Luncheon Meeting on 'Current Economic Situation of Bangladesh' organized by FICCI

Speech of the Governor, Bangladesh Bank

Date Time Location : 28 March 2012 : 12.45 pm : Pan Pacific Sonargaon Hotel, Dhaka

BB Governor speaks at the Luncheon Meeting on 'Current Economic Situation of Bangladesh' organized by FICCI

President and members of FICCI, representatives from foreign missions, ladies and gentlemen, a very good afternoon to you all. Thank you for inviting me to speak on the current economic situation in Bangladesh and its prospects. Let me start by setting the broad context. Bangladesh grew by 6 percent in FY11 and on average by 6 percent a year during the past decade. Over the same period, external trade increased by almost four-fold in U.S. dollar terms and more than doubled as a share of GDP. At the same time, the poverty level nearly halved, in line with achieving most of our Millennium Development Goals by 2015. These achievements are stunning given where this country was at its birth. Bangladeshs Vision 2021 aims to raise growth to an average of 8 percent a year over during this decade and make further decisive inroads in reducing poverty, in line with our aspiration to achieve middle-income status in the next 10 years. In order to get to this 8 percent growth we need to cash in on our demographic dividend. Our ratio of working age population to the total population is steadily rising due to the impressive progress we have made in fertility reduction. This means our dependency ratio is falling and there are more people who can contribute productively to growth and society at large. However as the example of Sri Lanka, and many other countries outside the region, clearly illustrates this demographic dividend does not last for ever. At some point this bulge in the working age population will transform itself into a bulge in the elderly population. As such in the next ten years or so we have to make the most of this low dependency ratio to invest in our countries future by making sure that we do not carry on as business as usual. We must use this next ten years to create higher productivity jobs, intermediate the savings that this working population has to invest in our countrys infrastructure and institutions and build the foundations to prepare for when this demographic dividend is over. The next ten years is the best opportunity we have to drastically cut poverty in Bangladesh. So how can this happen? Page1of4

First of all in order to create jobs we need to maintain macro-stability. Compared to its peers Bangladeshs growth performance has been remarkably stable as has its macro-stability. This year we have seen some macro pressures but we are managing them. Take the example of the exchange rate. In order to reduce the number one constraint to investment, the government decided to invest in power plants that would quickly address the power shortage but which required higher oil imports. At the same time oil prices remained firm and this year rose to record highs. As a result of these balance of payment pressures, the taka began a natural and expected depreciation, also prompted by the depreciation of the Indian rupee. At that point some commentators speculated about a free-fall of the taka. Yet back in early December my senior management team and I took the tough decision that we will do what it takes to avoid a so-called free-fall, even if it means a temporary squeeze on the economy. We spent many days debating the policy trade-offs but decided that we need to sharply tighten domestic money markets and import demand. Many were skeptical when on January 26th we launched the new Monetary Policy Statement and said that soon we would achieve an exchange rate equilibrium. Yet you have seen the results with the exchange rate turning the corner in early February, and after the exchange rate stabilized, bank liquidity conditions also improved with the call money rate falling from around 20% in January to around 13% now. In parallel we have limited foreign reserve depletion and our gross foreign reserve is around the benchmark three months of import cover. But even in the weeks when reserves were declining we had back-up plans about lines of financing from various commercial sources. Looking ahead on our balance of payments pressures we know that power, transportation and climate change-mitigating infrastructure needs remain immense, as noted in our Sixth FiveYear Plan (FY11-15), including associated import requirements, which are likely to add to our transitional BOP financing needs. As such we have opted for a three year IMF Extended Credit Facility (ECF) which is going to the IMF Board next month for approval. This ECF is also a signal to foreign and local investors of our commitment to maintain macro-economic stability and undertake the necessary reforms for sustained growth. The point I want to make with these examples is that we often take decisions which are market sensitive and so we operate quietly. But be assured there are a set of competent and dedicated professionals who work in the key economic institutions in this country who have maintained this track record of macro stability even in the face of many exogenous shocks. Let me turn to our monetary policy stance. While country specific circumstances remain critical in determining the appropriate pace and mix of policy adjustments, cross-country experiences from around the region illustrate the importance in Bangladesh of using monetary policy to stay ahead of the curve and act preemptively to mitigate risks from domestic and external imbalances. In FY10 and FY11 the global economy was reeling from the global financial crisis of 2009 and in order to avert an impact on the Bangladesh economy, broad money growth and specifically private sector credit growth were eased. The Bangladesh economy as a consequence of this stance, and other pro-active measures, emerged largely unscathed from the global crisis, averaging over 6% growth between FY2009 and FY2011. In FY12 the economy faces different challenges related to both global and domestic factors and as such our monetary stance has been adjusted accordingly while keeping the key goals of the Bangladesh Bank-inflation management and supporting equitable growth in mind. This brings me to what I consider my biggest challenge. While we have restored exchange rate stability and improved liquidity conditions in the money markets, the one indicator which remains stubbornly high is inflation. Point to point inflation in February 2012 is at 10.4% and average inflation is close to 11%. We know that both for optimal economic growth and to ensure that the poor are not disproportionately affected, single digit inflation is ideal. As a result our last Monetary Policy Statement emphasizes the restoration of single digit inflation. There has been some progress towards this goal with point to point inflation declining from a peak of 12% in September to the current 10.4%. However, let us also be clear that Bangladesh Bank does not have all the tools in its hands to achieve this target. Inflation is determined by numerous factors such as global commodity prices, administrative price adjustments for subsidized goods such as fuel and domestic supply-chain bottlenecks which are outside our control. However there is a clear link between the growth of money supply and inflation which is why we have adopted a restrained stance. But this link also involves a time-lag. In India, policy rates were raised 13 times, by a total of 375 basis points, between March 2010 and October 2011 to address rising inflationary pressures. As a result the main inflation Page2of4

guage, the Wholesale Price Index, has now fallen from 10.5% in mid 2010 to a two year low of 7.5% in December 2011. In Bangladesh monetary tightening began six months after India and as such we expect to reach single digit inflation by the end of this fiscal year. Our monetary growth targets for FY12 are on track establishing the credibility of the stance taken in the Monetary Policy Statement. Our latest numbers show that broad money growth (M2) of 17.9% is well on course to get to the 17% June target we set in our last MPS. To help achieve our program targets, BB is prepared to maintain the existing restrained monetary policy and to ensure banks better manage liquidity pressures. The central bank will also encourage all commercial banks to maintain market-determined lending and deposit rates to facilitate monetary transmission and properly price risk. At the same time we have instructed banks to keep a check on spreads so that excess profits are not made on the backs of private sector entrepreneurs. Specifically we are monitoring that banks keep spreads below 5% except for SME and consumer lending. And in order to facilitate access to finance to worthy businesses, I as chair of the relevant Board of Investment Committee have allowed $598 million of foreign borrowing since the start of this fiscal year by local corporate in sectors as diverse as shipping, power, footwear, IT, telecom, agriculture, steel and RMG. Let me turn to the issue of short and medium term growth prospects. The fiscal stance is supportive of the governments growth strategy but the rapid growth of borrowing from the banking sector-currently around 16500 crore taka has given rise to concerns over excessive crowding out of credit to the private sector. We must remember though that Government borrowing is still only around one-fifth of total domestic credit in the economy. As a result of this limited share, there is only a very limited amount of crowding out that this level of government borrowing can lead to. As such even with these projected higher levels of government borrowing in our monetary program we are confident that at least 16% private sector credit growth can be maintained while ensuring that our overall monetary targets are not breached. Domestic growth was projected at 7% in the FY12 Budget assuming stable domestic and global economic conditions. Data for the first half of FY 12 on agricultural output as well as indicators of industrial and service sector performance-specifically the Quantum Index of Manufacturing Output and export data-suggest an overall robust growth outlook and would support the FY12 projection. However, global growth prospects remain highly uncertain in key trading partner countries, particularly in Europe. The United States is showing fledgling signs of recovery but overall the growth prospect for 2012 in advanced economies remains bleak and there have also been downward growth projection adjustments in developing countries including India and China. The combination of the global slowdown with slowing imports and moderating credit growth will all limit aggregate demand. As such we are projecting growth in the range of 6.5-7.0%. However what is more important than short term fluctuations is for us to understand the key link between investment and growth and specifically grapple with what factors impede firms from investing more in Bangladesh. A slew of surveys over the past ten years point to the same issues. Firms report electricity, corruption, political instability, access to land and tax administration as key impediments. For many of these there has been clear progress especially due to greater recent investments in power generation and in e-governance. Ofcourse there is still a large unfinished agenda. However for the access to land issue we have to accept that our limited geographical land-mass and growing population will make this constraint even more serious in the future. As such new industries will have to take this account and we need to finance and nurture those which require less land-use and service sector industries come to mind. But what type of jobcreating growth do we want to see and how can all actors, be it government, private sector and foreign partners support this vision? My own view is that so far relatively low wages have given Bangladesh a competitive edge in garments but that this low cost advantage may not be enough to compete globally in the medium run. As such we need to strategically build the skills required to move up-market both in garments as well as in other industries such as shipbuilding, pharmaceuticals, jute, leather products and so on. But more fundamentally we need to recognize that the services sector now contribute about 50% of GDP. So how can we move to higher productivity service sector based job creation? Just like garments we will need to start somewhere and then build up. For instance we can gradually increase our share of the e-services market. It may start low-end, as say the data entry business shifts from India, but eventually we want to become more high-end, producing world-class Page3of4

software etc. There are a number of Business Process Outsourcing firms which have come to us recently and we welcome them as this could be a key source of employment for the larger numbers of educated youths coming out of our educational system. Moving beyond product diversification the other issue related to export-led growth is the issue of geographical diversification. It is good that RMG exports to eleven new countries has risen by 42% over the past seven months. But these eleven countries, are still well below 10% of total export volume. In order to promote diversification I think we need to have performance-related pay for our trade promotion staff in overseas embassies. This will promote the necessary incentives to find new markets. In general we need to debate different views but what we need is a forum for these discussions so that the Government and private sector can regularly get together and discuss both their immediate issues as well as a medium term vision of stimulating investment and job creation. Let me conclude with some suggestions for those of you here today. FICCI is a body representing foreign investors and we have to be candid that the levels of foreign investment in Bangladesh are way short of what they should be. And yet it isnt that there isnt adequate foreign interest in exploring possibilities. Flights to Dhaka are always fully booked and so are hotel rooms. But this investor interest is not translating into the billions of dollars of FDI which we need to move beyond our current growth path. There are many factors here, some which we have discussed above and are resolvable by stroke of the pen decisions and others which will need more time such as resolving power and gas constraints. But there is also a role for those of you sitting in this room. Some of you represent foreign missions and to you I encourage you to move out your Gulshan-Baridhara corridor and truly immerse yourselves into our country. Find out who the reform champions are in government, build a rapport with them. Discover the many entrepreneurs of this country who are overcoming all kinds of hurdles. Go out of Dhaka regularly and see what potential this country has. Because if you do all this you will be able to persuade those investors who are undecided, who are dithering about whether to bring in their capital, that it is worth it despite the admittedly many obstacles they might face. At the end of the day the World Bank Doing Business Indicators show that we are ahead of India, Indonesia and the Philippines and what we need from you is to portray Bangladesh in that manner. I know there are many of you here who are not from foreign missions and are fellow Bangladeshis. To you as well let me encourage you to help in improving our countrys image by showcasing how far we have come in such a short period and helping foreign investors navigate their way through to a successful job-creating investment. And from my part, as Central Bank Governor, and in my role at BOI, I remain committed to helping create that conducive macro environment which all investors require. Thank you and look forward to our discussion.

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