury bills/bonds, are at levels that have set benchmarks for risk-free investments for individuals and banks alike and are now significantly above inflation. Third, there is still insufficient competition in the form of different sources of finance and our domestic banks are compelled to reduce operating costs and spreads—though we are now encouraging these alternative sources.
TDS: What are the merits and risks to private equity and foreign loan sources in the MPS that you mentioned?
HZ: I have discussed the importance of competition in our financial sector beyond just among banks and nonbank financial institutions. It is critical for our large industries to be able to access multiple sources of financing, so that neither the bank nor clients are too dependent on each other. Moreover, tapping our capital market is not only useful for the depth of the market, but also for financial disclosure, transparency and improved corporate governance of these firms. As for private equity and venture capital, we should encourage these, as it is critical both for start-ups as well as established firms. Several large funds are interested in Bangladesh but we need to work on some regulatory issues related to their valuation at the end of their investments and lock-in period issues in order to encourage these investments. As for access to foreign loans, the interest rates are significantly lower and hence, attractive and from a macro viewpoint these are different from foreign portfolio investments, which are the most likely to cause sudden external capital flight concerns as happened in India last year. That said we are monitoring their growth closely.
TDS: How do you respond to drastic falls in default loans in the last quarter of 2013?
HZ: I would not read too much into this. The last quarter of 2013 was an unusual one for obvious reasons and in order to give firms some breathing space, the central bank has temporarily relaxed loan-rescheduling rules. There was also some real cash recovery but it is hard to separate these factors and hence, it is impossible to draw inferences on the health of the banks from last quarters' figures. It is best to wait for the default loan figures that will come out later this year to get a more meaningful picture.
Published: 12:00 am Sunday, March 02, 2014
Last modified: 12:17 am Sunday, March 02, 2014
