Banggyladesh Economy and Monetary Policy 2015 · Banggyladesh Economy and Monetary Policy 2015 Biru...
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Bangladesh Economy and Monetary Policy 2015 Biru Paksha Paul, PhD Chief Economist Bangladesh Bank Bangladesh Bank Today ’ s roadmap Today s roadmap P tA B ld hE Part A: Bangladesh Economy Part B: Monetary Policy Questions and Answers BD Economy & Monetary Policy 2 © Bangladesh Bank
Transcript of Banggyladesh Economy and Monetary Policy 2015 · Banggyladesh Economy and Monetary Policy 2015 Biru...
Bangladesh Economy and g yMonetary Policy 2015
Biru Paksha Paul, PhDChief EconomistBangladesh BankBangladesh Bank
Today’s roadmapToday s roadmap
P t A B l d h E Part A: Bangladesh Economy
Part B: Monetary Policy
Questions and Answers
BD Economy & Monetary Policy 2© Bangladesh Bank
PART A BANGLADESH ECONOMYPART A: BANGLADESH ECONOMY
BD Economy & Monetary Policy 3© Bangladesh Bank
A time-series economic overviewA time series economic overview
Global outlook
Domestic sector
External sector External sector
Price, Money, and financial sector
Lessons for monetary policy?
BD Economy & Monetary Policy 4© Bangladesh Bank
Global Outlook on growth
GDP at constant prices Year on year % change Projections
Global Outlook on growth
2011 2012 2013 2014 2015
World 4.1 3.4 3.3 3.3 3.8
Advanced Economies 1.7 1.2 1.4 1.8 2.3Advanced Economies 1.7 1.2 1.4 1.8 2.3
USA 1.6 2.3 2.2 2.2 3.1
Euro Area 1.6 -0.7 -0.4 0.8 1.3
Other Advanced Economies 2.7 1.6 2.1 2.9 2.9Other Advanced Economies 2.7 1.6 2.1 2.9 2.9Emerging Market and Developing Economies
6.2 5.1 4.7 4.4 5.0
China 9.3 7.7 7.7 7.4 7.1China 9 3
India 6.6 4.7 5.0 5.6 6.4
Bangladesh 6.5 6.3 6.1 6.2 6.4
BD Economy & Monetary Policy 5© Bangladesh Bank
Source: IMF World Economic Outlook (October 2014)
Domestic SectorDomestic Sector
BD Economy & Monetary Policy 6© Bangladesh Bank
Composition of the economy:
90%
100%
Dynamics of the 3 Sectors
60%
70%
80%
90%
40%
50%
60%
10%
20%
30%
0%
BD Economy & Monetary Policy 7© Bangladesh Bank
Agriculture Industry Service
Growth of the 3 Sectors
10 00
12.00
Growth of the 3 Sectors
8.00
10.00
4.00
6.00
2.00
-2.00
0.00
19
81
19
83
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
20
07
20
09
20
11
20
13
BD Economy & Monetary Policy 8© Bangladesh Bank
Aggriculture Industry Service
Linear (Aggriculture) Linear (Industry) Linear (Service)
8Growth earned an uptrend since 1991
7
8Bangladesh's GDP Growth in PercentMoving Trend
A G th 3 9% A G th 5 5%
5
6Ave Growth 3.9%Volatility 1.60
Ave Growth 5.5%Volatility 0.85
3
4
2
3
0
1 New Era of Democracyand Liberalization
Period of PolicyAnomalies
BD Economy & Monetary Policy
© Bangladesh Bank 9
01980 1985 1990 1995 2000 2005 2010
BD’s growth 2nd highest in South Asia
6.777
8
BD s growth 2nd highest in South Asia
cen
t
5.49
4.29
5.73
5
6
In P
er 4.29
2.132.61
1 95
3
4
2.13 1.95
0.571
2
0
India Sri Lanka Pakistan Bangladesh
Average Rate of GDP Growth Growth Volatility
BD Economy & Monetary Policy 10© Bangladesh Bank
BD’s growth prospect is one of the best12
Bangladesh India Pakistan Sri Lanka
BD s growth prospect is one of the best
8
10Projection
4
6
Pe
rce
nt
0
2
-2
0
99
5
99
6
99
7
99
8
99
9
00
0
00
1
00
2
00
3
00
4
00
5
00
6
00
7
00
8
00
9
01
0
01
1
01
2
01
3
01
4
01
5
01
6
01
7
01
8
01
9
BD Economy & Monetary Policy
© Bangladesh Bank 11
19
19
19
19
19
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
Investment-GDP ratio shows an uptrend
35
40Investment GDP ratio shows an uptrend
30
25
15
20
10
76
78
80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
10
12
India Pakistan Sri Lanka Bangladesh
BD Economy & Monetary Policy 12© Bangladesh Bank
19
7
19
7
19
8
19
8
19
8
19
8
19
8
19
9
19
9
19
9
19
9
19
9
20
0
20
0
20
0
20
0
20
0
20
1
20
1
External SectorExternal Sector
BD Economy & Monetary Policy 13© Bangladesh Bank
Exports and imports are rising steadilyExports and imports are rising steadily
10.50
11.00
8 50
9.00
9.50
10.00
7 00
7.50
8.00
8.50
6.00
6.50
7.00
Export (in Log) Import (in Log)
BD Economy & Monetary Policy 14© Bangladesh Bank
Uptrend in export and import growthUptrend in export and import growth
25
30
35
10
15
20
25
-5
0
5
-20
-15
-10
Export Growth (%) Import Growth(%)
Linear (Export Growth (%)) Linear (Import Growth(%))
BD Economy & Monetary Policy 15© Bangladesh Bank
Linear (Export Growth (%)) Linear (Import Growth(%))
Trade-GDP ratio is rising steadily
50
60India Pakistan Bangladesh
Trade GDP ratio is rising steadily
40
20
30
10
20
Lib li ti0
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
20
14
Liberalization
BD Economy & Monetary Policy 16© Bangladesh Bank
Remittances rose remarkably after 2007
1500
Remittances rose remarkably after 2007
1100
1300SD
700
900
Mill
ion
US
300
500
100
Jul-
01
Mar
-02
No
v-0
2
Jul-
03
Mar
-04
No
v-0
4
Jul-
05
Mar
-06
No
v-0
6
Jul-
07
Mar
-08
No
v-0
8
Jul-
09
Mar
-10
No
v-1
0
Jul-
11
Mar
-12
No
v-1
2
Jul-
13
Mar
-14
No
v-1
4
BD Economy & Monetary Policy
© Bangladesh Bank 17
M N M N M N M N M N M N M N
CAB shows no fixed pattern
3000
4000
CAB shows no fixed pattern
USD
2000
3000
Mill
ion
U
0
1000
-2000
-1000
-2000
BD Economy & Monetary Policy
© Bangladesh Bank 18
FDI inadequate: still less than 1% of GDP
1600
1800
FDI inadequate: still less than 1% of GDP
1200
1400
1600
USD
800
1000
Mill
ion
U
400
600
0
200
BD Economy & Monetary Policy
© Bangladesh Bank 19
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Foreign reserves cover 6 months’ imports
20
22
24
Foreign reserves cover 6 months imports
14
16
18
20
on
USD
8
10
12
14
Bill
i
2
4
6
8
0
2
Jun
-01
De
c-0
1
Jun
-02
De
c-0
2
Jun
-03
De
c-0
3
Jun
-04
De
c-0
4
Jun
-05
De
c-0
5
Jun
-06
De
c-0
6
Jun
-07
De
c-0
7
Jun
-08
De
c-0
8
Jun
-09
De
c-0
9
Jun
-10
De
c-1
0
Jun
-11
De
c-1
1
Jun
-12
De
c-1
2
Jun
-13
De
c-1
3
Jun
-14
De
c-1
4
BD Economy & Monetary Policy
© Bangladesh Bank 20
J D J D J D J D J D J D J D J D J D J D J D J D J D J D
Exchange rate: a story of all stages
0.0150
Exchange rate: a story of all stages
0.0140
0.0145
Appreciation
0.0130
0.0135 Stability Stability
0.0120
0.0125
0.0115
un
-07
ec-0
7
un
-08
ec-0
8
un
-09
ec-0
9
un
-10
ec-1
0
un
-11
ec-1
1
un
-12
ec-1
2
un
-13
ec-1
3
un
-14
ec-1
4
Depreciation
BD Economy & Monetary Policy
© Bangladesh Bank 21
Ju De Ju De Ju De Ju De Ju De Ju De Ju De Ju De
Debt-GDP Ratio: the lowest in South Asia
110
120
Debt GDP Ratio: the lowest in South Asia
80
90
100
50
60
70
20
30
40
50
0
10
20
Bangladesh India Pakistan Sri Lanka
BD Economy & Monetary Policy
© Bangladesh Bank 22
Price, Money, and Financial Sector
BD Economy & Monetary Policy 23© Bangladesh Bank
Inflation is falling since end-201112%
N F d
Inflation is falling since end 2011.
8%
10% Non-Food
Food
General
4%
6%
2%
4%
0%
Jun
-01
De
c-0
1Ju
n-0
2D
ec-
02
Jun
-03
De
c-0
3Ju
n-0
4D
ec-
04
Jun
-05
De
c-0
5Ju
n-0
6D
ec-
06
Jun
-07
De
c-0
7Ju
n-0
8D
ec-
08
Jun
-09
De
c-0
9Ju
n-1
0D
ec-
10
Jun
-11
De
c-1
1Ju
n-1
2D
ec-
12
Jun
-13
De
c-1
3Ju
n-1
4D
ec-
14
BD Economy & Monetary Policy
© Bangladesh Bank 24
J D J D J D J D J D J D J D J D J D J D J D J D J D J D
BD’s inflation is the lowest in South Asia
9.4510
BD s inflation is the lowest in South Asia
8.57
7.31
6.457
8
9
cen
t
4.523.84
4
5
6
In P
er
2.872.44
1
2
3
0
1
Sri Lanka Pakistan India Bangladesh
A R t f i fl ti I fl ti V l tilit
BD Economy & Monetary Policy 25© Bangladesh Bank
Average Rate of inflation Inflation Volatility
Projected Inflation shows a downtrend
22
24Bangladesh India Pakistan Sri Lanka
Projected Inflation shows a downtrend
16
18
20
Projection
10
12
14
Pe
rce
nt
4
6
8
10
0
2
4
5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9
BD Economy & Monetary Policy
© Bangladesh Bank 26
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
Interest rates are still too high: why?
14
Interest rates are still too high: why?
12
13
14
9
10
11
7
8
9
Lending Rate Deposit Rate6
Jan
-11
Ap
r-1
1
Jul-
11
Oct
-11
Jan
-12
Ap
r-1
2
Jul-
12
Oct
-12
Jan
-13
Ap
r-1
3
Jul-
13
Oct
-13
Jan
-14
Ap
r-1
4
Jul-
14
Oct
-14
g p
BD Economy & Monetary Policy
© Bangladesh Bank 27
A O A O A O A O
Bad loans weaken the banking sectorBad loans weaken the banking sector
BD Economy & Monetary Policy 28© Bangladesh Bank
Capital market issuesCapital market issues
Immature stage: irrational movements
High deposit rates dampen stock market.
Transparency and regulation needed Transparency and regulation needed
Knowledge economy/financial education
BD Economy & Monetary Policy 29© Bangladesh Bank
LessonsLessons
Liberalization contributed to growth acceleration and poverty reduction.
BD’s growth, inflation, exchange rates, andBD s growth, inflation, exchange rates, and reserves are commendable in the region.
BD hibit d hi h t t f t bilit i BD exhibited highest amount of stability in inflation and growth in the region.
BD Economy & Monetary Policy 30© Bangladesh Bank
LessonsLessons
The interest rates are comparably high and unsustainable in a globalized economy.
We have some space to increase our debt.We have some space to increase our debt.
Infrastructure, energy, and social peace are d d t k th f tneeded to make the economy grow fast.
BD Economy & Monetary Policy 31© Bangladesh Bank
PART B: MONETARY POLICY
BD Economy & Monetary Policy 32© Bangladesh Bank
Monetary PolicyMonetary Policy
What is monetary policy?
Why is it needed? Objectives?
How does it work? The Star Model How does it work? The Star Model
What are the main points of the latest MP?
How is it different in different economies?
What did we learn and what should we do? What did we learn and what should we do?
BD Economy & Monetary Policy 33© Bangladesh Bank
Why is monetary policy important?Why is monetary policy important?
Fiscal and monetary policy: two wings of the economy bird.
You need to grow (growth) for earningYou need to grow (growth) for earning good health (development) after ensuring normal blood pressure and temperaturenormal blood pressure and temperature (inflation).
BD Economy & Monetary Policy 34© Bangladesh Bank
Monetary Policy ObjectivesMonetary Policy Objectives
Price stability is the main target of Monetary Policy. – Keynes (1923)
Dual Mandate (USA): price stability (2% ( ) p y (inflation) and maximum employment (94%).
BD doesn’t have proper data on employment BD doesn t have proper data on employment
Dual Mandate (BD): moderate inflation (5-6%) d hi h b i bl h (6 8%)6%)and high but sustainable growth (6-8%).
BD Economy & Monetary Policy 35© Bangladesh Bank
BD Economy & Monetary Policy
© Bangladesh Bank 36
The Star Model of Monetary PolicyThe Star Model of Monetary Policy
BD Economy & Monetary Policy 37© Bangladesh Bank
How does the Star Model work?How does the Star Model work?Growth Growth
Final targets
E hE hInflation Exchange Rate
Inflation Exchange Rate Intermediate targets
InterestInterest O ti t tInterest Rate
Money Supply
Interest Rate
Money Supply
Operating targets
BD Economy & Monetary Policy 38© Bangladesh Bank
If expansionary monetary policy is taken:If expansionary monetary policy is taken:
Interest rate falls => investment and consumption i d h irise => output and growth increase.
Exchange rate falls => exports rise and imports fall => net exports rise => output and growth increase.
Wages rise => inflation increases (monetary channel of inflation) )
BD Economy & Monetary Policy 39© Bangladesh Bank
Why is monetary policy difficult?Why is monetary policy difficult?
Although the relationship between growth and inflation is complex (positive, negative, or zero), high growth is often g ) g gassociated with high inflation.
Hence achieving high growth and low Hence, achieving high growth and low inflation is the most difficult task for
limonetary policy.
BD Economy & Monetary Policy 40© Bangladesh Bank
Do we see any correlation between them?
12
14Do we see any correlation between them?
8
10
6
8
2
4
0
1980 1985 1990 1995 2000 2005 2010
BD Economy & Monetary Policy
© Bangladesh Bank 41
BD GDP Growth Rate INFLATION
Is growth inflationary?
14
Correlation over 1976-2014: No (-12% but insignificant)Correlation over 1990-2014: Yes (+45% and significant)
g y
10
12
14
6
8
10
2
4
6
0
2
1980 1985 1990 1995 2000 2005 2010
LiberalizationPolicy Anomalies
BD Economy & Monetary Policy
© Bangladesh Bank 42
BD GDP Growth Rate INFLATION
High inflation will erode growthHigh inflation will erode growth
If output rises => inflation rises => interest rate rises (Fisher) => investment and output fall.p
If interest rate rises => exchange rate rises=> net exports and output fallsrises=> net exports and output falls.
A parable of self destruction
BD Economy & Monetary Policy 43© Bangladesh Bank
Hyperinflation
L
16%
15%
14%
13%
Inflation Heat Map
Lessons Avoid both
13%
12%
11% High
10% Inflation
hyperinflation and deflation.
9%
8%
7%
6%
Target disinflation or
5% Moderate
4% Inflation
3%
2% Di i fl tidisinflation or moderate inflation
2% Disinflation
1%
0%
-1%inflation.BD Economy & Monetary Policy 44© Bangladesh Bank
-2% Deflation
Highlights of Monetary PolicyHighlights of Monetary Policy Inflation target 6.5% and GDP growth target 6.5-
6 8% by June 20156.8% by June 2015
Growth of reserve money at 15.9%, broad 16 5% d i t dit 15 5%money 16.5%, and private credit 15.5%
Lending rates and the spread to be reduced
Exchange rate stability and healthy foreign reserves
Inclusive and green financing for sustainable growth
BD Economy & Monetary Policy 45© Bangladesh Bank
Thank you.Di i d Q tiDiscussion and Questions
BD Economy & Monetary Policy 46© Bangladesh Bank
