BSS, Dhaka :
Bangladesh Bank (BB) will continue its guarded stance in capital management especially allowing capital outflow to avoid risks of spillover impact of global economic uncertainties.
“Bangladesh would be well advised to maintain more guarded stance in widening their openness to footloose short term capital flows,” said Governor Dr Atiur Rahman.
He was speaking on the Unwinding of Unconventional Monetary Policies and its Impact on Emerging Market Economies (EMEs) at the SAACR Finance Governor Symposium in Colombo, Sri Lanka on Thursday.
The governor’s comment came only few days ahead of the announcement of the monetary policy stance (MPS). BB is announcing the MPS on Saturday for the first half of the current 2014-15 financial year (FY15).
Referring to the Indian experience, Dr Atiur said the neighboring country is more exposed to the impacts of quantitative easing of advanced economies because of her more open capital accounts.
Quantitative easing is a process, which is followed to increase money supply through financial institutions with capital in an effort to promote increased lending and liquidity.
Citing the example of following the quantitative easing process by the developed economies like the United State, the governor said the developed countries maintained a low rate of interest through the process to increase liquidity flow for expediting real sector growth.
He said global liquidity surplus sustained by the quantitative easing offered ample access to low cost financing in convertible currencies not just in the advanced economies but also in Emerging Market Economies (EMEs) as positive external spillovers.
But, he said emerging economies like Bangladesh would need appropriate adaptive strategies in coping with the negative external spillovers from quantitative easing phase out in the advanced economies, both individually and collectively at regional and global levels.
“At the global and regional levels, the first best option is clearly that of global cooperation underpinning global financial stability by tethering global liquidity expansion effectively to the growth pace of real global output; supervised by an appropriately mandated supranational forum, perhaps a reformed IMF,” said Dr Atiur.
At the individual country level, he said, the most important thing for emerging economies in coping with negative impacts of quantitative easing phase outs of advanced economies is to maintain effective grip on short term hot money inflows and outflows.
Currently, Bangladesh economy is virtually fully open to non-resident for capital inflows and outflows in the equity and longer term debt markets, but barred from investing in local short term money markets to avoid risks of volatility and destabilization from surges of money inflows and outflows.
Investments abroad by residents also remain restricted though permissible only for facilitation of export marketing.
Foreign Portfolio Investment (FPI) inflows and outflows are freely allowed, but investment policies place greater emphasis on facilitating and attracting less footloose Foreign Direct Investment (FDI) inflows.
