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Dr Khondaker Golam Moazzem on net foreign asset and reserve money

Appreciation of a country’s currency against that of any other country will push down the value of both foreign currency-denominated assets and liabilities while depreciation will push up the value of these overseas assets and liabilities.

Published in The Financial Express on Friday, 23 October 2015.

Reserve money growth takes slow lane

Jasim Uddin Haroon

The growth rate of reserve money (RM) remained at a low level of 15 per cent throughout the last fiscal year, a trend that continued into July last, when the rate decelerated to nearly 7.0 per cent.

The growth rate of 15 per cent was just lower than the 16 per cent targeted in the last Monetary Policy Statement (MPS), according to the central bank statistics.

In September of the last fiscal year the rate scaled its fiscal-year peak at 23 per cent, the Bangladesh Bank data showed.

In the current MPS for the period of July to December, the reserve money programme targets a growth rate of 16.5 per cent during the period.

The target of reserve money growth in the MPS for the period of January-June in 2015 had been set at 16 per cent. In the previous MPS for the period of July-December, 2014 the target was set at 15.5 per cent.

The reserve or high-powered money is a combination of currencies in circulation and a certain portion of banks’ deposits with the central bank.

A low growth hints that the economy weakens on sagging investment demand.

The growth in the reserve money basically accelerates on two factors-increase in bankers’ deposits with the central bank and the Bangladesh Bank credit to the banks and the commercial sector.

However, economists came up with mixed reactions on the existing growth as some argue that higher growth in the reserve money fuels inflation and others argue that this is a clear sign of slow economic activities.

Dr Zahid Hussain, lead economist at the Dhaka Office of the World Bank, said low growth in reserve money showed that the investment demand had squeezed.

Reserve money is a monetary base. So, it should have grown at a certain level to boost investment demand in the economy, Dr Hussain said.

He also said policy rates had remained unchanged for long, leading to lower growth in reserve money.

But some economists argued that the 15 per cent growth was quite consistent with the current economic circumstances.

Dr Ahsan H Mansur, executive director at the Policy Research Institute of Bangladesh (PRI), said the 15 per cent growth was consistent with the economic reality of Bangladesh.

Commenting on the nearly 7.0 per cent growth at the end of July last, Dr Mansur said it was much lower than expectation. “We cannot judge the reserve money growth by a single month.”

He said if the single-digit growth sustains, it would be a danger signal for the economy.

However, the BB said its net foreign assets (NFA) increased by Tk 341.98 billion in July 2015 while its net domestic assets decreased by Tk 240.83 billion, resulting in much lower credit demand by the government from the BB.

It said the reserve money multiplier stood at 5.17 at the end of July 2015, down from 5.30 of June 2015.

Dr Mustafa K Mujeri, former director general of the state-owned Bangladesh Institute of Development Studies (BIDS), said usually there is a reserve money programme in every half-yearly MPS.

He said the nearly 7.0 per cent growth in July 2015 was much less than the target set in the programme.

Dr Khandker Golam Moazzem, additional director at the Centre for Policy Dialogue (CPD), said the net foreign asset is an important matter in reserve money. An alternative definition of net foreign assets by the World Bank is that it is the sum of foreign assets held by monetary authorities and the deposit money of banks minus their foreign liabilities.

Dr Moazzem said exchange rate fluctuations can also have a significant effect on the net foreign asset (NFA) position and influence the reserve money.

Appreciation of a country’s currency against that of any other country will push down the value of both foreign currency-denominated assets and liabilities while depreciation will push up the value of these overseas assets and liabilities.

He said foreign governments including that of Bangladesh hold trillions of dollars in U.S. government bonds.

If interest rates rise and US government bonds decline in price, this would leave effects like fall in the overall value of U.S. government bond holdings of Bangladesh and other nations and thus influence their net foreign assets.

He said Bangladesh’s net foreign assets increased and net domestic asset decreased, resulting in the slow growth in reserve money.

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