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Bangladesh Bank Quarterly
Editor: Professor Syed M. Ahsan, Resident Economic Adviser
Co-Editors: Habibullah Bahar, Economic Adviser K.M. Jamshed-uj-Zaman, Executive Director
Team Members
Dr. Habibur Rahman Senior Research Economist Policy Analysis Unit
Md. Sakhawat Hossain Research Economist Policy Analysis Unit
Md. Ezazul Islam Research Economist Policy Analysis Unit
Md. Abdul Halim Joint Director Monetary Policy Department
Shamim Ahmed Research Economist Policy Analysis Unit
Muhammmad Amir Hossain Deputy Director Statistics Department
Md. Shahiduzzaman Research Economist Policy Analysis Unit
Shamim Ara Deputy Director Statistics Department
Md. Habibour Rahman Research Economist Policy Analysis Unit
Web-hosting and Distribution Nazneen Sultana
Systems Manager (IT Operation and Communication)
F.M. Mokammel Huq Deputy General Manager (DPR&P)
Bangladesh Bank welcomes suggestions and comments for improvement of the contents and form of the publication. Comments and suggestions may be sent to:
Resident Economic Adviser: [email protected] Advisor : [email protected]
Executive Director : [email protected]
Website: www.bangladeshbank.org.bd www.bangladesh-bank.org
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Bangladesh Bank Quarterly
June, 2006
Volume III No. 4
Bangladesh Bank
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Contents Part A: Economic and Financial Developments Overview
I. Developments in the Real Economy II. Money and Credit Market Developments III. Fiscal Developments IV. External Sector Developments V. Price Developments VI. Health of the Banking System VII. Capital Market Developments VIII. Near-Term Economic Outlook
Part B: Speech Section
“Governance Issue in the Banking Sector” by Governor Dr. Salehuddin Ahmed
Part C: Policy Note Section
(1) “Interest Rate Spread in Bangladesh: An Analytical Review,” by Shamim Ahmed and Md. Ezazul Islam.
(2) “Future Prospects of Bangladesh’s Ready-Made Garments Industry and the Supportive Policy Regime”, by Md. Nehal Ahmed and Md. Sakhawat Hossain
(3) “Recent Experiences in the Foreign Exchange and Money Markets”, by Md. Habibur Rahman and Subhasish Barua
Part D: Boxes / Annexes
Box 1 Chronology of Major Policy Announcements: April-June 2006 Annexe 1: Budget Highlights: Fiscal Year 2006-2007
Charts I.1 Growth of Real GDP I.2 Production of Major Crops I.3 Quantum Index of Manufacturing Industries II.1 12-Month CPI Inflation II.2 Commodity Prices in International Market II.3 Inflation in South Asia III.1 Components of Reserve Money III.2 Components of Broad Money III.3 Trends in Private Sector Credit III.4 Yields on Treasury Bills III.5 Yields Curve III.6 Movements in Interest Rates III.7 Taka-Dollar Exchange Rate and REER IV.1 Trend in Government Revenue and Expenditure IV.2 Financing of Budget Deficit
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V.1 Trends in Current Account and Overall Balance V.2 Trends in Exports and Imports V.3 Forex Reserve and Exchange Rate VI.1 Ratio of Gross NPLs to Total Loans VI.2 Ratio of Net NPLs to Total Loans VII.1 Trends in Market Capitalization and DSE Index Tables I.1 GDP Growth by Sectors I.2 Crop-wise Agricultural Production of Bangladesh I.3 Quantum Index of Manufacturing Industries I.4 Cargo Handled by Chittagong Port I.5 Trends in Private Sector Credit I.6 Bank Credit by Economic Purposes I.7 Trends in Agricultural Credit I.8 Micro-Credit Operations of the Grameen Bank and Large NGOs I.9 Term Lending by Banks and NBFIs II.1 Trends in Inflation II.2 Commodity Prices in the International Market II.3 Inflation in South Asian Countries III.1 Movements in Reserve Money III.2 Movements in Broad Money III.3 Interest Rate Developments III.4 Outstanding Stock of Treasury Bills and NSD Certificates IV.1 Government Fiscal Operations V.1 Balance of Payments V.2 Trends in the Commodity Composition of Exports V.3 Trends in the Commodity Composition of Imports V.4 Country-wise Workers’ Remittances V.5 Major Destination-wise RMG Related Exports V.6 Export Performance for the Period of July-June’06 VI.1 Risk-Weighted Capital-Asset Ratios by Type of Banks VI.2 Gross NPL Ratios by Types of Banks VI.3 Net NPL Ratios by Types of Banks VI.4 Profitability Ratios by Type of Banks VII.1 Indicators of Capital Market Developments VII.2 Group-wise Market Capitalisation of Dhaka Stock Exchange
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Overview of Economic and Financial Developments
The Bangladesh economy is provisionally estimated to have grown at a robust pace of 6.7 percent in FY06 vis-à-vis the revised rate of 6.0 percent for FY05. The new rate is the highest in 25 years, i.e., since FY81, which happens to be the earliest year for which growth data has been re-calibrated to the current base (1995-96). Fast growth was realized despite the challenges posed by persistently high oil prices in the international market and adjustments in the RMG market following the global MFA phase out. Bangladesh Bureau of Statistics (BBS) estimates sectoral growth of 4.5 percent for agriculture, 9.6 percent for Industry and 6.5 percent for the service sector in FY06. Agricultural growth of 4.5 percent, even if based on a weak post-flood backdrop of the last fiscal, is significantly above trend. Broad-based industrial growth was led by both domestic and external demand. Buoyant agriculture and industrial sectors in turn led to robust performance in the service sector.
In order to dampen inflationary expectations and to manage an orderly adjustment of the Taka-Dollar exchange rate, Bangladesh Bank (BB) has reiterated a cautious and restrained monetary policy stance in the half-yearly Monetary Policy Statement of July 2006. In actual practice however, domestic credit has grown even faster in the fourth quarter (and hence over FY06) than in the comparable period(s) of FY05. Deposit mobilization by DMBs increased by 18.71 percent during FY06, while domestic credit grew by 20.5 percent. Yet most of the mismatch, namely credit expansion overtaking deposit growth, took place in the first three quarters of FY06, indeed in the 3rd quarter. The pattern was reversed to an extent in the 4th quarter whereby deposits grew at 8.8 percent within the quarter while domestic credit expanded by 6.9 percent. Credit to the public sector expanded much faster in FY06 (27.0 vs. 19.1 percent in FY05) in order to finance both the widening fiscal deficit as well as the import of petroleum products.1
As share of GDP, total revenue accumulation in the fourth quarter FY06 has been 3.23 percent, virtually the same (3.24 percent) as in FY05 vis-à-vis the level of total expenditure of 4.94 percent (4.78 percent in FY05), resulting in a quarterly deficit of 1.71 percent. Over the fiscal year, total revenue rose to 10.5 from 10.4 percent in the last fiscal, again as share of GDP, while total expenditure went up to 13.7 from 13.4 percent so that the deficit increased from 3.0 to 3.2 percent between the two fiscal years. However, because of the stagnant level of foreign financing, domestic financing of the deficit increased substantially. In particular, bank financing of deficit in FY06 amounted to 1.4 percent of GDP (i.e., BDT
1 Bank financing of budget deficit in FY06 rose to 1.4 percent (vis-à-vis 0.8 in FY05) of GDP, while foreign financing declined marginally to 1.2 percent of GDP (vs. 1.3 percent in FY05). Moreover, the former was mostly incurred in the 4th quarter. In comparison, the FY06 SOE debt rose by 0.94 percent of GDP as opposed to a figure of 0.6 percent in FY05.
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56.7 billion, of which 48.8 billion was incurred in the fourth quarter alone) vis-à-vis 0.6 percent of GDP (or, BDT 31.0 billion) in FY05, which led to the large growth of credit to the public sector as cited above.
While the foreign exchange market remained under pressure over the first three quarters of FY06, with the Taka losing about 10.4 percent of its nominal value against the US Dollar within this period, the behaviour during the 4th quarter was rather stable.2 Indeed the currency gained back some of the loss such that the FY06 depreciation in USD terms came down to 9.3 percent. The depreciation no doubt contributed to the record growth of exports and remittances over the whole year, and particularly in the 4th quarter, which led to a large (USD 341 million) positive current account balance (CAB) for the quarter. However the financial account, which traditionally has been robust in recent years, ended the year in a small deficit (USD 24 million). The primary reason was that “other” investment flows (inclusive of medium and long-term loans), but excluding FDI and portfolio investments, turned negative in every quarter of the fiscal year.3 However, given the sizeable CAB, the overall balance of payments (BOP) turned strongly positive in the 4th quarter, which more than offset the shortfalls experienced in the first three quarters of FY06. The year-end BOP turned into a surplus of USD 365 million (as against a deficit of USD 323 million in FY05) setting the foreign exchange reserves on a healthier footing. These developments allowed for the much needed stability in the foreign exchange market in the last quarter of FY06 with a minor appreciation of the currency as already noted.
The expansion of domestic credit, currency depreciation, and the elevated level of world commodity prices exerted inflationary pressures on both demand and supply sides in the domestic market. The 12-month moving average inflation rose modestly in the 4th quarter of FY06 from 7.02 percent in March '06 to 7.16 percent in June '06,staying above the 7-percent mark that has been set as the central bank’s ceiling as announced in the first issue of the Monetary Policy Statement of January 2006. Examining the 12-month point-to-point data, an interesting pattern emerges between food and non-food inflationary development in FY06. While non-food prices rose persistently in the first three quarters (especially in rural areas), and moderated in the fourth quarter, food prices started to move up sharply in the fourth quarter. Having grown at 6.31 percent during the first nine months, food prices shot up by 15.6 percent in the 4th quarter (at annualized rates).
As inflation remained stubborn, Bangladesh Bank continued its tightened stance which was reflected in several hikes in the key policy rates. The 28-day TB rate rose from 7.05 percent in March '06 to 7.10 percent in June
2 The end month Taka-Dollar exchange rate (mid-value of commercial bank transactions) which stood at 63.75 in June 2005 declined to 70.35 by March 2006, and ended the fiscal year at 69.67. 3 In other words, the positive FDI (combined with the minor portfolio investments) flows were outweighed by the negative flows of “other investment”.
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'06. The central bank's 1-2 day repo and reverse repo rates rose from 8.00 and 5.51 percent in Jan '06 to 8.50 (in May '06) and 6.04 percent in June '06, respectively. Further repo operation was held only in January and May during the entire fiscal year. By contrast, Bangladesh Bank used its reverse repo tool more frequently to mop up excess liquidity from the market. The tighter monetary management may have contributed to the decline in non-food inflation as measured by 12-month point-to-point index, which fell from 6.57 in March to 5.73 percent in June ’06.
While gross NPL worsened for nationalized commercial banks (NCBs) during the fourth quarter of FY06, the net NPL ratio experienced a minor improvement (Charts VI.1-VI.2). A good part of the difficulty faced by NCBs arises out of their non-performing loans to SOEs, especially BPC. The latter in turn is hamstrung by the government’s decision to not allow complete pass-through of the international energy prices onto the domestic consumers. The other banking system soundness indicators, notably risk-weighted capital ratio and profitability of banks (as measured by the return on equity, ROE, and return on assets, ROA) have continued to improve in the second half of FY06. Disbursement of industrial term lending rose by a modest 8.21 percent in FY06 from 30.39 percent in FY05. However the overdue rate (i.e., as a share of current outstanding) improved in FY06 to 14.41 percent from 18.13 percent in the preceding fiscal year.
The central bank’s policy stance has been supportive of economic growth that the economy has achieved in the last quarter and indeed over the entire fiscal year. Growth has been accompanied by enhanced external sector viability. The emergence of sharp food price increase in the last quarter however remains a matter of concern and requires further analysis as to the sources of the pressure on prices. In the meantime, it will be prudent to continue with the monetary policy stance that dampens inflationary expectations and maintains a stable and competitive real exchange rate.
I. Developments in the Real Economy
The Bangladesh economy is provisionally estimated to have grown at a robust pace of 6.7 percent in FY06 vis-à-vis the revised rate of 6.0 percent for FY05. The new rate is the highest in 25 years, i.e., since FY81, which happens to be the earliest year for which growth data has been re-calibrated to the current base (1995-96). Fast growth was realized despite the challenges posed by persistently high oil prices in the international market and adjustments in the RMG market following the global MFA phase out. Bangladesh Bureau of Statistics (BBS) estimates sectoral growth of 4.5 percent for agriculture, 9.6 percent for Industry and 6.5 percent for the service sector in FY06. Agricultural growth of 4.5 percent, even if based on a weak post-flood backdrop of the last fiscal, is significantly above trend. Broad-based industrial growth was led by both
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domestic and external demand. Buoyant agriculture and industrial sectors in turn led to a robust performance in the service sector.
The overall agricultural growth was supported by strong growth in major sub-sectors. The crops and horticulture sub-sectors recovered well from previous year’s flood losses. Aus production (the first crop with a relatively small share in total food grains) stood at 1.75 million metric tons (MMT) which is 16.3 percent higher than the actual production in the previous year. Total yield on Aman, the second largest crop, increased to 10.8 MMT, which is 10 percent higher than in the last fiscal due to favourable weather conditions and adequate supply of high yielding variety (HYV) seeds and other inputs, especially fertilizer. In the wake of disruptions in the delivery of diesel fuel and fertilizer, the boro yield is estimated to be 14.2 MMT. An enhanced flow of credit, favourable weather conditions and greater use of certified seeds appear to have overcome the supply bottlenecks cited above.
Wheat production decreased by about 13 percent from the level production of FY05 and stood at 0.85 MMT reflecting a gradual shift from wheat to maize production due mainly to a decline in the latter’s production costs and the relative market outlook for these two crops. The maize yield stood at 0.69 MMT in FY06 which is 42.2 percent higher than the FY05 actual production. In view of the good performance of the crop sector, the total food grain production stood at 28.3 MMT, which is 6.3 percent higher than the actual production of the previous year (Table I.4).
In spite of the Avian Bird flu scare, poultry firms are growing in Bangladesh. However, overall growth of animal farming sub-sector slowed marginally to 6.3 percent in FY06 from 7.2 percent in FY 05. Fishing sub-sector grew by 3.9 percent in FY06 as against 3.7 percent growth in the last fiscal.
Chart I.1 Growth of Real GDP
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Chart I.2 Production of Major Crops
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During FY06, a total of BDT 57.9 billion agricultural credit has been disbursed, which is 16.8 percent higher than that of FY05, and crossed the programmed amount of 55.4 billion. Of the total, about BDT 22.3 billion, went to crops during FY06, which is 6.7 percent higher than that in the last year. The second highest amount, about BDT 14.0 billion, went to poverty alleviation related activities during FY06, which again is 21.7 percent higher than last year’s level. A total of BDT 41.2 billion agricultural credit was recovered during this period as against BDT 31.7 billion in the same period of the previous year (Table: I.9). These developments are indicative of a buoyant agricultural sector.
According to BBS estimates, annual growth of the manufacturing sector stood at 10.5 percent in FY06 as against 8.2 percent in FY05. This growth was mainly supported by medium and large scale industries, recording an increase of 11 percent in FY06 compared to 8.3 percent in FY05 (Table I.2). Industrial production was broad based covering both export and domestic market oriented enterprises. Despite the seasonality in RMG related product demand across the world, the production of both large and medium scale manufacturing industries, particularly food manufacturing, knitwear, RMG, cotton textile, leather footwear, pharmaceuticals, ceramics, cement, plastic products etc. increased substantially during FY06. The higher manufacturing production was well supported by strong domestic and external demand. The currency deprecation of 9.3 percent (against USD) over the fiscal year paved the way to an overall export growth (in value terms) of 21.6 percent in FY06. The impetus to domestic demand for goods stemmed from fast growth of domestic credit of 20.2 percent tin FY06 vis-à-vis 17.5 percent in FY05.
According to the new weight distribution, value addition in industrial production comes manly from “jute, cotton, RMG and leather”, “chemical, petroleum and rubber” and “food, beverage and tobacco” sub-sectors, which together comprise 93 percent of total manufacturing. These components grew by 19.8, 4.2 and 8.4 percent, respectively in the fiscal year just ended (Table: I.5 and chart I.3).
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Chart I.3 Quantum Index of Manufacturing Industries
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The demand for power has been increasing rapidly as industry, agriculture and housing sectors are growing faster. On the supply side however, growth of the “power, gas and water” output slowed to 7.7 in FY06 from the average of 9.0 percent growth observed over the past two years, resulting in significant disruptions throughout the country. Growth of the construction sector was stable (at 8.4 percent in FY06 as against the 8.3 in FY05) creating a robust market for domestic cement production as well as higher import growth of construction materials such as iron, steel and other base metals, and clinker.
Service sector contributes 52.4 percent to total GDP (in current market prices), which grew by 6.5 percent in FY06 over FY05. This growth was well supported by the robust growth of both agricultural and industrial sectors. The sub-sectors adding more value to the service sector, viz. ‘wholesale and retail trade’, ‘transport storage and communication’ and real estate, renting and business activates’ grew by 7.3 percent, 8.3 percent and 3.7 percent respectively in FY06 over FY05 (Table I.2). Rapid growth in the cellular phone industry and emergence of new private TV networks also reflect higher activities in the service sector. Other sub-sectors like “health and social work’, “public administration and defence activities”, “community, social and personal services”, and “financial intermediation” also contributed towards the expansion of the service sector in FY06.
II. Money and Credit Market Developments
In order to dampen inflationary expectations and to manage an orderly adjustment of the Taka-Dollar exchange rate, Bangladesh Bank (BB) has reiterated a cautious and restrained monetary policy stance in the half-yearly Monetary Policy Statement of July 2006. In actual practice however, domestic credit has grown even faster in the fourth quarter (and hence over FY06) than in the comparable period(s) of FY05. Deposit mobilization by DMBs increased by 18.96 percent during FY06, while domestic credit grew by 20.5 percent. Yet most of the mismatch, namely credit expansion overtaking deposit growth, took place in the first three quarters of FY06, indeed in the 3rd quarter. The pattern was reversed to
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an extent in the 4th quarter whereby deposits grew at 8.8 percent within the quarter while domestic credit expanded by 6.9 percent. Credit to the public sector expanded much faster in FY06 (27 vs. 19.1 percent in FY05) in order to finance both the widening fiscal deficit as well as the import of petroleum products.
The growth momentum generated in FY06 could not have materialized in the absence of a robust growth of commercial bank credit and access to foreign exchange in order to finance the import of necessary raw materials, intermediate goods and machinery. As a result both these demands had to be balanced without engendering an inflationary spiral and currency instability. In spite of the policy stance, monetary conditions eased substantially in the April-June quarter of FY06, which was reflected in a large injection of liquidity associated with credit to the government in order to finance the (seasonal) year-end bunching of government expenditure. On a year-on-year basis, reserve money increased by 28.1 percent in the fourth quarter (and over FY06), substantially higher than 21.5 percent recorded in the third quarter as well as 12.5 percent growth in FY 05. (Table III.1 and Chart II.1)
The large increase in reserve money was propelled by sizeable increase in net foreign assets (NFA) as well as net domestic assets (NDA) of the Bangladesh Bank, reflecting temporary central bank financing of budget deficit. However as in the previous two quarters broad money growth was relatively lower than the growth in reserve money as the money multiplier continued to decline in June 2006 partly due to a rise in the cash reserve requirement that had come into effect earlier and change in public’s money holding behaviour. Broad money growth of 19.5 percent during the quarter was substantially higher than 16.8 percent observed in the same quarter of the preceding fiscal, which also reflected continuing private sector credit growth over and above that to the government sector as cited above (Table III. 2, Charts II. 2 and II.3).
During FY06, the overall stock of reserve money increased by 28.1 percent compared with 12.5 percent recorded in the previous year due primarily to a significant growth in NDA (30.3 percent), reflecting more than 50.0 percent increase in claims on the government (net) compared with 32.1 percent in the previous year. NFA of the central bank, on the other hand, increased by 26.5 percent. It is noteworthy that the expansionary impact of monetary aggregates was restrained due to a decline in the money multiplier noted earlier.
Looking at the components of broad money during the year just ended of it is seen that NDA of the banking system increased by 19.7 percent, while NFA increased by 17.9 percent as against 17.2 percent and 14.3 percent respectively in FY05. Reflecting sizeable public borrowing in the fourth quarter, banking system’s credit to the “other public sector” increased by 34.9 percent compared with 24.8 percent recorded in the previous year
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due, among others, to sustained high oil prices in the international markets (Table IV.1).4
Chart II.1 Components of Reserve Money
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Chart II.2 Components of Broad Money
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More critically, despite the monetary stance, private sector credit demand increased rapidly in the fourth quarter of FY06 as compared to same quarter of FY05, which is demonstrative of the inflationary expectations on the part of economic agents (Table I.7). This is also evident in the data on bank advances by economic purpose, trends in agricultural credit and credit operations of the micro-finance institutions and NGOs (Tables I.8, I.9 and I.10). Banking system’s credit to the private sector registered a strong growth of 18.3 percent in FY06 compared with 17.0 percent in FY05 reflecting increases in both working capital and term-finance. As shown in Table I.7 credit provided by non-bank financial institutions (NBFIs), micro-finance institutions (MFIs) and NGOs also increased at a faster rate. Much of the increase in credit to the private sector was due to trade, industry and working capital finance, which increased respectively by 22.5 percent, 19.7 percent and 14.1 percent during the quarter under
4 State-owned enterprises (SOEs) such as Bangladesh Petroleum Corporation (BPC), national airlines (Bangladesh Biman), and others constitute the “other public sector’.
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review (Table I.8). Total disbursement of term lending by banks and NBFIs increased by 21.2 percent in the final quarter of FY06 compared with 35.4 percent in same quarter of FY05, though over the entire fiscal year growth in the last fiscal was modest at 5.3 percent vis-à-vis 36.4 percent in FY05 (Table I.11).
Chart II.3 Trends in Private Sector Credit
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Chart II.4 Yield on Treasury Bills
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Balancing the high credit demand by the banking system with the restrained monetary policy pursued by Bangladesh Bank kept a sustained upward pressure on the yield on government securities during April-June period of FY06. The weighted average yields on 28-day, 91-day, 182-day, 364-day treasury bills increased modestly from 7.05 percent, 7.25 percent, 7.49 percent and 7.85 percent respectively in March 2006 to 7.10 percent, 7.43 percent, 7.75 percent and 8.30 percent respectively in June 2006 (Table III.3 and Chart II.3). However the yield on 5-year and 10-year treasury bonds remained virtually unchanged from 10.60 and 12.09 percent, respectively, in March 2006 to 10.65 and 12.10 percent in June 2006. While the outstanding stock of Government treasury bills and bonds rose slightly (1.9 percent) during the quarter, the figure for the fiscal year
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registered a decline of 8.7 percent. The stock of NSD certificates, i.e., non-bank borrowing by the public sector, on the other hand, rose both during the quarter and over the fiscal year in review (1.5 and 2.8 percent respectively, Table III.4). The latter growth however has to be viewed as rather modest vis-à-vis the growth in FY05 (of 8.7 percent).
Chart II.5 Weighted average yield of accepted Gov't Treasury Bills & Bonds (August 27, 2006)
10-Year BGTB
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Chart II.6 Movements in Interest Rates
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After a declining trend during the last two years, both lending and deposit rates of banks increased during the quarter, reflecting high credit demand during March-June period of FY06. Over the year, the weighted average lending and deposits rates for all banks increased to 11.60 percent and 6.26 percent respectively at the end of FY06 from 10.93 percent and 5.62 percent respectively at the end of FY05. Liquidity situation during March-June period also eased substantially as reflected in the overnight call money rates (mostly unsecured). The weighted average call money rates in the inter-bank money market decreased substantially from 17.15 percent in March to 10.84 percent in June 2006, although these figures are subject to strong seasonality thus making further inferences difficult. With the injection of liquidity associated with the seasonal high level of
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government expenditure in the fourth quarter, inter-bank call money rates remained stable in the quarter.
In line with the monetary stance, the repo and reverse repo rates of Bangladesh Bank were also raised somewhat to mop up (or inject) liquidity as and when needed to meet the monetary targets. As in previous years, the central bank mopped up a large amount of excess liquidity through reverse repo operations in June. The rates on repo increased by about 25 basis points to 8.25 percent in March 2006 from 8.0 percent in December 2005 and the reverse repo rates for a 1-2 day and 3-11 day agreements increased to 6.04 and 6.29 percent respectively in June 2006 from 5.60 and 5.95 percent respectively in March 2006 (Table III.4).
III. Fiscal Developments
As share of GDP, total revenue accumulation in the fourth quarter FY06 has been 3.23 percent, virtually the same (3.24 percent) as in FY05 vis-à-vis the level of total expenditure of 4.94 percent (4.78 percent in FY05), resulting in a quarterly deficit of 1.71 percent. Over the fiscal year, total revenue rose to 10.5 from 10.4 percent in the last fiscal, again as share of GDP, while total expenditure went up to 13.7 from 13.4 percent so that the deficit increased from 3.0 to 3.2 percent between the two fiscal years. However, because of the stagnant level of foreign financing, domestic financing of the deficit increased substantially. In particular, bank financing of deficit in FY06 amounted to 1.4 percent of GDP (i.e., BDT 56.7 billion, of which 48.8 billion was incurred in the fourth quarter alone) vis-à-vis 0.6 percent of GDP (or, BDT 31.0 billion) in FY05, which led to the large growth of credit to the public sector as cited above.
Nominal revenue (inclusive of both tax and non-tax sources) increased by 12.5 percent during the fourth quarter of FY06 over the corresponding quarter of FY05, resulting in about 13.6 percent growth in total revenue during FY06 over FY05. The provisional estimates indicate that revenue-GDP ratio in FY06 gradually moved up to 10.5 percent (against 10.4 in FY05) and below the original budgetary target of 11 (later revised to 10.8) percent (Table IV.1 and Chart IV.1).
Revenue collection from VAT, income tax and “non-tax” sources, again in nominal terms, increased faster than other categories, namely by 18.4, 25.9 and 14.5 percent respectively over FY05. By contrast customs duties declined very marginally (0.9 percent, Table IV.1). In the era of globalization and freer trade, it is unlikely that customs duties will ever regain the former stature, it is noted that for the revenue goals to be met, an even faster growth of modern sources of revenue such as VAT and income tax would be necessary. It is anticipated that undergoing administrative reforms at NBR targeted at the large taxpayer unit (LTU), tax avoidance and evasion, improved tax compliance and the institutional structure will soon yield results.
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Chart III.1 Trends in Government Revenue and Expenditure
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Chart III.2 Financing of Budget Deficits
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Total expenditure as a percentage of GDP stood at 13.8 percent in FY06 as against 13.4 percent in FY05. This growth mainly comes from both current expenditure and ADP. The current expenditure and ADP increased by 33.1 percent and 19.7 percent respectively during the fourth quarter of FY06 over the same quarter of FY05. Over the fiscal year growth in total current expenditure increased by 15.5 percent in FY06 as against 14.7 percent in FY05. While the growth of ADP expenditure seems high, the implementation rate stood at 96 percent of the targeted amount of BDT 215 billion in the FY06 revised budget.
The provisional estimates indicate that overall budget deficit stood at 3.2 percent in FY06 as against the anticipated level of 3.9 in the revised budget. The deficit was accommodated by both domestic and external financing. The overall domestic financing in FY06 came to BDT 84.2 billion as against BDT 60.2 billion in FY05. Among the domestic sources, BDT 56.7 billion was bank financing. In the wake of a stagnant level of aid and grants, the foreign financing component stood at BDT 50.5 billion in FY06. The recent trend indicates that relative share of foreign financing has been on the decline. The slow disbursement of development assistance
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from the donors via the DSC and PRGF facilities has contributed to this development in FY06.
IV. External Sector Development
While the foreign exchange market remained under pressure over the first three quarters of FY06, with the Taka losing about 10.4 percent of its nominal value against the US Dollar within this period, the behaviour during the 4th quarter was rather stable.5 Indeed the currency gained back some of the loss such that the FY06 depreciation in USD terms came down to 9.3 percent. The depreciation no doubt contributed to the record growth of exports and remittances over the whole year, and particularly in the 4th quarter, which led to a large (USD 341 million) positive current account balance (CAB) for the quarter. However the financial account, which traditionally has been robust in recent years, ended the year in a small deficit (USD 24 million). The primary reason was that “other” investment flows (inclusive of medium and long-term loans), but excluding FDI and portfolio investments, turned negative in every quarter of the fiscal year.6 However, given the sizeable CAB, the overall balance of payments (BOP) turned strongly positive in the 4th quarter, which more than offset the shortfalls experienced in the first three quarters of FY06. The year-end BOP turned into a surplus of USD 365 million setting the foreign exchange reserves on a healthier footing. These developments allowed for the much needed stability in the foreign exchange market in the last quarter of FY06 with a minor appreciation of the currency as already noted.
Indeed Bangladesh Taka appreciated by about one percent of its nominal value against the US Dollar during the last quarter.7 The overall current account balance of USD 341 million during the April-June quarter appears to be the highest in recent years and followed smaller surpluses in all previous quarters. The overall balance of payments also showed a sizeable surplus in the fourth quarter (USD 402 million) which offset the deficits in the first three quarters during FY06, rendering the FY balance in surplus of USD 365 million (Table V.1 and Charts V.1 and V.2). While the capital and financial account showed a deficit in the first quarter, surpluses in the subsequent quarters turned the overall capital and financial account into a surplus for FY06. The deficit in the errors and omissions offsets to an extent the surpluses in the current and the capital and financial accounts diluting the magnitude of the surplus for the balance of payments (BOP) during the fiscal year.
5 See footnote 2 above. 6 In other words, the positive FDI (combined with the minor portfolio investments) flows were outweighed by the negative flows of “other investment”. 7 This calculation is based on the monthly weighted average Taka-Dollar exchange rate in the inter-bank foreign
exchange market, which stood at 69.67 in June, 2006 (as against 66.09 in December 2005). The variation during the April-June quarter was minimal, between 69.43 and 70.05.
18
Chart IV.1 Trends of Current Account and Overall Balance
-3.0
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rcen
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Over the past two quarters both the nominal and real effective exchange rates (NER and REER) have moved in tandem, whereby a nominal depreciation has been matched by an appreciation in REER (in the 3rd quarter), and the opposite for a nominal appreciation (in the 4th quarter). In spite of the recent appreciation, REER has become more competitive over the fiscal year (Chart V.3).
Chart IV.2 Trends in Exports & Imports
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Chart IV.3 Taka-Dollar Exchange Rate and REER
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Overall export earnings recorded a strong growth of 28.9 percent during the fourth quarter of FY06 compared to the same quarter of FY05. Products which led to the growth in exports during the period are: woven
19
garments, knitwear products, leather, petroleum by-products, textile fabrics and raw jute reflecting both greater competitive conditions for Bangladesh products as well as stable demand conditions in major markets (Table V.2).
In terms of meeting export targets over the April-June period of FY06, in addition to the leading items cited above, products such as frozen food, agricultural products and computer services recorded both higher growth over last year and also matched or exceeded the target for FY06. Exports of jute goods, footwear, electronics, chemical products, engineering products, home textile and other manufacturing goods recorded a higher growth over last year’s but fell short of target. On the other hand, exports of tea, handicrafts and ceramic products recorded a decline over last year’s level as well as the target (Table V.6).
Destination-wise trend of RMG exports which is reported in Table V.5 shows that in the fourth quarter of FY06 Bangladesh gained greater access for both woven and knitwear products in the US market while the share of exports to EU has dropped. In spite of the duty free status, Bangladesh exporters find the EU “rules of origin” (ROO) harder to meet. In the mean time, greater effort by Bangladesh exporters to seek out new markets is paying dividends. The latter share while still very small has grown fast in FY06 (nearly four-fold).
Chart IV.4 FO REX Reserve & Exchange Rate
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During the quarter under review, exports of woven garments to the US showed a growth of 26.7 percent (vis-à-vis an overall growth rate of 21.4 percent for the category) compared to the same period of FY05. Knitwear products on the other hand grew even more rapidly (108.9 percent vis-à-vis 47.5 percent for the category) in the US market. On the other hand knitwear exports to the European countries increased by a meagre 7.1 percent while that of woven garments declined by 5.6 percent during the quarter.
Total merchandise imports measured by settlement of L/Cs have shown robust growth of 19.5 percent during the fourth quarter following a slower growth of 5.1 percent in the third quarter of FY06 (Table V.3). Imports of
20
food grains declined due on account of reduced rice imports while other food items such as the value of edible oil increased during the period under review. Imports of consumer and intermediate goods also increased by 21.7 percent during the quarter. The overall growth reflected the increased cost of energy products, raw cotton and yarn. Import of capital goods also registered a relatively high growth of 22.0 percent (of which capital machinery by 25.9 percent) during the quarter.
In recent years, remittances have proved to be the corner stone of the current account balance. Inflow of workers’ remittances recorded significant growth of 29.5 percent (to USD 1.33 billion) in the fourth quarter of FY06. Thus total remittances increased by 24.8 percent during FY06, reaching a new record of USD 4.8 billion. The improvement partly reflects the positive impact of measures undertaken by BB to facilitate transactions through the banking system and strengthening the anti-money laundering activities.
V. Price Developments
The expansion of domestic credit, currency depreciation, and the elevated level of world commodity prices exerted inflationary pressures on both demand and supply sides in the domestic market. The 12-month moving average inflation rose modestly in the 4th quarter of FY06 from 7.02 percent in March '06 to 7.16 percent in June '06,staying above the 7-percent mark that has been set as the central bank’s ceiling as announced in the first issue of the Monetary Policy Statement of January 2006. Examining the 12-month point-to-point data, an interesting pattern emerges between food and non-food inflationary development in FY06. While non-food prices rose persistently in the first three quarters (especially in rural areas), and moderated in the fourth quarter, food prices started to move up sharply in the fourth quarter. Having grown at 6.31 percent during the first nine months, food prices shot up by 15.6 percent in the 4th quarter (at annualized rates).
The sustained upward pressure on CPI inflation during FY06 has been driven both by food and non-food prices (Chart II.I and Table II.1). In terms of point-to-point data, non-food prices appear to have increased mostly in rural areas, and then over the first nine months of the fiscal year (at an annualized rate of 6.68 percent). A good part of the latter increase presumably originated from higher prices of kerosene and diesel, in spite of a rather muted response in the administered fuel prices in the face of sharp increases in the global crude oil price.8 However, the energy prices abroad may still affect domestic prices via the higher cost of imported intermediate goods. Within the fourth quarter itself, however, the rural non-food inflation rose only by 4 percent (annualized rate). The 12-month point-to-point increase was 5.73 percent nationally. Hence one would
8 Note that gross rent, fuel & lighting component constitutes the highest weight (16.87 percent) among the non-food sub-categories.
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predict some easing of non-food inflation in the coming months, especially on a 12-month moving average basis. The tighter monetary management may have contributed to the decline in non-food inflation in the 4th quarter of FY06. Rising rural food prices (see below) may have also dampened the demand for non-food items, and thus demand forces may also explain the decline in rural non-food inflation cited here.
The twelve-month average food inflation was 7.76 percent in June '06 as compared to the 7.90 percent in June '05. Looking at the point-to-point index it is seen that food prices have risen sharply during the last quarter, a pattern exactly opposite to that of non-food prices, which as seen above mostly rose in the first three quarters of the fiscal year. Having grown at 6.31 percent during the first nine months, food prices shot up by 15.6 percent in the 4th quarter (at annualized rates). Indeed urban food prices rose even faster (16.4 percent in the last quarter).9 The impetus behind the price rise may come from a mix of forces such as demand fuelled by inflation expectations, greater integration with the global food trade, currency depreciation, and, as widely reported in the media, subversion of the market forces by syndicates of traders and other unscrupulous agents.
It is to be noted that prices of major food items in the international market have also edged higher during the quarter under review (Chart II.2). There has been a rise in the price of rice and soybean oil, while price of wheat has marginally gone down in recent quarters. As shown in the figure, the significant upward pressure of petroleum prices still continued in the fourth quarter of FY06. The average crude price (US$/Barrel) petroleum in the international market has gone up from 61.0 in March '06 to 68.3 in June '06 (Table II.2).
Chart II.1 12-Month CPI Inflation
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9 Use of seasonally adjusted figures (over FY00 and FY06) lead to even higher estimates of inflation for the last quarter.
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Chart II.2 Commodity Prices at International Market
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Chart II.3 Inflation in South Asia (12-month poit to point)
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6
91215
1821
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
FY03 FY04 FY05 FY06
Perc
ent
Bangladesh India Pakistan Srilanka Inflation in South Asian countries edged higher in the last quarter of FY06. The Indian inflation rose to 6.3 percent in May '06 from 4.6 percent in March '06. While rising oil prices continue to dominate Indian inflation, domestic factors like prices of primary food articles namely rice, fruits and vegetables also posted upward pressure on the headline inflation in India during the last quarter.10 Inflation (point-to-point) in Pakistan and Sri Lankan also went up in the last quarter of FY06. The point-to-point inflation in Sri Lanka showed an abrupt rise to 17.7 percent in June '06 from 6.4 percent in March 2006. The Monthly Bulletin (July-2006) of Central Bank of Sri Lanka describes this rise as a result of demand pressure in the economy. Given the picture, the inflation in Bangladesh in last quarter of FY06 may be viewed as moderate as compared to the regional picture.
VI. Health of the Banking System
While gross NPL worsened for nationalized commercial banks (NCBs) during the fourth quarter of FY06, the net NPL ratio experienced a minor
10 In India, while the price of domestic petroleum products have been adjusted more vigorously than in Bangladesh, these still lag the rise in the price of international crude oil. Between March '04 and June '06 as the price of international crude oil price doubled, petrol price in the domestic market was increased by 40.3 percent, high-speed diesel by 49.5 percent while LPG and kerosene prices remained unchanged out if social concern as of November 2004 and since April '02, respectively (Reserve Bank of India, First Quarter Review, 2006-7, pp44-5).
23
improvement (Charts VI.1-VI.2). A good part of the difficulty faced by NCBs arises out of their non-performing loans to SOEs, especially BPC. The latter in turn is hamstrung by the government’s decision to not allow complete pass-through of the international energy prices onto the domestic consumers. The other banking system soundness indicators, notably risk-weighted capital ratio and profitability of banks (as measured by the return on equity, ROE, and return on assets, ROA) have continued to improve in the second half of FY06 (Tables VI.1-VI.4). While the growth in the issue of new term loans slowed in FY06, the overdue rate also fell.
Total gross NPL for the banking sector increased to 16.59 percent at the end of June 2006 from 15.38 percent at the end of March 2006. This increment mainly stemmed from the higher NPL ratio of NCBs (i.e., 31.38 percent) due to the fact that part of the SOE outstanding loans had become classified during the last two quarters of FY06. At the same time, NPL ratio for SBs declined to 32.7 percent from 35.15 percent over the same period. However, net NPL for groups of banks indicate that the ratios declined except for the PCBs. The figure for all bank groups stood at 8.21 percent at the end of June 2006 from 8.59 percent at the end of March 2006. A major contributing factor behind this improvement is the recent implementation of loan write-off directive.
According to recent data, risk-weighted capital asset ratio for all banks increased to 8.02 percent in June 2006 from 7.34 percent in December 2005, mainly due to an improvement in the asset position of NCBs (from -0.37 percent to 0.53 percent). The latter event reflects the impact of the recent issuance of bond worth BDT 10 billion by the government in favour of NCBs. Risk-weighted capital asset ratio remained much higher than the regulatory requirement (9-percent) for the foreign and private commercial banks (FCBs and PCBs) and remained slightly above 9-percent for the specialized banks (SBs) (Table VI.1).
Bank profitability measures, namely ROA and ROE increased to 0.72 percent and 13.35 percent at the end of December 2005 for all banks from 0.69 percent and 12.97 percent, respectively, at the end of December 2004. During the last six months of FY06, ROA and ROE for all bank groups also improved substantially (Table VI.4).
Disbursement of industrial term loans by all banks and non-bank financial institutions (NBFIs) in FY06 stood higher at BDT 96.50 billion compared to BDT 87.04 billion in FY05. In growth terms, disbursement of industrial term lending rose much slower at 8.21 percent in FY06 from 30.39 percent in FY05. However the “overdue rate” (i.e., as a share of current outstanding) improved in FY06 to 14.41 percent from 18.13 percent in the preceding fiscal year.
24
Chart VI.1 Ratio of Gross NPLs to Total Loans
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Chart VI.2 Ratio of Net NPLs to Total Loans
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Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4FY03 FY04 FY05 FY06
Percent
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VII. Capital Market Developments
In spite of strong performance of macroeconomic indicators such as GDP, exports, remittances, investment flows and foreign exchange reserves, the capital market performed poorly during FY06. During the 4th quarter capital market indicators show a downward pressure as evidenced by the general index, market capitalization and turnover. The DSE general index and market capitalization declined by 10.2 percent and 2.0 percent respectively during April-June’06. Over the entire fiscal year, the general index and market capitalization decreased by 21.8 percent and 3.6 percent respectively.
While the liquidity situation in the capital market improved in the last quarter of FY06 from the previous quarter, the volume of total turnover decreased to BDT 10.5 billion in the 4th quarter of FY06 from BDT 17.8 billion in same quarter of FY05, i.e., a decline of 41 percent. Over the entire FY06, total turnover decreased by 37.9 percent to BDT 46.0 billion as compared to BDT 74.1 billion in FY05.
However the “number of listed securities” and the value of “issued equity and debt” increased marginally by 1.1 and 7.2 percent respectively during the 4th quarter. During FY06 the “number of listed securities” and the
25
total “issued equity and debt” increased by 6.9 and 22.5 percent respectively (Table VII.1).
Chart VII.1 Trends in Market Capitalization and DSE Index
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Market Capitalisation Index Sector-wise DSE data show that during last quarter of FY06 market capitalization increased only two sector such as fuel and power and textile all other sector declined. Though declining slightly since 2nd quarter of FY06 the banking sector still accounts for about half of the total market capitalization with only 34 listed companies out of 269. Year-on-year basis market capitalization on financial sector increased marginally by 2.2 percent and manufacturing sector significantly declined by 24.4 percent but service & miscellaneous sector significantly rise by 92.8 percent. The increase mainly due to new listing of Government owned electric supply company DESCO listed in the capital market by newly introduced direct listing regulation, 2006 and another private sector electric generation company namely summit power listed with DSE by initial public offer.
VIII. Near-Term Economic Outlook
The central bank’s policy stance has been supportive of economic growth that the economy has achieved in the last quarter and indeed over the entire fiscal year. Growth has been accompanied by enhanced external sector viability. The emergence of sharp food price increase in the last quarter however remains a matter of concern and requires further analysis as to the sources of the pressure on prices. In the meantime, it will be prudent to continue with the monetary policy stance that dampens inflationary expectations and maintains a stable and competitive real exchange rate.
In the last issue of BBQ, it was pointed out that among elements of a policy regime consistent with the attainment of the highest sustainable output growth included rationalization of the energy price regime and SOE debt. This issue has assumed an even greater importance due to the continuing accumulation of SOE debt jeopardizing their own financial solvency and at the same time rendering the concerned commercial banks (typically NCBs) vulnerable to crisis engendering systemic instability. The resulting liquidity situation also prevents the smooth conduct of open
26
market operations as NCBs are unable to fully participate in the auction process.
While in the 4th quarter of FY06 a bond worth BDT 10 billion (of 3 year’s maturity) was issued by the government to Sonali Bank, the largest of NCBs, in partial adjustment of its overdue loans to BPC, it is preferable that such ad hoc devices give away to a modality for the elimination of the BPC losses through an explicit subsidy from the government budget, and a judicious revision of retail prices and tariffs on fuel oils. Such steps would facilitate better coordination of monetary and fiscal policies.
27
Governance Issues in the Banking Sector11
Dr. Salehuddin Ahmed Governor, Bangladesh Bank
The issue of corporate governance has assumed importance around the globe. It is a multi-faceted subject. Some like to define ‘corporate governance’ as the set of processes, customs, policies, laws and institutions affecting the way a corporation is directed, administered or controlled. An important part of corporate governance deals with accountability, fiduciary duty, disclosures, and mechanisms of auditing and control. Another important focus is economic efficiency, both within the corporation (such as the best practice guidelines) as well as externally. In this “economic view”, the corporate governance system should be designed in such a way as to optimize results, as well as to detect and prevent fraud.
Commercial banks pose unique corporate governance problems for managers and regulators as well as for claimants on the banks' cash flows. When banks efficiently mobilize and allocate funds, this lowers the cost of capital to firms, boosts capital formation, and stimulates productivity growth. So, weak governance of banks echoes throughout the economy with negative implications for economic development. There are two special attributes of banks that make them special in practice: greater management complexities than other industries and greater government regulation. These attributes weaken many traditional governance mechanisms. Nevertheless a good research is a pre-condition for better implementation of good governance.
I would like to underpin that the banks and NBFIs face some additional reasons for ensuring good governance. These include
• The rapid changes bought about by globalization, deregulation and technological advances have posed risk for the sector,
• Bank run does not only affect its stakeholders, but may have a systemic impact on the stability of the sector as a whole.
• Private sector banks with profit maximization motives are prone to take excessive risks with depositors’ money.
• Basel II requirements are more difficult to achieve.
11 Speech by Governor Dr. Salehuddin Ahmed of Bangladesh Bank as Chief Guest at the Workshop on Corporate Governance, organized by Bangladesh Enterprise Institute on September 2, 2006.
28
In this backdrop and particularly with a view to strengthening good governance in the financial sector especially in the banking sector the Bangladesh Bank has embarked upon a financial
ber of home grown reforms have either been implemented or are
ancial sector, bring dynamism therein, nomy of the central bank, combat money-laundering offences and obtain decrees and
exe i
• ourts to give judgment on original and appeal
or
Wit ce:
me
s and TORs. Banks
anks; • Issuance of IPO by banks and FIs was made compulsory which implies disclosures, good
rati n es. With these objectives:
sector reform. A large numunder way. Some of the developments are cited below:
BB attempted to strengthen the legal framework of the finextend auto
cut ons against defaulters of loans. More specifically:
• Money Laundering Prevention Act 2002, gave BB responsibility for the prevention of money laundering offences;
• Banks Nationalization (Amendment) Act 2003 (among others, requires disclosure of financial statements to the Board and BB and gives BB greater say in the appointment and removal of MDs);
• Bank Company (Amendment) Act 2003, (among others, authorized capital was raised to Tk. 1 billion); Financial Loan Court Act 2003: Setting up of special courts dealing exclusively with default loans; prescribing time limits for csuits; mandating banks to sell collateralized security before filing cases; provision falternative dispute resolution mechanism.
h a strong legal foothold, we could focus our attention to establishing good governan
Roles and functions of the Board and management were clarified and redefined; Number of Directors of Board was limited to 13; A person to be a director for a bank for more than six years at a stretch was debarred;
o Restrictions have been placed on close relations of directors of a bank to becdirectors;
Appointment of two independent directors to protect depositors’ interest was decided; ‘Fit and proper’ test for Bank Directors and the Managing Directors were prescribed; Disclosure and transparency standards in accordance with International Audit Standard
(specially IAS-30) have been introduced; • Audit Committees were mandated for all banks with clear guideline
have been asked to strengthen their internal control system; • Credit rating of banks has been made mandatory; • Assets Liabilities Committee (ALCO) has been formed in all b
audit report and public scrutiny. • Early Warning System (EWS) has been introduced by BB.
As installing of good governance is a continuous process, we need on the one hand to lower NPL added with older ono a d on the other improve risk management so that new NPLs are not
29
• Stringent loan rescheduling conditions were introduced to stop ever greening of loans; Strict measures have been laid and enforced on loan provisionin• g;
sioning;
• ’s NPL ratio; • Syndication of several banks for large loans are encouraged and guidelines for
management, internal control and compliance oney laundering) laying down policies, processes, procedures and structures that will
s.
In the m
003 was achieved without encountering undue volatility.
nt bonds have been introduced.
• government and corporate bond market. BB and the
• NBR have developed an enabling legal, regulatory framework for bonds/ n of receivables. Securitization of receivables of private financial institutions
nking sector our strategy aims at improving performance, NCBs. As a first step in this direction Rupali
• Loan write off guidelines were issued by the Bangladesh Bank, allowing the banks for the first time, to write off ‘bad’ debts against full provi
• An upper limit on a bank's exposure to a particular customer or group was introduced; Large loan limit has been linked to bank
restructuring such loans are issued.
The Core Risk Management Guidelines on five major risks have been introduced by BB (credit, foreign exchange, and assets-liabilities riskand anti-mlead to better governance and improved service
onetary and foreign exchange front: • We have an exchange rate regime, which is now, market determined. Floating of taka
since June 2• Further reform in simplifying and streamlining forex operations and payment system is
underway. • New financial instruments of varying tenure such as repo and reverse repo and five-year
and ten-year government investme• Cash and debt management of the government have been separated and volume based t-
bill auction has been introduced. Efforts are underway to develop theSecurities and Exchange Commission (SEC) have agreed to allow the government bonds to be traded in the stock exchange. BB, SEC andsecuritizatiohas started.
To ensure good governance in the barestructuring and gradual corporatization of all Bank is being sold to a private buyer.
As a central bank, the Bangladesh Bank is mandated to promote the operation of a stable and sound financial system – for which good governance is required in Bangladesh Bank. The Bank is also mandated to conduct the monetary policy to ensure price stability and support growth. BB has started for the first time to announce monetary policy in advance through its semi-annual Monetary Policy Statement. We have initiated a capacity building program in the Bangladesh
30
Bank. Service standards have been introduced for works in different departments. Workflow analysis has been initiated to bring in greater speed and ensure quality. Performance Management System (PMS) is being introduced. To improve vigilance and inspection, BB has created a new Unit called Foreign Exchange Inspection and Vigilance. E-governance that
corporate procurement, appointment through automated system with open access by public is
the decades-old traditional and
terization of the operations of the Bangladesh Bank, rms of recruitment, promotion and compensation
ents,
se, ) capacity building in the core activities, i.e. monetary policy, regulation of the financial sector,
nsparency and further market discipline – in one word – good governance. It would be a challenge for us to achieve all these, but we have to continue the journey on the path we have chosen.
inbeing introduced in BB. The Central Bank Strengthening Program aims to transformmanual system to a modern, automated system that includes (a) compu(b) human resource development through refopolicies, (c) restructuring of the different departm(d) reengineering the business processes, (e) automation of the Clearing Hou(fand research and policy analysis. We are now going to face challenges arising from adoption of Basle II Accord and consequential management of risks. Early adoption of the Accord presents an opportunity and as well as challenge for banks. They will enjoy a competitive advantage in international market. But the banks would need skilled human resources, automated business process, strong Internal Rating Systems and Management Information System, increased tra
31
Policy Note: PN 0701
Interest Rate Spread in Bangladesh: An Analytical Review Shamim Ahmed & Md. Ezazul Islam∗
Abstract Lower spread is a vital indicator of the efficiency and competition in the financial system and conducive to higher economic growth of a country via investment spending. In Bangladesh, the spread in the banking sector has been persistently high over the years. The inefficiency originated from the government’s ‘interventionist policies’ of the past and inadequate technical skills in the arena of risk and portfolio management, which caused the high spread in the banking system. If this situation continues indefinitely, private sector investment may be jeopardized. Therefore, lowering of the high banking spread would require substantial improvement in the current situation of limited competition, overstaffing, high administrative costs, the burden of NPLs, and above all, congruence between monetary and fiscal policy stances.
1. Introduction Lower financial intermediation cost is a vital indicator of the efficiency and competition in the financial system and conducive to higher economic growth of a country via investment spending. In this connection, interest rate spread characterizes a critical feature of the financial intermediation process in the economy. It is basically the difference between weighted average lending and deposit rates, a crude measure of the cost of efficient resource intermediation in the financial system. Historically, least developed countries (LDCs) with financial market imperfections have been characterized by higher spreads due to factors such as absence of competition, burden of non-performing loans (NPLs), high administrative costs, etc.12
To reduce the financial intermediation cost and achieve higher economic growth, the developing countries of Latin America (e.g., Argentina, Brazil, Mexico, Columbia, Chile, and Uruguay) and Asia (e.g., Malaysia, Indonesia, Philippines, South Korea, Thailand, India, Pakistan, and Sri Lanka) have implemented various Financial Sector Reform Programs (FSRPs) beginning from the mid-1970s. In this regard, Bangladesh is not an exception which initiated the FSRP in the early 1990s. One of the objectives of this comprehensive program was to provide a better return on deposits and create conditions for the efficient allocation of credit in the financial market by moving towards a market based interest rate regime from an administered regime (Islam and Begum, 2004). This paper explains the persistently high spread even in the currently liberalized regime. Besides, it examines the likely modality (e.g., relative scope of monetary policy tools vis-à-vis medium term public borrowing) by which high spread is maintained in the banking system on the basis of empirical research.
2. Evolution of Interest Rate Policy 2.1 Past Regime Immediately after independence in 1971, Bangladesh Bank (BB) adopted an administered interest rate policy which continued to the end of 1980s. The whole objective of this comprehensive policy of controls on the level as well as the structure of interest rates was to limit the cost of financial intermediation with a view to enforcing a reasonable structure of lending and deposit rates both generally as well as that ∗ Research Economist, Policy Analysis Unit (PAU), Research Department, Bangladesh Bank. The views expressed in this paper are author’s own. The authors would like to thank World Bank Institute (WBI) Resident Economic Adviser at the Bangladesh Bank Prof. Syed M. Ahsan for his helpful suggestions and comments. 12 High spreads are unfavourable for the economy since these indicate institutional inefficiencies or a certain degree of monopoly power on the part of financial intermediaries. Conversely, too low spreads are unlikely to be sustainable in the absence of an adequate non-interest income, and thereby, putting pressure on the intermediaries’ investment fund base and render them vulnerable to shocks (Islam and Begum, 2004).
32
directed to priority sectors. In practical terms the interest rates were generally kept at a low level in the 1970s; indeed rates on fixed deposits (except for FY76 and FY77) were below the rate of inflation. Consequently, the real rates of return on term deposits were negative in most of the years during this decade. Besides, the spread between lending and deposits rates remained about 7-percent on average over the same period. Considering sustained negative real rates on deposits over the years, in October 1980, BB revised upward the nominal rates on term deposits in order to correct the situation. As a result, the nominal rates on deposit were kept at a higher level during the 1980s. However, this rate increase was not fully in line with the changes in inflation rates, causing real rates on deposits to be negative again for most of the 1980s (except for FY89). During the 1980s, generally, more and more exceptions were introduced or special lending categories were identified for directed credit. Therefore, the interest rate as well as the credit structure was distorted and competition was totally absent; allocation of resources was therefore inefficient in the banking system reflected by the large spread of about 6-percent on average between borrowing and lending rates in the decade.
In view of the shortcomings of the administered interest rates and to reduce financial intermediation cost, a market oriented interest rate policy was introduced in January 1990 under the FSRP. Initially, interest rate bands were established for 11 exhaustive categories determined by the government. For lending below a shadow market rate determined by BB, the government paid subsidies to the scheduled banks, mainly nationalized commercial banks (NCBs), thus making these transparent (Islam and Begum, 2004). The reform measures in general allowed scheduled banks to freely set both lending and deposit rates as long as they remained within the bands determined by BB. However, a floor and ceiling for savings and fixed deposit were established. At that time the directed lending regime was redesigned; BB initiated a rediscount facility essentially for lending to the scheduled banks at a uniform rate, thereby replacing the entire menu of refinance rates. In 1992, the prescribed bands for lending rate were removed from all but three sectors, namely agriculture, export and small-industry sectors. Floors on savings and fixed deposit were continued but ceilings were removed. In 1997, the floor rates of deposits were also removed. Finally, in August 1999, interest band on agriculture and small and medium enterprises (SMEs) loans were also removed. It is important to mention that even after all of these policy changes, the spread between lending and deposits rates remained about 7-percent on average during the 1990s.
2.2 Current Regime Although most of the formal restrictions on the interest rate have been removed by the late 1990’s, lending and deposit rates are still not fully responsive to the market conditions. One major shortcoming here is the continuation of directed lending to certain sectors (especially state owned enterprise (SOE) in energy and civil aviation) which are mediated by NCBs, as well as more generally at the government owned specialized banks (SBs). Of course, it is the mandate of BB to influence lending and deposit rates in the desired direction through the monetary policy instruments such as open market operations (including repo and reverse-repo auctions), setting of the bank rate, statutory liquidity ratio (SLR), cash reserve requirement (CRR), and the like. But, these polices have had an uncertain impact on the structure of borrowing and lending rates prevailing in the financial system.
In the recent Bangladesh experience, public (non-bank) borrowing through the National Savings Directorate (NSD) certificates has served as a source of an occasional shock to the credit market equilibrium. Historically these instruments offer non-market rates of return to depositors, and thus whenever the NSD rates are re-evaluated by Ministry of Finance (MOF), the market experiences a jolt. Subsequent adjustments in the structure of deposit rates (and thus lending rate as well) reverberate throughout the financial system until a new equilibrium is reached. In this regard, empirical results reveal that over the past several years, the NSD rate as well as monetary policy instruments of BB have more or less influenced lending and deposit rates in the banking system (Annex Table).
The NSD rates were increased most recently in December 2005 by 1.5 percentage points. While deposits of less than six months (particular at foreign commercial banks (FCBs)) have yet to experience much of a general adjustment, those of six months and longer have gone up by at least one full percentage point at
33
most banks. Private commercial banks (PCBs) appear to have raised deposit rates across the board.13 While this may have helped to move the real deposit rate in the positive arena, but this has not been the motivating factor. During the first 5-months of FY06, the net sale of NSD certificates had been at BDT 5.66 billion as against 7.95 billion in FY05, about 29 percent less. Clearly an increase was necessary to induce sales. Question remains if the scale of the increase was necessary to induce the anticipated amount of additional borrowing. Ordinarily it would be expected that on account of the perceived low risk of investing in government issued instruments, the NSD certificates should attract sizeable investments if the offered rate were close to the rate prevailing in the banking system on deposits of comparable maturity. Presumably this practice will disappear once the borrowing requirements moderate.
3. Recent Persistence of High Spread 3.1 Weighted Average Spread Table 1 illustrates the weighted average spread of all banks as well as sector wise behaviour of the spread pattern between June 2003 and March 2006. The spread for SBs has declined during FY04, but stabilising at about 4-percent over the past 12 months or so, the lowest spread among all the major bank groups in the country. Conversely, the spread for FCBs has gradually increased from the fourth quarter of FY04 for the next six quarters before easing a bit (but still in the 8-percnt range) in December 2005 and again increased above 8-percent in the third quarter of FY06. Moreover, it is the highest among all bank groups over the same period. Finally, while the spread had moderated for most of FY04, both PCBs and NCBs have followed a rather similar and stable path (i.e., about 6 percentage points) over the past seven quarters of so. While historically NCBs charged a slightly lower spread than PCBs, it is no longer so as of December 2005.
Table 1: Interest Rate Spread (quarterly weighted average in percent) Quarter All Banks NCBs SBs PCBs FCBs June ’03 6.48 6.14 6.00 6.63 7.61 September ’03 6.23 5.90 5.67 6.45 7.43 December ’03 6.11 5.77 4.71 6.55 7.32 March ’04 5.40 4.79 4.29 5.89 6.94 June ’04 5.36 4.88 3.64 5.85 7.22 September ’04 5.22 4.70 3.66 5.67 7.36 December ’04 5.27 4.87 3.70 5.54 7.46 March ’05 5.16 4.80 3.66 5.29 7.82 June ’05 5.31 5.14 3.58 5.25 7.93 September ’05 5.24 5.08 3.56 5.10 8.34 December ’05 5.38 5.42 3.66 5.08 7.87 March ’06 5.34 5.26 3.34 5.22 8.25
Note: In the above figure, Islamic banks (IBs) are also included in the PCBs group. Source: BB Quarterly (various issues) and authors’ calculation.
It is hard to compare the weighted average spread internationally as consistent data is not typically available for this indicator. In India, nominal prime lending rates of public sector banks and deposit rates of various maturities were within the range of 10.25 to 11.25 percent and 2.75 to 7-percent respectively during December 2005. India’s spread had been the lowest in South Asia in 2005 (Table 2). In contrast, although Pakistan has the lowest lending and deposit rates in nominal terms as well as real terms among the South Asian countries starting from June 2003, the spread of the banking system however remains the highest in the region as the rate on deposit has been too low. The nominal lending and deposit rates in Sri Lanka have been the highest in the region since August 2005, therefore, the spread of the banking system remains in a high single digit. Though based on incomplete data, on the basis of the evidence cited above,
13 These statements are based on the Economic Trends (February/March, 2006).
34
the Bangladesh spread behaviour does not appear to be much of an outlier, though it is a good deal higher than that in India, which boasts as the more competitive of the banking systems in the region.
Table 2: Interest Rate Spread in South Asia Year Pakistan India Sri Lanka Bangladesh 2003 6.63 6.09 4.34 6.11 2004 6.33 5.17 4.4 5.27 2005 6.40 4.50 5.99 5.38
Notes: 1. All the figures have been taken for the month of December in each period except the figure for Pakistan in 2005 has been taken for the month of June.
2. For India, deposit and prime lending rates are the mid-points of the range where the rates relates to five major banks. Moreover, deposit rates are for more than one year maturity. Bangladesh, Pakistan, and Sri Lanka figures are weighted average.
Source: Reserve Bank of India Bulletin (various issues), International Financial Statistics (2005), and authors’ calculation.
3.2 Net Interest Margin (NIM)14
The figure in Table 3 indicates that while the overall pattern of the interest margin is comparable between Bangladesh and India, there are major differences along market segments. Given that reforms have been deep rooted in India, it would be particularly interesting to compare the PCB segment in the two countries, as they are generally free of pubic directives. While in Bangladesh the margin has declined in each year for both PCBs and FCBs, which is encouraging, by contrast there has been a shift up in the Indian figures across the board in 2004. Importantly the private banks (as well as FCBs) in India are seen to be more efficient than in Bangladesh. Though FCBs in both countries exhibit the highest spread, the figures in Bangladesh while having moderated dramatically in 2004, have been significantly higher than in India. It would be interest to see how the figure evolves in 2005, i.e., whether the 2004 decline was sustained or not. It would thus appear that there is room for efficiency gains via enhanced competition among PCB and FCBs.
Table 3: Net Interest Margin of Major Bank Groups: Comparison with India15
Bangladesh India Year All
Banks NCBs SBs PCBs FCBs All
Banks Public Banks
Private Banks
FCBs
2002 2.65 1.25 2.25 3.88 7.11 2.57 2.73 1.58 3.25 2003 2.70 1.47 1.48 3.71 6.76 2.48 2.52 1.96 3.36 2004 2.17 1.00 1.12 3.27 3.84 2.87 2.97 2.24 3.47
Note: Data for Bangladesh are at the end of December of respective years, while data for India are at the end of March of respective years.
Source: Statistics Department and Off-site Department, Bangladesh Bank and Mohan (2005).
The overall pattern of NIM is driven by the robust figure for the public sector banks which still account for nearly 75 percent of banking assets in India, and which are on the whole rather profitable. In contrast the NCBs in Bangladesh exhibit low spread on account of various restrictions that are imposed on their priority lending as well as to the relevant interest rates they can charge of these clients. NIM behavior lends easily to an international comparison. Mohan (2005, p18) cites a set of figures for a number of countries which indicate that the spreads for 2003 was below 2-percent for both Thailand and China, and higher for Korea (2.5 percent), Philippines (2.3 percent) and Indonesia (4.22 percent). Thai figure 14 NIM is typically defined as the difference between ‘interest expenses’ and ‘interest income’ per unit of ‘total bank assets’. This is believed to be an important an indicator of intermediation efficiency. In the wider banking literature, the alternative concept of NIM is more prevalent. 15 The Bangladesh figures are similar to those reported by Mian (2004) though the latter uses a different methodology.
35
primarily reflecting private banks can only be compared with that relevant to the private sector banks only (PCBs and FCBs in the present acronyms) in Bangladesh and India. Seen in this light the Bangladesh figures appear to be on the high side.
How high are these rates? This can only be known with precision if one knew the true costs of intermediation in the financial sector. Note that the figures in Table 4 are a mere fraction of the weighted average spread discussed above, and also below the NIM applicable for each bank group. Overall, however, these figures are lower than those in India (2.2 percent in 2004, and stable over the past decade).16 Internationally China (1.01 percent), Korea (1.38 percent), Malaysia (1.61 percent), and Thailand (1.71 percent) yield lower costs than other Asian countries (Mohan, 2005, p18). Interestingly here Bangladesh comes out among the leaders, although not having access to the data behind the foreign figures the exact comparability remains to be further explored.
Table 4: Costs of Intermediation (Operating Expenses as % of Total Assets) in Bangladesh Year All Banks NCBs SBs PCBs FCBs 2001 1.83 1.53 1.94 1.93 3.21 2002 1.77 1.43 1.55 2.08 2.71 2003 1.92 1.58 1.88 2.14 2.72 2004 1.87 1.54 1.91 2.06 2.49 2005 1.76 1.61 1.08 1.96 2.21
Source: Bangladesh Bank Annual Report (various issues) and Off-site Supervision Department, Bangladesh Bank.
4. Causes and Consequences of the High Spread Before analysing the reasons behind the high spread, it is worth mentioning that SBs featuring a variety of government interventions are not meant to form an efficient and competitive financial sector, therefore, the analysis into the causes of high spread may largely ignore this segment of the market. Besides, for the present discussion it is also kept in the background that the deposit rate in the banking industry is sort of exogenous to the market due to public sector borrowing requirements via the NSD certificates and similar instruments offering non-market yields. In particular, empirical results presented in the Annex Table suggest that 3-year NSD rate-increase in general triggers shift in deposit rate (i.e., weighted average rate on all types of deposits), savings deposit rate and rate on fixed deposit with 1-year to less than 2-year maturity in the positive direction. In turn, deposit rate and quarterly import growth also influence lending rates offered by the scheduled banks. Apart from 3-year NSD rate, bank rate set by the BB has been generally successful in influencing deposit and savings deposit rates.17
An interpretation of the persistence of high spread may therefore proceed as follows.
a. If the banking industry were believed competitive, the high spread would be indicative of high costs of intermediation. Here the high volume of NPL may figure as an explanation. Clearly high NPL faced by NCBs (and even higher by SBs) do not permit these institutions to make full use of their assets in earning the required return unless the lending rates are relatively high in relation to deposit rates. The question that arises is why competition among PCBs do not lead to a lowering of the spread in their segment of the market, and thus in the banking industry.
b. Another argument that may be put forward in explaining the high spread is that given the ‘high’ deposit rates in the banking industry, the addition of even a ‘normal’ intermediation costs would render the final break-even lending rate ‘high’, though this by itself does not explain high spread. However, potential investors would have to be imaginative in the use of money as they need to earn a high enough return to be able to pay the bank off. Thus if they undertake riskier than usual projects which on average 16 In the Indian case, all figures are close to each other across the bank groups, such that none of the figures fall below 2-percent (Mohan, 2005, p12). 17 The other monetary policy instruments such as SLR, CRR, Treasury bill auctions have not been considered in the empirical estimation to keep the analysis simple.
36
yield higher returns, given the risks of default, the prudent lender has to take that into account as well in setting the ‘break-even’ lending rate. In this mechanism high deposit rate leads to a ratchet effect on the high lending rate, and hence the high spread. The above argument holds a fortiori in a non-competitive setting. Note that the high deposit rate which serves as a trigger in this construction may originate from the high rates available on public debt (Annex Table).
c. The remaining hypothesis is that the market is non-competitive, and the spread is mainly indicative of ‘monopoly’ profit. This view primarily rests on the market segmentation hypothesis, namely that each segment of the market (i.e., NCBs, PCBs, and FCBs) have distinct demand features which are catered only by the respective segment. The recent FCB behaviour is supportive of market segmentation; not only does this part of the market display a much higher spread than the rest, the differential seems robust, actually having risen substantially over the past two years (Table 1). Competition would have brought about the opposite trend.
The convergence of the spread between NCBs and PCBs over time may give an appearance of competition between these two segments of the market. However, the knowledge that the NCBs will not be allowed to exit the market simply on grounds of their losses would permit one to interpret the observed spread in the NCB-PCB segment of the market as the minimum necessary to meet the cash flow requirements of NCBs just to keep the latter functioning.18 It is thus plausible that the more efficient firms among them (typically PCBs) enjoy some market power, and they exploit the advantage (i.e., earn excess profit) by adhering to the spread below which NCBs simply cannot operate. In other words, these better-run banks do not play the competitive game by paring the spread in order to win market share. The overall behaviour may then appear as one of tacit collusion within the PCB sector.
5. Conclusion To a degree the high spread reflects institutional inefficiencies. The inefficiency originated from the government’s ‘interventionist policies’ of the past and inadequate technical skills in the arena of risk and portfolio management. In this regard, Mahmud (2004) has argued that Bangladesh adopted financial liberalization without preparing for adequate regulation and supervision. It is important to mention that if this situation of high spread continues indefinitely, private sector investment may be jeopardized. Given the preponderance of debt financing in the country, increases in the borrowing rates raise the cost of investment nearly proportionately and thus eliminates many possible investment projects that were at the margin of acceptance. Here the absolute level of the (real) lending rate matters more than the spread. Further, the resulting high cost of borrowing also puts strains on the government by increasing the cost of servicing public borrowing from commercial banks as well as that from the non-bank public (Mahmud, 2004). Therefore, lowering of the high banking spreads would require substantial improvement in the current situation of limited competition, overstaffing, high administrative costs, the burden of NPLs, and above all, congruence between monetary and fiscal policy stances.
References Bangladesh Bank. Economic Trends (various issues), Statistics Department, BB: Dhaka. __________________. Bangladesh Bank Quarterly (various issues), BB: Dhaka. International Monetary Fund (2005). International Financial Statistics (IFs), Washington, D.C. Islam, E. Md. and N. Begum (2004). “High Lending Rates in Bangladesh: An Analytical Review,” Bank Parikrama,
Bangladesh Institute of Bank Management (BIBM), Vol. 29-29, pp. 100-119. Mahmud, W. (2004). “Macroeconomic Management From Stabilization to Growth?,” Economic and Political
Weekly, Vol. 35, No. 36, pp. 4023-32.
18 Note that the current income of NCBs, high spread notwithstanding, does not permit them to make adequate provisions for bad and doubtful debts as required under BB regulations. They do not maintain the capital adequacy ratios either.
37
Mian, Md. A.M. (2004). “Interest Rate Spread of Commercial Banks Operating in Bangladesh,” mimeo, BB, Dhaka.
Mohan, R. (December 2005). “Reforms, Productivity and Efficiency in Banking: The Indian Experience,” Address delivered at the 21st Annual General Meeting and Conference of the Pakistan Society of Development Economists.
Annex Table: Determinants of Lending and Deposit Rates (1997-2006)19
Dependent Variable: Lending Rate of Independent Variables All Banks PCBs FCBs Bank Rate 0.114
(0.089) 0.051
(0.121) 0.020
(0.112) Deposit Rate (of) 1.127*
(0.176) 0.7223* (0.250)
0.507* (0.142)
Import Growth Rate 0.002*** (0.001)
0.002 (0.001)
0.000 (0.001)
Adjusted R2 0.981 0.955 0.885 Sample Size 37 37 37 Dependent Variable: Deposit Rate (all types) of Independent Variables All Banks PCBs FCBs Bank Rate 0.344***
(0.168) -0.073
(0.345) 0.227
(0.140) 3-Year NSD Certificate Rate
0.223* (0.065)
0.070 (0.086)
0.297* (0.055)
1-2 Day Repo Rate 0.019 (0.031)
0.012 (0.040)
-0.079** (0.026)
Adjusted R2 0.665 0.628 0.761 Sample Size 15 15 15 Dependent Variable: Savings Deposit Rate of Independent Variables All Banks PCBs FCBs Bank Rate 0.678**
(0.234) 0.352
(0.290) 0.306
(0.557) 3-Year NSD Certificate Rate
0.245** (0.092)
0.075 (0.079)
0.055 (0.138)
1-2 Day Repo Rate 0.002 (0.042)
-0.003 (0.035)
-0.034 (0.065)
Adjusted R2 0.749 0.845 0.835 Sample Size 15 15 15 Dependent Variable: Fixed Deposit Rate (1 year to less than 2 years) of Independent Variables All Banks PCBs FCBs Bank Rate -0.225
(0.374) -0.363
(0.440) -0.413
(0.250) 3-Year NSD Certificate Rate
0.370** (0.147)
0.205*** (0.109)
0.454* (0.098)
1-2 Day Repo Rate 0.091 (0.066)
0.053 (0.051)
0.063 (0.047)
Adjusted R2 0.422 0.742 0.487 Sample Size 15 15 15
Notes: 1. *,**, and **** means significant at 1-percent, 5-percent and 10 percent levels respectively. 2. Standard errors in the parentheses are corrected for serial correlation.
19 All estimations have been performed based on quarterly data set retrieved from various publications of BB for the period of January-March 1997 to January-March 2006. Besides, the variables are stationary in level based on Augmented Dickey-Fuller (ADF), Phillips-Perron (PP), and Kwiatkowski-Phillips-Schmidt-Shin (KPSS) tests. For ‘1-2 Day Repo Rate’, unit root tests have not been performed due to small number of observations (i.e., only 15).
38
Policy Note Series: PN 0702
Future Prospects of Bangladesh’s Ready-Made Garments Industry
and the Supportive Policy Regime
Md. Nehal Ahmed∗
and
Md. Sakhawat Hossain∗
Abstract Emergence of the global market has heightened the role of trade in world economy and made industrialization as an integral system of global trade and production. Bangladesh economy at present is more globally integrated than at any time in the past. The MFA phase-out will lead to more efficient global realignments of the textile and clothing industry. After the introduction of Agreement on Textile and Clothing (ATC), the RMG industry of Bangladesh is facing new and unique challenges. The paper attempts to identify the prospects of RMG industry in the post-MFA period by analyzing the current scenario along with different policy measures and the available options in order to be more competitive in the new regime. The phase out was expected to have a negative impact on the economy of Bangladesh. But recent data reveals that Bangladesh absorbed the shock successfully and indeed RMG exports grew significantly. Due to a number of steps taken by the industry (e.g., successful in diversifying products and markets, increased backward integration, high level of investment, and supportive policy regime), Bangladesh still remains competitive in RMG exports even in this post phase-out period. But much more needs to be done (e.g., removal of structural impediments, establishment of training and research institute, sharing of knowledge and technology) in order to maintain the competitiveness in the global RMG market.
∗ Research Economist, Policy Analysis Unit (PAU), Research Department, Bangladesh Bank. The authors would like to acknowledge Prof. Syed M. Ahsan, World Bank Institute (WBI) Resident Economic Adviser at the Bangladesh Bank for his excellent guidance, valuable suggestions and helpful comments. The authors are also highly grateful to Dr. Md. Akhtaruzzaman, Senior Research Economist, PAU, Research department, Bangladesh Bank for his experienced and constructive suggestions.
39
Introduction The Ready-Made Garments (RMG) industry occupies a unique position in the Bangladesh economy. It is the largest exporting industry in Bangladesh, which experienced phenomenal growth during the last 20 years. By taking advantage of an insulated market under the provision of Multi Fibre Agreement (MFA) of GATT, it attained a high profile in terms of foreign exchange earnings, exports, industrialization and contribution to GDP within a short span of time. The industry plays a key role in employment generation and in the provision of income to the poor. Nearly two million workers are directly and more than ten million inhabitants are indirectly associated with the industry. Over the past twenty years, the number of manufacturing units has grown from 180 to over 3600. The sector has also played a significant role in the socio-economic development of the country. The Agreement on Textile and Clothing (ATC) introduced in 1994, aimed at bringing textiles and clothing within the domain of WTO rules by abolishing all quotas by the end of 2004. It provides an adjustment period of 10 years, so that countries affected by the MFA could take the necessary steps to adjust to the new trading environment. Liberalization of trade following the Uruguay Round agreement presents opportunities as well as challenges for a developing country like Bangladesh in RMG sector. In the Post-Uruguay Round period, traditional instruments of trade policy such as tariffs, quotas, and subsidies will become less feasible and less relevant. In a liberalized trade regime, competition among textiles and clothing exporting countries is likely to become intense. The objective of this paper is to identify the prospects of RMG industry after the MFA phase out by analyzing the current scenario along with different policy measures and the available options in order to be more competitive in the new regime.
Contribution of the RMG Industry RMG business started in the late 70s as a negligible non-traditional sector with a narrow export base and by the year 1983 it emerged as a promising export earning sector; presently it contributes around 75 percent of the total export earnings. Over the past one and half decade, RMG export earnings have increased by more than 8 times with an exceptional growth rate of 16.5 percent per annum. In FY06, earnings reached about 8 billion USD, which was only less than a billion USD in FY91. Excepting FY02, the industry registered significant positive growth throughout this period.20
Figure 1: Trend of RMG Export Volume, Export Growth and Contribution to GDP
20 The negative growth in FY02 was most likely the outcome of the worldwide effects of September 11, 2001.
40
Source: Export Promotion Bureau (EPB) and Economic Trends, Bangladesh Bank In terms of GDP, RMG’s contribution is highly remarkable; it reaches 13 percent of GDP which was only about 3 percent in FY91. This is a clear indication of the industry’s contribution to the overall economy. It also plays a pivotal role to promote the development of other key sectors of the economy like banking, insurance, shipping, hotel, tourism, road transportation, railway container services, etc. A 1999 study found the industry supporting approximately USD 2.0 billion worth of economic activities (Bhattacharya and Rahman), when the value of exports stood at a little over USD 4.0 billion. One of the key advantages of the RMG industry is its cheap labour force, which provides a competitive edge over its competitors. The sector has created jobs for about two million people of which 70 percent are women who mostly come from rural areas. The sector opened up employment opportunities for many more individuals through direct and indirect economic activities, which eventually helps the country’s social development, woman empowerment and poverty alleviation. Prospects of the RMG Industry Despite many difficulties faced by the RMG industry over the past years, it continued to show its robust performance and competitive strength. The resilience and bold trend in this MFA phase-out period partly reflects the imposition of ‘safeguard quotas’ by US and similar restrictions by EU administration on China up to 2008, which has been the largest supplier of textiles and apparel to USA. Other factors like price competitiveness, enhanced GSP facility, market and product diversification, cheap labour, increased backward integration, high level of investment, and government support are among the key factors that helped the country to continue the momentum in export earnings in the apparel sector. Some of these elements are reviewed below.
Market Diversification Bangladeshi RMG products are mainly destined to the US and EU. Back in 1996-97, Bangladesh was the 7th and 5th largest apparel exporter to the USA and European Union respectively. The industry was successful in exploring the opportunities in markets away from EU and US. In FY06, a successful turnaround was observed in exports to third countries, which having a negative growth in FY05 rose three-fold in FY06, which helped to record 23.1 percent overall export growth in the RMG sector. It is anticipated that the trend of market diversification will continue and this will help to maintain the growth
0
2
4
6
8
10
12
14
FY91
FY92
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
Perc
enta
ge o
f GD
P
0
1000
2000
3000
4000
5000
6000
7000
8000
FY91
FY92
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
Exp
ort (
Mill
ion
US
D)
-10
0
10
20
30
40
50
Gro
wth
(%)
RMG Export Growth Rate
41
momentum of export earnings. At the same time a recent WTO review points out that Bangladesh has not been able to exploit fully the duty free access to EU that it enjoys. While this is pointed out to be due to stringent rules of origin (ROO) criteria, the relative stagnation in exports to EU requires further analysis. Table 1: Region-wise Share of RMG Export
Share to E s
Combined Share of Export Share of Other Year Export Share to Export USA uropean Countrie USA & EU (%) Countries (%)
2001-2002 42.67 55.43 98.10 1.90 2002-2003 38.02 57.12 95.14 4.86 2003-2004 28.64 65.42 94.06 5.94 2004-2005 30.64 64.24 94.88 5.12 2005-2006 33.67 49.77 83.43 16.57
Sou desh Ban erly
roduct Diversification
he growth pattern of RMG exports can be categorized into two distinct phases. During the initial phase it
twear Total RMG Export
rce: Bangla k Quart
P Twas the woven category, which contributed the most. Second phase is the emergence of knitwear products that powered the recent double digit (year-on-year) growth starting in FY04.
Woven and Knitwear Categories Table 2: Growth Pattern of Year Woven Kni
2 002-03 4.28 13.34 7.16 2003-04 8.59 29.88 15.76 2004-05 1.70 31.26 12.87 2005-06 13.50 35.38 23.11
Source: E motion Bureau (EP
the globalized economy and ever-changing fashion world, product diversification is the key to
(in Million USD) Year Shirt Jackets T-Shirt Trousers
xport Pro B) Incontinuous business success. Starting with a few items, the entrepreneurs of the RMG sector have also been able to diversify the product base ranging from ordinary shirts, T-shirts, trousers, shorts, pajamas, ladies and children’s wear to sophisticated high value items like quality suits, branded jeans, jackets, sweaters, embroidered wear etc. It is clear that value addition accrues mostly in the designer items, and the sooner local entrepreneurs can catch on to this trend the brighter be the RMG future. Table 3: Export Performance of Different Apparel Items
Sweater 2 1 000-01 067.22 570.33 593.87 652.44 474.04 2001-02 871.22 412.34 546.28 636.61 517.83 2002-03 1019.88 464.51 642.62 643.66 578.38 2003-04 1116.57 364.78 1062.11 1334.85 616.31 2004-05 1053.34 430.28 1349.71 1667.72 893.12 2005-06 1056.87 408.97 1781.51 2165.25 1042.61
42
Sour Promot u (EPB)
ackward Integration
proved itself to be a resilient industry and can be a catalyst for
ce: Export ion Burea B
MG industry in Bangladesh has alreadyRfurther industrialization in the country. However, this vital industry still depends heavily on imported fabrics. After the liberalization of the quota regime some of the major textile suppliers Thailand, India, China, Hong Kong, Indonesia and Taiwan increased their own RMG exports.
Figure 2: Trend of Back-to-Back Import
20.00
25.00
30.00
35.00
40.00
45.00
50.00
e
FY00 FY01 FY02 FY03 FY04 FY05 FY06
Bac
k to
Bac
k Im
port
Per
cent
ag
Source: Foreign Exchange Policy Department (FEPD), Bangladesh Ban
If Bangladesh w arket economy it has
low of Investment
estic entrepreneurs alone may not be able to develop the textile industry by
otal Lending and Capital Machinery Import in the Apparel Industry
kants to enjoy increased market access created by the global open m
no alternative but to produce textile items competitively at home through the establishment of backward linkage with the RMG industry. To some extent the industry has foreseen the need and has embarked on its own capacity building. The trend of back-to-back import has been declining over the years implying a rising contribution of domestic value addition (Figure 2). This is an optimistic indication that a well equipped and modern backward linkage industry may well prove cost effective and thus helping Bangladesh to meet the challenges in the post-MFA era. F
is plausible that domItestablishing modern mills with adequate capacity to meet the growing RMG demand. It is important to have significant flow of investment both in terms of finance and technology. Figure 3 indicates that the investment outlook in this sector is encouraging, although the uncertainties before the MFA phase-out period caused a sluggish investment scenario. In part the momentum in the post-MFA phase-out period is indicative of the efforts underway towards capacity building through backward integration. This is evident in the pace of lending to the RMG sector and in the rising import share of RMG related machinery. However further progress would be necessary to improve and sustain competitiveness on a global scale.
igure 3: Trend of TF
43
Note: The first figure indicates the total RMG lending as percentage of total lending while the second one represents the import of textile and garments related capital machinery as percentage of total import of the country. Source: Schedule Bank Statistics (SBS) and Foreign Exchange Policy Department (FEPD), Bangladesh Bank A Supportive Policy Regime Government of Bangladesh has played an active role in designing policy support to the RMG sector that includes back-to-back L/C, bonded warehouse, cash incentives, export credit guarantee scheme, tax holiday and related facilities. At present government operates a cash compensation scheme through which domestic suppliers to export-oriented RMG units receive a cash payment equivalent to 5 percent of the net FOB value of exported garments. The FY04 budget also lowered the corporate income tax rate for the RMG industry from 30 to 10 percent for the period up to June 30, 2006. From FY05 the tax regime has been further changed, and a 0.25 percent tax at source will be deducted from the value of the export proceeds of Woven and Knitwear category. At the same time, income tax rate for textile manufacturers were reduced to 15 percent from its earlier level for the period up to June 30, 2008. The reduced tax rates and other facilities are likely to have a positive impact on the RMG sector. Lead Time
‘Lead time’ is a crucial factor maintaining export competitiveness. Bangladesh happens to feature the longest lead time in the RMG world. The lead time for Bangladesh is 120 days on an average, while the corresponding period for Sri Lanka is about 19-45 days and for India it is only about 12 days. Various factors like the distance from major markets, importation of raw materials, port congestion, strikes, poor roads, etc. are some of the factors responsible for this. At present the fashion seasons are becoming short with a changing trend, it would not be possible to compete if the lead time extends beyond 30-40 days. Therefore, bringing down the ‘lead time’ to about 30-40 days is a major challenge for the country’s RMG sector. Clearly more business can be captured only if the lead time could be improved. Infrastructural Impediments
The existence of sound infrastructural facilities is a prerequisite for economic development. In Bangladesh, continuing growth of the RMG sector is dependent on the development of a strong backward linkage in order to reduce the lead time. However, other factors constraining competitiveness of Bangladesh’s RMG exports included the absence of adequate physical infrastructure and utilities (e.g., transportation, telecommunication, stable power supply, efficient seaport, political tolerance, quality control and a smoothly functioning bureaucracy). According to a recent World Bank-IFC publication (2006) records that a businessman in Bangladesh needs 35 days to export and incurs USD 902 per container, whereas his counterpart in India requires 27 days and spends USD 864 per container. The
15
16
17
18
19
20
FY01 FY02 FY03 FY04 FY05 FY06
RMG
Len
ding
as %
of T
otal
Len
ding
0.50
1.00
1.50
2.00
2.50
3.00
FY01 FY02 FY03 FY04 FY05 FY06Capi
tal M
achi
nery
as %
of T
otal
Impo
rt
Textile Machinery Garments Machinery
44
comparable figures for Pakistan, Sri Lanka and Vietnam are 24 days and USD 996, 25 days and USD 797, and 35 days and USD 701, respectively. Labour Productivity
The productive efficiency of labour is more important determinant for gaining comparative advantage than the physical abundance of labour. In Bangladesh, the garment workers are mostly women with little education and training. The employment of an uneven number of unskilled labours by the garment factories results in low productivity and comparatively more expensive apparels. Bangladesh labour productivity is known to be lower when compared with that of Sri Lanka, South Korea and Hong Kong SAR. Bangladesh must look for ways to improve the productivity of its labour force if it wants to compete regionally if not globally. Cheap Labour Force The strength of a firm depends on its specific comparative advantages, which its competitors do not possess. To date the local industry has flourished in spite of the challenges cited above (e.g., lead time, infrastructure, and bureaucratic red tape) on the back of cheap female labour. The wages paid to RMG workers in Bangladesh are the lowest even by the South Asian regional standard. Figure 4 illustrates the comparative average hourly wages in apparel industry of selected developed and developing countries.
Figure 4: Comparative Average Hourly Wage in Apparel Industry 11.16
10.03
5.13
1.75 1.46 1.08 0.86 0.71 0.57 0.49 0.43 0.230
2
4
6
8
10
12
USA
Ger
man
y
Hon
gkon
g
Mex
ico
Lith
uani
a
El S
alva
dor
Chi
na
Indi
a
Sri L
anka
Paki
stan
Indo
nesi
a
Bang
lade
sh
USD
Per
Hou
r
Source: ILO, 2003 and CPD Occasional Paper Series
Research and Training The country has no dedicated research institute related to the apparel sector. RMG is highly fashion oriented and constant market research is necessary to become successful in the business. Here India has had a head start and Mumbai and Delhi are on line to become fashion centres on a global scale. At present whatever design work is done in the country, these are mostly carried out with foreign workers and experts. BGMEA has already established an institute which offers bachelor’s degree in fashion designing and BKMEA is planning on setting up a research and training institute. These and related initiatives need encouragement possibly intermediated by donor-assisted technology and knowledge transfer. A facilitating public sector role can be very relevant here. Conclusion and Recommendations Bangladesh economy at present is more globally integrated than at any time in the past. The MFA phase-out will lead to more efficient global realignments of the textile and clothing industry. The phase out was expected to have negative impact on the economy of Bangladesh. Recent data reveals that Bangladesh
45
absorbed the shock successfully and indeed RMG exports grew significantly both in FY05 and (especially) in FY06. Due to a number of steps taken by the industry, Bangladesh still remains competitive in RMG exports even in this post phase-out period. Cheap labour is no longer seen to be a mainstay of comparative advantage. The need for establishing strong backward linkage was appropriately realized and accordingly necessary steps were taken by all quarters of the RMG industry, which has been reflected in the decreased pattern of back-to-back import supported by increased domestic value addition. However further progress is in order, and a strong public sector role is necessary to mediate the establishment of textile mills with global standards. An appropriate policy regime is needed to encourage the importation of technology, intermediate and raw materials, so that the local industries get a chance to reduce its average cost to international level and narrow the lead time. Presently, Bangladesh’s apparel sector operates mainly at the lower-end segment of the international market. Although knitwear products achieved tremendous growth but these are low-value products with small profit margins. Bangladesh can enhance its value addition capacity substantially through diversification of apparel products and by moving into more value-added, high-priced, high-fashion products. Woven category can be more attractive via large capital investment. If cost effective investment can increase in the spinning and weaving sub-sectors, as it has been in the past few years, Bangladesh has the possibility of building a competitive export-oriented RMG sector with strong backward linkages in the textiles sector. Training is always considered as an effective instrument for upgrading skills and raising efficiency of human resource, which eventually ensures increased productivity. Some initiatives have been taken by the entrepreneurs of the relevant sector but much more needs to be done. Necessary steps should be taken both by the public and the private sectors, and development partners to establish appropriate fashion and technology institutes. Improvement in working conditions and organizational environment can also result in increased productivity, which eventually renders these enterprises more competitive. To remain competitive in the post-MFA phase, Bangladesh needs to remove all the structural impediments in the transportation facilities, telecommunication network, power supply, management of seaport, utility services and in the law and order situation. The government and the RMG sector would have to jointly work together to maintain competitiveness in the global RMG market. Given the remarkable entrepreneurial initiatives and the dedication of its workforce, Bangladesh can look forward to advancing its share of the global RMG market. References
Abdullah, Md. Abu Yousuf, 1997, “International Trade Implications and Future of Ready-Made Garments Sector of Bangladesh” Journal of Business Administration, Vol. 23, No. 3 & 4, Page 41-69. Azim, M. Tahlil, and Nasir Uddin, 2003, “Challenges for Garments Sector in Bangladesh After 2004: Avenues for Survival and Growth” Bangladesh Institute of International and Strategic Studies Journal, Vol. 24, No. 1, Page 49-82. Bhattacharya, D and M. Rahman, 1999, “Female Employment Under Export-Propelled Industrialization: Prospects for Internalizing Global Opportunities in Bangladesh's Apparel Sector”, UNRISD Occasional Paper.
46
Bhattacharya, D and M. Rahman, 2000, “Experience with Implementation of WTO-ATC and Implications for Bangladesh”, CPD Occasional Paper Series, Paper 7. Bhattacharya, D, M. Rahman and A. Raihan, 2002, “Contribution of the RMG Sector to the Bangladesh Economy”, CPD Occasional Paper Series, Paper 50. Bow, J. J, 2000, “Bangladesh’s Export Apparel Industry into the 21st Century – the Next Challenge”, The Asia Foundation. Centre for Policy Dialogue, 1999, “The Textile and Clothing Industry of Bangladesh: In a Changing World Economy”, CPD Dialog Report No. 18, Dhaka, Bangladesh. _________ , 2003, “Coping with Post-MFA Challenges: Strategic Responses for Bangladesh RMG Sector”, CPD Dialog Report No. 55, Dhaka, Bangladesh. Islam, Sadequl, 2001, The Textile and Clothing Industry of Bangladesh in a Changing World Economy, CPD and The University Press Ltd. Jahan, Sarwat, 2005, “The End of Multi-Fiber Arrangement: Challenges and Opportunities for Bangladesh”, WBI Policy Note. Katti, Vijaya and Subir Sen, 2000, “MFA Phasing Out and Indian Textiles Industry: Selected Issues for Negotiation”, Foreign Trade Review, Vol. XXXIV No. 3 & 4, Page 102-120. Mannur, H.G., 2000 (second revised edition), International Economics, Vikas Publishing House Pvt Ltd., India. Mlachula, Montfort and Yongzheng Yang, 2004, “The End of Textiles Quotas: A Case Study of the Impact on Bangladesh”, IMF Working Paper WP/04/08. World Bank-IFC, 2006, Doing Business 2007: How to Reform?, Washington, DC. World Trade Organization, 2006, “Trade Policy Review”, Geneva.
47
Policy Note Series: PN 0703
Recent Experiences in the Foreign Exchange and Money Markets
Md. Habibur Rahman, Ph. D∗
and Shubhasish Barua∗
September 2006
Abstract Over the last two fiscal years both the foreign exchange and the money markets in Bangladesh experienced notable volatility, which resulted in substantial depreciation of BDT against major currencies and a temporary rise in the interest rate in the money market. This paper attempts to analyze the underlying causes and impact of the recent developments in the foreign exchange and money markets. It is observed that, depreciation and volatility of exchange rate depends on various components of foreign exchange market; for example, when the gap between the monthly flow of imports and exports widens or the demand for opening import LCs rises, the exchange rate tends to depreciate. Similarly, volatility of the exchange rate appears to move in tandem, with the two aforementioned pressures. On the other hand there is high positive correlation between exchange rate and average call money rate and between volatility of exchange rate and that of call money rate, which signal that temporary instability in one market can generate pressure in the other market. These findings are tentative but they deserve careful review in fine tuning the day-to-day management of the policy stance.
∗ The authors are Senior Research Economist and Research Economist respectively of the Policy Analysis Unit at the Research Department of Bangladesh Bank and would like to thank Prof. Syed M. Ahsan, Resident Economic Adviser of Bangladesh Bank for his helpful suggestions and comments. The views expressed in this Note, however, are of authors’ own and is not necessarily reflect the views of the Bank.
48
Recent Experiences in the Foreign Exchange and Money Markets - Md. Habibur Rahman, Ph. D - Shubhasish Barua
1. Background
An in-depth analysis of the relationship between foreign exchange and money markets is an important issue for the policy makers, as any policy changes in one market can affect the movements in the other market significantly. An increase in interest rates in the money market tends to alleviate the depreciating pressure on the domestic currency in the foreign exchange market and a depreciating pressure in the foreign exchange market tends to aggravate an upward pressure in the money market. Therefore, an analysis of the movements in the foreign exchange and money markets, particularly the mechanism of volatility transmission between foreign exchange and money markets is vital for effective policy making. Available data for the last two fiscal years indicate that both the foreign exchange and the money markets in Bangladesh experienced notable volatility, which resulted in substantial depreciation of BDT against major currencies along with persistent inflationary pressure and a temporary rise in the interest rate, call money rate in particular, in the money market. This paper attempts to analyze the underlying causes and impact of the recent developments in the foreign exchange and money markets with a special attention to the policy implications.
2. Behaviour of the Foreign Exchange Market
During the early stage of the floatation, the foreign exchange market in Bangladesh remained largely stable with low volatility and minimal depreciation of Taka against major currencies due to the sound transition to the floating regime facilitated by the adequate preparatory steps taken by Bangladesh Bank and the then low inflationary global economic environment.1 From June ’03 to April ’04 the BDT/USD exchange rate remained fairly stable while during FY05 it experienced substantial depreciating pressure.
Figure 1: Daily Exchange Rate (weighted average)
55575961636567697173
03-0
7-04
12-0
8-04
23-0
9-04
04-1
1-04
23-1
2-04
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Average Rate
Source: Monetary Policy Department, Bangladesh Bank.
Despite significant growth of remittances and exports and a moderating growth in overall imports, BDT maintained its depreciating trend against USD during the first three quarters of FY06 due to a combination of high cost of energy imports, bunching of LC settlements, and deficits in the income and services components of the current account. The fourth quarter however was relatively calm. While the volume of imports is stimulated by internal demand reflecting broad based expansion of economic activities, the cost of imports reflects higher commodity prices, especially oil, in the international markets. The weighted average BDT/USD exchange rate stood at BDT 69.65 at the end of FY06 from BDT 63.68 in the same period of the previous year reflecting 8.56 percent depreciation over the year2. The weighted 1 Note that the BDT went into a floating exchange rate regime on May 31, 2003. 2 These are weighted average exchange rate in the inter-bank foreign exchange market.
average BDT/USD exchange rate reached its peak at BDT 71.75 in the inter-bank foreign exchange market on 21st March ’06 and fluctuated within the range of BDT 66.20-71.75 with the average rate of BDT 68.07 per Dollar during January–March ’06. The average volume of transactions was USD 12 million per day in the same quarter. During the corresponding period of FY05, BDT/USD rate varied within the range of BDT 60.59-63.67 with the average rate and volume of transactions of BDT 62.8 per Dollar and USD 13.3 million per day respectively.
Based on monthly movements, the BDT/USD exchange rate witnessed the highest level of volatility since the floatation in March ’06 resulting in a depreciation of about 4.57 percent over the previous month.3 Afterwards, the depreciating pressure on the Bangladeshi currency eased significantly and remained stable during April-June ’06 period reflecting a sizeable supply of foreign currency emanating from the export growth and the growing inflow of workers’ remittances. The volatility of BDT/USD exchange rate as measured by standard deviation reached 2.04 in the third quarter of FY06 vis-à-vis 0.91 in the same quarter of FY05 (Table 1).4
Table 1: Quarterly Statistics of BDT/USD Exchange Rate
AVG MAX MIN ST. DEV Jul-Sep FY05 59.52 60.51 59.26 0.30 Oct-Dec FY05 59.97 61.09 59.45 0.49 Jan-Mar FY05 62.80 63.67 60.59 0.91 Apr-Jun FY05 63.59 63.75 63.39 0.09 Jul-Sep FY06 65.06 65.71 63.76 0.67 Oct-Dec FY06 65.87 66.21 65.66 0.17 Jan-Mar FY06 68.07 71.75 66.20 2.04 Apr-Jun FY06 69.74 71.38 69.16 0.48
Source: Authors’ calculation Although, the direct intervention in the foreign exchange market under the floating exchange rate regime has largely been avoided, the central bank does intervene in the market by selling and purchasing foreign currency to bring an orderly adjustment in the exchange rate. Indeed, Bangladesh Bank bought and sold respectively USD 77.0 million and USD 413.0 million reflecting a net injection of USD 336.0 million in the inter-bank foreign market during FY06.
Figure 2: Co-movement of Volatility and Depreciation
-5-4
-3-2
-10
12
31-0
8-04
31-1
0-04
30-1
2-04
28-0
2-05
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29-1
2-05
28-0
2-06
30-0
4-06
30-0
6-06
Standard deviation as a measure of VolatilityNominal Depreciation of BDT vs. USD
Source: Authors’ calculation
3 In line with nominal exchange rate depreciation, the Real Effective Exchange Rate (REER) index also depreciated marginally from 89.72 in February FY05 to 89.43 in February FY06. 4 Note that the standard deviation in the exchange rate during January-March period appears to be larger in every year indicating some sort of seasonality in the movements of the BDT/USD exchange rate.
50
Relatively higher inflow in the fourth quarter has improved the liquidity condition in the inter-bank market relieving the pressure on the exchange rate. Furthermore, banks were very successful in keeping the foreign liabilities within the tolerable limits during this period, which also helped in maintaining a proper balance between supply and demand. It is observed that there is a strong negative relationship, namely that high volatility is matched by significant currency depreciation. The correlation coefficient is -0.67. Further, it is seen that there is a strong positive relationship between the volume of foreign exchange transactions and transaction volatility with a correlation coefficient of 0.82 during FY05-06 (Figures 2-3).
Figure 3: Monthly Volume of Transactions (USD) and Transactions Volatility
100.0
150.0
200.0
250.0
300.0
350.0
400.0
450.0Ju
l-04
Sep-
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-04
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-05
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-05
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5
Sep-
05
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-05
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06
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6
Vol
. Mn.
USD
0.0
2.0
4.0
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8.0
10.0
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14.0
Std.
Dev
Monthly Transaction Transaction Volatility Source: Authors’ calculation
3. Possible Explanation of Exchange Rate Movements
The behavior of exchange rate movements depends on the demand and supply of foreign currency which itself is determined by the interactions of different parts of the market. Below an attempt is being made to explain the recent movements in the exchange rate in terms of changes in different segments of the foreign exchange market as well as the money market factors.
(a) Movements of the Foreign Exchange Market Variables
It is observed that trade as well as the overall balance improved significantly in FY06 over FY05 reflecting about USD 418 million reduction in trade deficits and about USD 300 million rise in the overall balance of payments surplus. This behavior has been driven both by the rise in exports (21.5 percent) and remittances growth (24.8 percent). Despite recent payments made through the Asian Clearing Union (ACU) and the declining trend in the foreign aid, the Gross International Reserves (GIR) position continued to maintain its upward trend in the last three financial years. GIR position reached its record high of about USD 3.48 billion at the end of June ’06, which was USD 2.93 billion and USD 2.71 billion, respectively, at the end of FY05 and FY04.
However, the observed pressure in foreign exchange market over the last two fiscal years has plausibly been caused by seasonal pattern in the flow of imports and exports and bunching of LC openings coupled with shortfalls in income and service accounts. The gap between the flow of imports and exports reached more than 500 million USD during March-April ’06. In February ’06 import payments increased by USD 62.2 million and exports reduced by USD 32.54 million over the previous month. This was further exacerbated in March ’06 due to a sharp rise in import payments (184 million USD) and a relatively modest rise in export earnings. The gap was more than USD 550 million during March-April ’05. It is also observed that the import LCs opened in March ’06 is USD 202.1 million higher than the monthly average of the same year and 10.58 percent higher over its previous month. Similarly for March ’05, the LC-level rose by USD 251.8 million or 22.8 per cent higher over the previous month. It is evident that in both the last two fiscal years there was a sharp rise in demand for import LCs and thus precipitating a
51
temporary instability in the foreign exchange market. Table 2 represents a correlation analysis among the depreciation of BDT/USD exchange rate and volatility of exchange rate along with some important variables, such as monthly Import-Export gap, Import LCs opening, Remittances -as shares of gross foreign exchange reserves.5 It is observed that, when the gap between the monthly flow of imports and exports widens or demand for opening import LCs rises (as shares of reserves), the exchange rate of BDT/USD tends to depreciate. In the same way, volatility of the exchange rate appears to move in tandem, with the two aforementioned pressures.6
Table 2: Correlation between depreciation, volatility and other foreign exchange market variables
Depreciation Volatility IMEXGAP/ Reserve
LCOP/ Reserve
REM/ Reserve
Depreciation 1 Volatility -0.67 1 IMEXGAP/Reserve -0.40 0.22 1 LCOP/Reserve -0.32 0.45 0.37 1 REM/Reserve -0.26 0.41 0.16 0.69 1
Source: Authors’ calculation
(b) The Money Market Factors
As mentioned above, the nexus between foreign exchange and money markets is close. An increase in the import payments generates pressure on the exchange rate, which lead to higher credit demand generating pressure in the money market. The consequent increase in the interest rate, on the other hand, limits the expansion of credit and thereby limits the flow of import payments and eases the depreciating pressure on the home currency. With a view to controlling the twin pressure, namely of high inflation and exchange rate depreciation, the monetary authority in Bangladesh continued to pursue a restrained monetary policy stance during FY06. The monetary stance and a relatively higher inflow of foreign reserves led to an improvement of the liquidity condition in the inter-bank foreign exchange market such that the pressure on BDT/USD exchange rate eased significantly in the last quarter of FY06.
4. Movements in the Money Market
The easing of monetary conditions in the fourth quarter of June reflected a large injection of liquidity associated with the seasonal rise in government expenditure. Consequently, on a year-on-year basis, reserve money increased by 28.1 percent in the fourth quarter, substantially higher than 21.5 percent recorded in the third quarter. The large increase in reserve money was propelled by a sizeable increase in net foreign assets (NFA) as well as net domestic assets (NDA) of the Bangladesh Bank. It has also been observed that the broad money growth was relatively lower than the growth of reserve money as money multiplier continued to decline in June ’06 partly due to a rise in cash reserve requirement that had come into effect earlier and change in money holding behavior of the public. Despite these effects broad money growth stood at 19.5 percent at the end of June ’06, which was substantially higher than the growth of 16.8 percent in the same period of last year.
During the year, the range of average daily call money rates stayed between 4.9 to 40.4 percent where the mean and standard deviation were 11.5 percent and 5.5 respectively. From the beginning of January ’06, the range and volatility in the call money rate picked up significantly and remained high till the end of FY06 reflecting the high credit demand with the tight policy stance of the central bank. Movements in the volume of daily transactions indicate that the range remained between BDT 8.9-29.6 billion with the
5 Monthly data of IMEXGAP, LCOP, REM and Reserve are taken for FY05 to FY06 to calculate the ratios. 6 It is also seen that LC opening and remittance receipts are highly correlated. While no a priori relationships is apparent, remittances does facilitate LC opening.
52
average and standard deviation of BDT 21.3 billion and 4.6 respectively. It has also been observed that the average daily call money rate as well as the volume of transactions were the highest along with very high volatility in March ’06 demonstrating a very close linkage among the three indicators (Table 3).
Table 3: Movements in the Inter-bank Call Money Rate and Volume of Transactions Call Money (Lending) Rate Daily Volume (In billion Tk.)
Period Max Min Avg. SD Max Min Avg. SD FY 2006 40.37 4.93 11.05 6.13 29.62 8.87 21.33 4.61 Jul-05 5.64 4.93 5.42 0.17 18.67 8.87 12.74 2.94 Aug-05 7.96 5.75 6.32 0.61 21.37 12.91 17.40 2.71 Sep-05 7.74 5.87 6.09 0.38 22.63 18.28 20.04 1.25 Oct-05 8.48 6.55 7.23 0.61 23.77 15.82 20.31 2.09 Nov-05 17.23 6.63 8.46 3.09 25.55 16.22 21.88 2.82 Dec-05 10.37 6.65 8.40 0.97 29.30 21.54 24.62 2.23 Jan-06 34.45 10.76 15.61 6.23 29.15 17.38 23.48 3.85 Feb-06 13.38 11.19 12.13 0.67 28.95 21.86 26.11 2.37 Mar-06 40.37 12.46 17.15 7.36 29.62 16.40 25.65 3.08 Apr-06 28.39 18.09 21.63 3.45 25.53 20.44 23.52 1.35 May-06 21.89 10.93 15.15 2.64 27.87 20.82 23.45 2.25 Jun-06 26.02 7.90 12.83 6.46 22.35 17.85 20.36 1.20 Source: Monetary Policy Department, Bangladesh Bank and authors’ estimate.
As the excess liquidity fall substantially, the interest rate in the inter-bank call money as well as repo market went up sharply. As the operations of repo and reverse repo are now allowed to take part on a daily basis, the pressure in the call money market eased partially. At the end of March 2006, the repo rates for 3-9 day have stabilized at about 8.25 percent from 8.00 percent in December ’05.7 Weighted average rates for reverse repo, on the other hand, are displaying an upward trend during FY06. A higher reverse repo rate helped mop-up excess liquidity from banking industry. The weighted average reverse repo rates stood at 6.04 percent and 6.29 percent (more than double) respectively for 1-2 day and 3-11 day in June ’06 from 2.50 percent and 2.84 percent in June ’05 reflecting much tighter monetary stance in recent year. Much like repo and reverse repo rates, the weighted average yields for various T-bills as well lending and deposit rates of banks also kept rising during the period. Over the year the weighted average lending and deposits rates for all banks increased to 11.60 percent and 6.26 percent respectively at the end of FY06 from 10.93 percent and 5.62 percent respectively in FY05.
5. Possible Explanation of Money Market Movements
The reasons for this movement in the money market mainly include the following: (i) Relatively faster expansion of credit than that of deposits resulting from high credit demand and higher
interest rates on the various national savings instruments; (ii) Systematic withdrawal of excess liquidity by BB; (iii) High seasonal demand for foreign currency resulting from the increased imports bills; and (iv) As there is an observed inverse relationship between excess liquidity and call money rates (please see
Figure 4), a reduction in excess liquidity in the banking system tends to increase the volatility in the money market. Therefore, managing liquidity condition in the banking system is at the core of stability of the money market. The monetary authority controls the excess liquidity in order to keep it in line with the target monetary base by utilizing the standard instruments such as SLR, CRR, interest rates on government Treasury bills/bonds and other short term interest rates, such as repo/reverse Repo. Generally excess liquidity is affected by the changes in demand for liquid assets by the public and private sectors for different economic purposes. Rise in government and other public sectors borrowing
7 Note that there were no repo operations for 1-2 day during FY06.
53
from the banking system as well as unanticipated increase in demand for private sector credit can create extra pressure in the liquidity situation.
Figure 4: Excess Liquidity and Average Call Rate
0.0
20.0
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Jul-0
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4Se
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on T
K
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% R
ate
Exces LiquidityCall Rate
Source: Research Department and Monetary Policy Department, Bangladesh Bank
6. Underlying relationship between the Foreign Exchange and Money Market:
The preceding analysis of the money and foreign exchange markets delineates that functioning of these markets are interlinked and temporary instability in one market can generate pressure in the other market. This relationship is depicted in Table-4 by a correlation-matrix combining foreign exchange and money market Variables. It is observed that there is high positive correlation between exchange rate and average call rate -estimated coefficient is 0.68 for FY05-06. In the same way, volatility of exchange rate and call money rate are closely associated with each other (correlation coefficient is 0.53 for FY05-06).8
Table 4: Correlation-Matrix of Foreign Exchange and Money Market Variables
Exchange Rate Volatility of Exchange Rate
Average Call Rate
Volatility of Call Rate
Exchange Rate 1 Volatility of Exchange Rate 0.45 1 Average Call Rate 0.68 0.47 1 Volatility of Call Rate 0.22 0.53 0.62 1
Figure-5 shows that increasing volatility in the foreign exchange market can transmit into the heightened volatility in the money market and vice versa. In March ’06 volatility indicator in both the foreign exchange and money markets reached their highest level and declined subsequently in the following months of FY06. In response, the monetary authority in Bangladesh adopted various policy actions consistent with the tight monetary policy stance and various market conditions contributing significantly in mitigating the pressure on exchange rate of Taka with the improved liquidity in the inter-bank foreign exchange and money markets.
8 The data for the correlation analysis comprises of monthly average call money rate and BDT/USD exchange rate along with the estimated standard deviations for both FY05 and FY06.
54
Figure 5: Volatility in BDT/USD Exchange Rate and Call Money Rate
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8.0
Jul-0
4
Sep-
04
Nov
-04
Jan-
05
Mar
-05
May
-05
Jul-0
5
Sep-
05
Nov
-05
Jan-
06
Mar
-06
May
-06
Std
Call
Rate
0.00.20.40.60.81.01.21.41.61.8
Std
Ex-r
ate
Volatility of Call Rate Exchange Rate Volatility
7. Concluding Remarks
Over the last two fiscal years both the foreign exchange and the money markets in Bangladesh experienced notable volatility, which resulted in substantial depreciation of BDT against major currencies and a temporary rise in the interest rate in the money market. In this paper a modest attempt has been made to explain these developments and the links between these two markets. It is observed that, when the gap between the monthly flow of imports and exports widens or demand for opening import LCs rises (as shares of reserves), the exchange rate tends to depreciate. Similarly, volatility of the exchange rate appears to move in tandem, with the two aforementioned pressures. On the other hand there is high positive correlation between exchange rate and average call money rate and between volatility of exchange rate and that of call money rate, which signal that temporary instability in one market can generate pressure in the other market. These findings are tentative but they deserve careful review in fine tuning the day-to-day management of the policy stance.
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Annexe-I: Budget Highlights of FY07*
1. Goals and Strategies
Ministry of Finance (MOF) proposed a BDT 697.40 billion (15.6 % of FY06’s GDP) national budget for fiscal 2006-07, with an overall deficit of BDT 171.98 billion (4.1 % of FY06’s GDP) which will be met by both domestic and foreign borrowings. The stated goal of budget 2006-07 is poverty reduction. Meeting the Millennium Development Goals (MDGs) by achieving the annual targets embodied in Poverty Reduction Strategy Paper (PRSP) is the fundamental basis of the proposed budget. To meet the target the supporting strategies are as follows:
• accelerate economic growth by further streamlining the strong macroeconomic framework that is in place through continuous reforms and creating employment opportunities;
• elevate Human Development Index (HDI) with the increased allocation in education, health and other social sectors along with qualitative improvement;
• ensure financial security of the disadvantaged by widening social safety nets; • promote private sector initiatives and investment by developing physical infrastructure; and • ensure economic good governance, improve law and order, maintain internal security and
enhance public management capacity.
All these strategies have been argued to have been taken into account in the proposed budget.
2. Budget Highlights
The budget of FY07 will be implemented by three successive governments, namely, the present government, the caretaker government and the new elected government to be installed in office in early 2007. The stated objective is realizing the MDGs by creating an environment of a sustained economic growth amid macro-economic stability. Spending have been prioritized, so that the budget devotes 56.3 percent of total resources to direct and indirect poverty reduction activities by accelerating private sector led growth, creating employment opportunities, enhancing human development and improving governance.
2.1 Agriculture and Rural Development
For the expansion of the production base of agriculture, agro-based industry, and agribusiness, the allocation for agriculture subsidy has been increased together with a higher budget for agricultural research.
The target for agricultural credit has been increased to provide access to credit to a larger number of farmers, especially women.
To encourage commercialization and farm-based production of fisheries and livestock sub- sector and create employment opportunities, the allocation of these sub-sectors has been enhanced by 36 percent over the revised FY06 budget.
To exploit the potential of small and medium enterprises (SMEs) in employment generation, export promotion, economic growth and poverty reduction in rural and urban areas, government has increased the availability of funds at subsidized rates under a number of funds and schemes.
2.2 Social Safety Nets
Increased allocation for micro-credit programs have been made under various ministries with a view to creating greater employment opportunities for the poor.
An allocation of BDT 2.67 billion has been provided for as Special Fund for the Employment of the Hardcore Poor to be administered by PKSF.
* Prepared by Asish Kumar Das Gupta, Deputy General Manager, Research Department, Bangladesh Bank.
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An allocation of BDT 1.25 billion has been made for the NGO Foundation created to improve the social sector in rural areas.
Additional funds have also been allocated to expand the rates and coverage of old age allowances and for widowed, deserted, and destitute women.
Larger amount of funds have also been allocated to:
mitigate risks due to natural disasters; rehabilitate acid burn women; allocation of BDT 500 million to mitigate the housing problems of the homeless particularly for the
rural families; mitigate the sufferings of the Monga prone areas an additional amount of BDT 0.55 billion have
been allocated; and enhance the allocation of BDT 2.00 billion has been given to the Bangladesh Bank’s Equity
Entrepreneurship Fund for the development of agro-based industries, food processing and computer software.
2.3 Social Sector
Education and information technology has been accorded the highest priority with 15.9 percent of the combined revenue and development budgets allocated to this sector. Next in order of priorities are transport and communications (with 10.3 percent of total allocation), local government and rural development (9.7 percent), agriculture (7.5 percent), health (6.8 percent), energy and power (6.1 percent), defence (6.1 percent), public order and security (4.9 percent), social security and welfare (4.7 percent), and public administration (3.4 percent).
2.4 Restructuring the Tax Administration
The budget has proposed some measures to enhance the efficiency of tax administration.
The reorganization of NBR along functional lines and setting up of the NBR Audit Cell are expected to yield positive impacts on revenue collection. The appointment of a change management adviser, human resources development adviser, and information, communications and technology adviser have also been authorized.
Setting up branches of large tax payer units (LTUs) in Chittagong will simplify VAT and income tax collection in the port city.
Bifurcation of the Customs House in Chittagong into an import based customs house and an export-based customs house is foreseen to improve in customs administration.
Setting up the Office of the Tax Ombudsman is meant to address taxpayer grievances and tax disputes and enhance transparency in application of tax laws.
3. Revenue Measures
Streamlining tax administration, improving collection procedures and VAT laws and procedures and expanding income tax coverage are expected to increase total revenue by 17 percent to BDT 525.42 billion in FY07 as compared to the revised estimates of BDT 448.68 billion for FY06. Tax revenues are projected to increase by 18.63 percent and non-tax revenues by 10.74 percent as compared to the revised estimates of those in FY06. This is projected to increase the ratio of revenue to GDP to 11.29 percent in FY07 from 10.20 percent in FY06.
3.1 Major Tax and Tariff Measures
3.1.1 Income Tax
Limit of tax-exempt income, income slabs and tax-rate remained at the same level for the next assessment year 2007-08.
Tax rates for companies have remained unchanged.
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The assesses who paid tax at the highest rate of 25 percent in the assessment year 2006-07 will enjoy 10 percent tax rebate on the additional tax paid if they disclose more than 10 percent higher income in the assessment year 2007-08 has been introduced.
To encourage the investors in diamond cutting and polishing industry tax rate has been reduced at 15 percent.
Tax exemption and rebate for agro-processing, jute and textile industries have been extended to 30 June 2008.
Accelerated depreciation at the rate of 50, 30 and 20 percent respectively in first three years of installation of machinery instead of allowing 100 percent depreciation in the very first year of their installation have been proposed.
Exemption limit of conveyance allowance paid in cash has been raised from BDT 12 thousand to 18 thousand for computing income of the salaried persons.
The amount of allowable investment for the purpose of tax rebates has been raised from BDT 0.2 million to BDT 0.25 million irrespective of share purchase of a company.
Introducing the provision of minimum income tax of BDT 5000 or 0.50 percent of turnover, whichever is higher for companies' irrespective of profit or loss.
Deduction of tax at 5-percent on the amount of a cash subsidy on exports as final settlement of tax liability.
Enhancing the tax rate on land purchase from 5-percent to 7-percent. Tax-rate for the purchase of motor car has been re-fixed at 10 percent and 15 percent from 5-
percent and 7.5 percent respectively. Introduction of tax in case of purchase and construction of building/apartment (at Gulshan, Banani
and Baridhara) at BDT 300 for up to 200 square-metres and BDT 500 for over 200 square-metres has been proposed.
3.1.2 Taxes on Imports among amendments and new measures, the following may be highlighted.
Reduction of customs duty on capital machinery from 13 percent to 12 percent and intermediate goods from 6-percent to 5-percent.
Reduction of supplementary duty from 35 percent to 20 percent and 25 percent to 15 percent. Withdrawal of all duties and taxes on the fertilizer, seeds, capital machinery drum-seeder and other agricultural inputs at the importation stage.
Withdrawal of all duties and taxes from capital machinery and their accessories and other inputs for poultry industries and machinery for manufacture of poultry feed at importation stage.
Reduction of tax on garlic, turmeric, chilly and ginger from 20 percent to 5-percent and that for onion, pulses from 13 percent to 5 percent have been proposed.
Reduction of import duties on basic raw materials of plastic and melamine products from 13 percent to 5-percent.
To provide protection to the local plastic industry, an enhancement of import duties from 13 percent to 25 percent has been proposed.
With a view to encouraging the local electronics industry, import duties on diodes, transistors, semi-conductor devices and compressors has been reduced from 13 percent to 5-percent.
Enhancement of allowable depreciation from 15 percent to 20 percent in assessing reconditioned motor vehicles.
Reduction of duty on cellular mobile telephone sets from BDT 300 to BDT 200 per set. Imposition of duty on cellular fixed wireless telephone set has been proposed to BDT 200. Imposition of specific duty of BDT 5000 on sugar per MT at the importation stage has been
proposed.
3.1.3 Value Added Tax (VAT)
The time limit for disposal of VAT appeal cases has been reduced from one year to nine month for commissioner (Appeal) and customs. Excise and VAT Appellate Tribunal.
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The minimum penalty for minor offences has been reduced to Taka 5000 from BDT 10,000 and for offences of more serious nature to BDT 10,000 from BDT 25,000.
Withdrawal of supplementary duty of 2.5 percent from local production of packet powder milk in packs of 2.5 kg and over.
Reduction of tax (VAT) from BDT 900 to BDT 800 for each cellular mobile phone connection has been introduced. At the same time a tax of Taka 800 per connection of the cellular fixed- wireless telephone has been imposed.
4. Expenditure
The total expenditure has been projected at BDT 697.40 billion in FY07, which is expected to increase by 14.22 percent over the revised estimate of BDT 610.58 billion for FY06. The non-development expenditure has been estimated at BDT 395.36 billion, Annual Development Program (ADP) at BDT 260.00 billion and other expenditure at BDT 42.04 billion. The estimated current expenditure will increase by 13.6 percent, ADP by 20.9 percent while other expenditure decline by 11.5 percent. 56.5 percent of total ADP outlay for FY07 expected to be financed from domestic resources, while the remaining 43.5 percent will be resourced from foreign assistance. The ratio of total expenditure to GDP is projected to increase from 13.4 percent in FY06 to 15.0 percent in FY07.
4.1 Expenditure Measures
4.1.1 Current Expenditure
A combined allocation of BDT 110.93 billion from revenue and development budget has been allocated for the education sector, which is 15.91 percent of total budget outlay and 20 percent higher than revised estimate.
Agriculture sector has received an allocation of BDT 58.06 billion, which is 29.19 percent higher than revised estimates.
An amount of BDT 47.84 billion has been allocated for health and nutrition sector, which is 16.34 percent higher than revised estimate of FY06.
An amount of BDT 42.86 billion has been allocated for Power, Energy and Mineral Resources which is 13.69 percent higher than revised estimate of FY06.
With an increase of 4.49 percent over last year, an amount of BDT 67.95 billion has been allocated in rural development and rural infrastructure sector.
An amount of BDT 73.71 billion has been allocated to the transport and communication sector in FY07 which in 20.38 percent higher than revised estimates of FY06
For domestic and foreign interest payment an amount of BDT 76.37 billion has been allocated in FY07 which was 75.45 billion in FY06.
4.1.2 Annual Development Program (ADP)
In FY07 the ADP has been estimated at BDT 260.00 billion (5.6 percent of GDP) which is 20.93 percent higher than that of the revised ADP for FY06.
5. Budget Deficit and its Financing
In FY07 budget deficit (excluding grants) has projected at BDT 171.98 billion or 3.7 percent of GDP, lower than 3.9 percent in revised budget of FY06. While budget deficit ( including grants) has projected at BDT 146.90 billion or 3.2 percent of GDP in FY07 as compared to 3.3 percent of GDP of FY06. For financing this deficit, domestic bank and non-bank borrowing is expected to account to BDT 54.34 billion and BDT 34.01 billion respectively and the remaining BDT 83.63 billion are foreseen to be financed from foreign sources.
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BUDGET AT A GLANCE (BDT in billion)
Budget 2006-07
Description Amount % of GDP
Revised 2005-06
Budget 2005-06
Budget 2005-06p (Actual)
1. Total Revenue Tax Revenue Non-Tax Revenue
525.42 429.15 96.27
11.29 9.22 2.07
448.68 361.75 86.93
457.22 373.12 84.10
438.1 355.1 83.0
2. Total Expenditure Non-Development Expenditure
Non-Development Revenue Expenditure Non-Development Capital Expenditure Net Outlay for Food Account Operation Loans & Advances Structural Adjustment Expenditure
Developmental Expenditure Programs Financed from Non-Development
Budget Non-ADP Employment Generation Programs Annual Development Program Non-ADP FFW and Transfer
697.40 422.86 395.36 27.50 2.07
-12.11 0
284.63 14.34 5.48
260.00 4.81
14.99 9.09 8.50 0.59 0.04 -0.26
0 6.12 0.31 0.12 5.59 0.10
610.58 370.57 348.05 22.52 2.07
-0..32 2.00
236.26 10.13 3.50
215.00 7.63
643.83 380.82 355.23 25.59 1.58
-11.61 7.50
265.54 7.90 4.91
245.00 7.73
572.8 332.5 206.4
- - - - - - - -
206.4 -
3. a. Overall Deficit (Including grants) -146.90 -137.14 -153.56 -134.7 (as percent of GDP) -3.2 -3.3 -3.7 b. Overall Deficit (Excluding grants) -171.98 -161.90 -186.61 (as percent of GDP) -3.7 -3.9 -4..5 4. Financing Foreign Financing-Net
Foreign Borrowing Foreign grants Amortization
Domestic Financing – Net Borrowing from Banking System Non-Bank Borrowing
83.64 96.18 25.08 -37.62 88.34 54.34 34.00
1.80 2.00 0.54 -0.81 1.90 1.17 -0.73
80.00 89.56 24.76 -33.82 81.40 49.11 32.29
103.20 100.45 33.05 -30.30 83.41 36.40 47.01
50.5
- - -
84.2 56.7 27.5
Total - Financing 171.98 3.70 161.90 186.61 134.7 Memorandum Item (GDP) 4653.00 4161.54 4171.00 4161.54
Source: Budget in brief 2005-06.
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