Dr Atiur Rahman, Governor, Bangladesh Bank :
We at the SEANZA Forum are from countries at all stages of economic and financial development, viz., Developing Economies (DEs) including LDCs, littoral and landlocked countries, Emerging Market Economies (EMEs), and Advanced Economies (AEs). The internal and external challenges that we SEANZA member central bankers face in the unfolding global context have both diversities and commonalities, which is why networking and interactions in the SEANZA forum sessions are excellent opportunities of mutual learning and experience sharing. The theme assigned for my keynote address here today is a topical one of common interest to us all, viz., vulnerabilities of our macroeconomic and financial environments to instability risks, and our preparedness in managing crisis situations arising therefrom.
2. The global financial crisis of 2008-2009 and the lingering global growth slowdown in its aftermath are vivid examples of how imbalances and instabilities in the macroeconomic and financial environments create downward spiral of financial market failures and real sector growth slippages feeding on each other. Global liquidity surfeit from prolonged spells of macroeconomic imbalances in major advanced economies led to credit and asset price bubbles from imprudent risk taking, eventually precipitating crises in their own financial sectors and by contagion into others in the integrated open global financial system. Financial market collapses and credit freezes ensuing from the bubble bursts severely disrupted real sector economic performance, weakening macroeconomic balance. Fiscal and monetary stimuluses to shore up ailing financial sectors brought yet more worsening of the macroeconomic imbalances that brought the financial instabilities in the first place, paving the path for recurrence of the vicious cycle. Breaking out from this vicious cycle requires harsh monetary discipline and painful fiscal austerity that are hard to impose and sustain. It is, therefore, of utmost importance to remain watchful against risks or threats to stability and balance in the macroeconomic and financial environments, promptly addressing emerging new vulnerabilities and occasional localized small crises well before these can grow into wider system wide concerns.
3. Regional and global collective initiatives do have roles in addressing stability concerns, but the primary onus for maintaining macroeconomic and financial stability begins and remains at the country level. For maintaining a balanced and stable macroeconomic environment the country level monetary and fiscal authorities need to pursue effective coordination of forward looking policies with monetary expansion, fiscal gap, bop current account position and other key domestic and external sector parameters on sustainable growth paths; to provide enabling environment interalia including price stability for nurturing and optimally utilizing the output potentials of their economies.
4. In Bangladesh fiscal and monetary policymaking exercises routinely include rounds of prior stakeholder consultations; and continuous coordination of monetary and fiscal policies take place in quarterly rounds of formal consultations in the Macroeconomic Coordination Council chaired by the Finance Minister and participated by Bangladesh Bank Governor and Ministers/Secretaries of other related government ministries. While reviewing the ongoing trends of various macroeconomic variables and developments in the real economy, consultations in the Council meetings take note of new shocks, risks and vulnerabilities to stability from unfolding events in the domestic and external scenes, towards adoption of appropriate coherent response approaches by the central bank and the concerned government authorities. This coordination mechanism has been serving Bangladesh economy well; the central bank’s cautious monetary policies and attendant growth supportive inclusive financial policies, coupled with the government’s fiscal prudence have yielded us a continuing spell of steady above six percent annual average real GDP growth for well over a decade now, even amid the global growth slowdown triggered by the last global financial crisis. Bangladesh economy’s growth performance has been remarkably stable, with insignificant variability compared to those of comparator developing economy peers. CPI inflation has been remained broadly stable at single digit levels, the government’s fiscal deficit as percent of GDP has remained contained at lower single digit levels. External sector viability has been gaining strength steadily, Export growth at double digit annual rates and remittance inflows from workers abroad have kept bop current account in healthy surplus, with rising foreign exchange reserves and sustained appreciation pressure on the domestic currency Taka. Inclusive broad based growth has hastened poverty decline, headcount poverty rate coming down from over fifty percent of the nineteen nineties to a little above twenty five percent now.
Much as country level efforts are the key to maintaining macroeconomic balance, smaller open economies like Bangladesh have limitations in coping with external sector shocks to macroeconomic stability from negative spillovers of imbalances in dominant large AEs that find it expedient to avoid adjustment pains in their domestic economies by exporting away the consequences of their imbalances to the rest of the world. The global liquidity surfeit from persistent imbalances in dominant AEs that precipitated the global financial crisis has, instead of being reined back, been swelled further in attempts of shoring up faltering growth in the AEs, with near zero policy interest rate levels suboptimal for global output and employment growth. Reversal of this laxity in AEs would also entail traumatic shock waves for stability in small open economies, already felt in the recent past following signaling by some AEs of their incipient QE phase-out and attendant interest rate rise. Global cooperation dialogue initiatives aimed at imposing discipline on dominant AEs against persistent macroeconomic imbalances have so far gone nowhere; small open economies like ours have therefore to make do with defensive strategies for mitigating the disruptive impacts of negative external spillovers from imbalances in the larger AEs. In Bangladesh we have opted to remain carefully selective in external openness. Besides being fully open to trade related and other external current account transactions, Bangladesh economy is also open to non-resident owned investment inflows and outflows excepting in the short term money markets, so as not to attract destabilizing surges of footloose hot money. While FPI inflows and outflows are freely permissible, policy supports better favor FDIs, being of more stable nature. Because investment needs in the domestic economy are larger than the available pool of domestic savings, investment abroad by residents remains restricted, allowed only sparingly for facilitation of export marketing and facilitation of external investment and remittance inflows. The cautious stance of carefully managed external sector openness has kept Bangladesh’s financial sector and the broader economy stable and broadly well protected from adverse impacts of the global financial crisis and the earlier East Asian currency crisis.
5. Coming now to maintaining of financial stability, the global financial crisis has brought to forefront the urgency of oversight on sector wide systemic robustness of the financial sector besides soundness of individual institutions. Over the past several decades freer capital flows have drawn financial markets across national borders into increasingly closer integration. Although systemic threats to financial stability are not large right now for economies like Bangladesh that are partially open on capital account, they too view buildup of systemic robustness important as necessary preparedness for widening capital account openness to attract higher investment inflows. Groups of global experts based in BIS, Basel are reviewing and revising regulatory and supervisory best practice norms and standards for the increasingly integrating financial sectors around the globe; country level regulatory and supervisory regimes are adapting to these at paces appropriate to prevailing country contexts.
Bangladesh has already adopted risk based Basel II capital adequacy regime and preparatory work for adoption of the revised Basel III version including its liquidity coverage standards are in progress. Although Bangladesh doesn’t yet have too much to worry about systemically important globally active too big to fail banks and financial institutions, Bangladesh Bank (BB) is active in building up supervisory capabilities of early identification and addressing of any incipient systemic risks. Routine stress test exercises are mandatory for banks to identify vulnerabilities; banks and financial institutions found vulnerable in these tests or otherwise deficient in BB’s assessments are placed under intensified supervisory vigilance until recovery to healthiness. Work of developing and putting in place new lender of last resort facility, contingency planning and bank intervention/resolution frameworks are in progress, towards ensuring prompt resolution of localized institutional crises so that other institutions with exposures to the afflicted banks do not get infected. BB regularly engages in FSAP self assessments and IMF-WB/peer group assessments of degree of convergence of its regulatory and supervisory regimes with international best practice standards. Besides the above mentioned supervisory strengthening initiatives with systemic focus, BB has also placed strong emphasis on further strengthening supervision focused on individual institutions. Limits of permissible investment of banks in equity stocks have been curtailed to capital base linked safe levels; oversight on corporate governance and risk management practices in individual institutions has been sharpened considerably, asset classification and provisioning requirements have been tightened to bring these in line with best practice standards, transparency and disclosure requirements have been made more demanding. It would be relevant to mention here that Bangladesh’s financial sector has remained remarkably stable over several decades now amid domestic shocks and global turbulences, with very few sporadic instances of institutional failures. Rather than remaining complacent about it we intend to rapidly strengthen risk management capacities in our banks and financial institutions, enabling them to withstand the likely bigger external shocks as the economy opens up further.
6. Capacity building for risk focused management of banks and financial institutions, and capacity building for risk focused supervision in BB are major undertakings requiring substantial outlays in both IT infrastructure and expert trainer manpower resources. The entire financial sector has undertaken a major BB led IT infrastructure upgrading initiative, IMF and other development partners have come forward with some training expertise resources. Appropriate twining arrangements with some more advanced central bank peers in the SEANZA forum for mentoring and training in this area could usefully supplement the ongoing efforts in BB; and perhaps also in other SEANZA forum member central banks with similar needs.
7. It is mentioning how the stress on inclusive, environmentally sustainable financing in BB’s monetary and financial policies is promoting macroeconomic and financial stability in our economy. Inclusive financing now enthusiastically embraced by the entire financial sector is supporting micro and small scale output initiatives of broad swathes of hitherto un-served or underserved population segments. These initiatives are adding incremental output on the supply side while also at the same time adding incremental employment and income on the demand side; strengthening macroeconomic balance. Environmentally sustainable financing in its turn has somewhat longer run beneficial impact on sustainable growth. Banks and financial institutions are on the one hand diversifying and reducing credit risks of their investment portfolios by moving into broadened bases of numerous new inclusion clients, reducing large exposures to big corporates. On the other hand they are acquiring broader bases of numerous small deposits from the inclusion clients, reducing their liquidity risks from dependence on large deposits from a few big corporate clients. Financial stability is gaining strength in the process. Because socially responsible inclusive and environmentally responsible financing has such clear positive link with macroeconomic and financial stability, I don’t see why monetary and financial supervisory authorities should feel shy of promoting these in their monetary and financial policies.
(From 29th SEANZA Governors’ Symposium Keynote Address)
