Fiscal developments: From actual decline in FY10, Government’s budgetary borrowing from the domestic banking system rose sharply by 39.3 per cent in FYll, characteristically exceeding rather than falling short of initial projections, despite healthy growth in revenue receipts. The main reason was the decline in external financing and non-bank borrowing through National Savings Scheme (NSS) instruments, of which net sales plummeted with downward revision of profit rates.
While overall budgetary deficits (3.8 and 4.4 per cent of GDP for FYll and FY12 respectively) are not particularly worrisome, there is room for rebalancing of the 6 per cent-94 per cent Treasury bill-bond composition planned for FY12 borrowing. Secondary trading in Treasury bonds has not yet developed significantly in the local market, primary dealer banks required to take up Treasury bonds in primary auctions end up laden with high volumes of practically illiquid assets. Treasury bills being short term (tenors up to one year) are much easier for banks to carry in their books as these are much more easily tradable in the secondary market; and with lower yield these are also a cheaper borrowing option for the government. Raising the share of bills in the bill-bond composition of government borrowing from the banking system (say, 30 per cent-70 per cent) may be both convenient for banks and cost saving for the government. Secondly, the planned volume of FY12 domestic non bank borrowing is less than a third of the planned volume of bank borrowing; with modest further improvement of return rates on NSS instruments (over the recent rather marginal improvements on some of these) it should be possible to borrow more through higher sales of NSS instruments, easing the demand pressure on banks. The reduced demand pressure on banks will mean correspondingly lower borrowing cost (lower yield rate on T-bills/bonds in auctions) there may be no net increase in borrowing cost in such rebalancing of bank and non-bank government borrowing.
As pointed out in previous recent issues of MPS, borrowing by non financial State Owned Enterprises (S0Es) is escalating fast in recent years, and has grown 32 per cent in FYll. Many loss making unviable non financial SOEs closed down earlier at considerable cost in severance payments and loan liabilities are being reopened with newly borrowed funds. It is unclear whether the reopening decisions were based on proper viability appraisals or whether performance of these reopened SOEs are being monitored closely. This merits being an area of priority attention, as does ensuring efficiency and preventing wastefulness in utilization of the rapidly rising ADP expenditure allocations. Towards easing the growing public sector borrowing demand from the modest domestic savings pool in FY12 and beyond, it may be timely now to initiate steps for raising external financing by longer term bond issues in international markets for the larger public sector infrastructure projects that will generate own income streams for debt servicing; as the processes require several months of preparatory work.
d) External sector: The high, above forty per cent FY11 growth in both imports and exports following a couple of years in global crisis induced slowdown cannot sustain for long, and is projected to ease down to around 15 per cent in FY12, both for exports and imports (Annex-2). Growth in workers' remittance inflows in FY12 are seen as likely to remain around the same mid single-digit level as in FYll, there being no indication of major positive change in outlook for migrant manpower demand in job markets abroad. BOP current account balance, maintaining surplus throughout FY11 despite heavy import related pressure, is projected to swing into deficit in FY12, with tepid growth in workers' remittance inflows falling short of the increasing deficits in trade, services and income accounts. With net balance in capital and financial account in negative, overall balance is estimated to be in the negative in FYll, and projected to remain in negative also in FY12. Consequently, exchange rate of Taka is likely to continue to be under some pressure in FYl2, reserves are projected to decline slightly by close of FY12. The projected BOP outcomes for FY12 are trend based; with scope of improvement with appropriate policy efforts successfully promoting exports and attracting capital and workers' remittance inflows.
e) Issues in market stability and development: Smooth adjustment of money and credit markets to the demand pressures and stresses anticipated for FY12 and beyond will require attention to prevailing imperfections and incompleteness in the markets. Issues meriting immediate attention include the following:
-In FYl1 rise in Treasury bill/bond yields was less than proportionate with rise in issue volumes.
Market value of stocks of bills/bonds decline with yield rate rise; BB rules required banks to hold a high 75 per cent of bill/bond stocks in trading books. Losses to be booked on required daily marking to market valuation of the stock of bills/bonds in trading book made banks averse to seeking yield rise. To redress this loss in flexibility of bill/bond yields, BB reduced the required trading book portion of total bill/bond stock to 50 per cent. There is room for further easing of this requirement, even 25 per cent of total stock held in trading book may now be sufficient for secondary market trading.
-Demand base for long dated Treasury bonds in entities with long term liabilities (life insurers, provident and pension funds) remains undeveloped, rendering these bonds virtually illiquid. Policy measures requiring former sector employers to maintain fully funded pension/provident fund schemes are needed to develop the demand base required for active secondary market in Treasury bonds. Issuance of asset backed corporate securities, thus far only sporadic, stalled following withdrawal of a tax break on such holdings, and there are transfer fee issues impeding secondary trade in corporate securities. Resolution of these issues will help promote and support development of liquidity enhancing securitization processes.
-Islamic banks in Bangladesh cannot participate in the interest based interbank overnight money market. Activation of an Islamic interbank money market can enhance efficiency of utilization of available liquidity. Consultations on modalities of doing 50 have already been initiated. (To be continued)
While overall budgetary deficits (3.8 and 4.4 per cent of GDP for FYll and FY12 respectively) are not particularly worrisome, there is room for rebalancing of the 6 per cent-94 per cent Treasury bill-bond composition planned for FY12 borrowing. Secondary trading in Treasury bonds has not yet developed significantly in the local market, primary dealer banks required to take up Treasury bonds in primary auctions end up laden with high volumes of practically illiquid assets. Treasury bills being short term (tenors up to one year) are much easier for banks to carry in their books as these are much more easily tradable in the secondary market; and with lower yield these are also a cheaper borrowing option for the government. Raising the share of bills in the bill-bond composition of government borrowing from the banking system (say, 30 per cent-70 per cent) may be both convenient for banks and cost saving for the government. Secondly, the planned volume of FY12 domestic non bank borrowing is less than a third of the planned volume of bank borrowing; with modest further improvement of return rates on NSS instruments (over the recent rather marginal improvements on some of these) it should be possible to borrow more through higher sales of NSS instruments, easing the demand pressure on banks. The reduced demand pressure on banks will mean correspondingly lower borrowing cost (lower yield rate on T-bills/bonds in auctions) there may be no net increase in borrowing cost in such rebalancing of bank and non-bank government borrowing.
As pointed out in previous recent issues of MPS, borrowing by non financial State Owned Enterprises (S0Es) is escalating fast in recent years, and has grown 32 per cent in FYll. Many loss making unviable non financial SOEs closed down earlier at considerable cost in severance payments and loan liabilities are being reopened with newly borrowed funds. It is unclear whether the reopening decisions were based on proper viability appraisals or whether performance of these reopened SOEs are being monitored closely. This merits being an area of priority attention, as does ensuring efficiency and preventing wastefulness in utilization of the rapidly rising ADP expenditure allocations. Towards easing the growing public sector borrowing demand from the modest domestic savings pool in FY12 and beyond, it may be timely now to initiate steps for raising external financing by longer term bond issues in international markets for the larger public sector infrastructure projects that will generate own income streams for debt servicing; as the processes require several months of preparatory work.
d) External sector: The high, above forty per cent FY11 growth in both imports and exports following a couple of years in global crisis induced slowdown cannot sustain for long, and is projected to ease down to around 15 per cent in FY12, both for exports and imports (Annex-2). Growth in workers' remittance inflows in FY12 are seen as likely to remain around the same mid single-digit level as in FYll, there being no indication of major positive change in outlook for migrant manpower demand in job markets abroad. BOP current account balance, maintaining surplus throughout FY11 despite heavy import related pressure, is projected to swing into deficit in FY12, with tepid growth in workers' remittance inflows falling short of the increasing deficits in trade, services and income accounts. With net balance in capital and financial account in negative, overall balance is estimated to be in the negative in FYll, and projected to remain in negative also in FY12. Consequently, exchange rate of Taka is likely to continue to be under some pressure in FYl2, reserves are projected to decline slightly by close of FY12. The projected BOP outcomes for FY12 are trend based; with scope of improvement with appropriate policy efforts successfully promoting exports and attracting capital and workers' remittance inflows.
e) Issues in market stability and development: Smooth adjustment of money and credit markets to the demand pressures and stresses anticipated for FY12 and beyond will require attention to prevailing imperfections and incompleteness in the markets. Issues meriting immediate attention include the following:
-In FYl1 rise in Treasury bill/bond yields was less than proportionate with rise in issue volumes.
Market value of stocks of bills/bonds decline with yield rate rise; BB rules required banks to hold a high 75 per cent of bill/bond stocks in trading books. Losses to be booked on required daily marking to market valuation of the stock of bills/bonds in trading book made banks averse to seeking yield rise. To redress this loss in flexibility of bill/bond yields, BB reduced the required trading book portion of total bill/bond stock to 50 per cent. There is room for further easing of this requirement, even 25 per cent of total stock held in trading book may now be sufficient for secondary market trading.
-Demand base for long dated Treasury bonds in entities with long term liabilities (life insurers, provident and pension funds) remains undeveloped, rendering these bonds virtually illiquid. Policy measures requiring former sector employers to maintain fully funded pension/provident fund schemes are needed to develop the demand base required for active secondary market in Treasury bonds. Issuance of asset backed corporate securities, thus far only sporadic, stalled following withdrawal of a tax break on such holdings, and there are transfer fee issues impeding secondary trade in corporate securities. Resolution of these issues will help promote and support development of liquidity enhancing securitization processes.
-Islamic banks in Bangladesh cannot participate in the interest based interbank overnight money market. Activation of an Islamic interbank money market can enhance efficiency of utilization of available liquidity. Consultations on modalities of doing 50 have already been initiated. (To be continued)
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