‘BB tries ensuring enough liquidity in capital market’

The Bangladesh Bank in the wake of the recent economic challenges, tried to back the country’s capital market by ensuring enough liquidity there, the banking regulator on Sunday said after unveiling its monetary policy for the first half of the fiscal year 2023-24.

Unveiling a contractionary monetary policy for the next six months, central bank Governor Abdur Rouf Talukder projected a 15.3 per cent domestic credit growth ceiling in FY24—accommodating the 11 per cent credit growth in the private sector and 30 per cent in the public sector.

Moreover, the government can finance a significant slice of its budget deficit from the bond market at lower cost, though the capital market, particularly the bond market, was not well developed yet, the cenbank’s monetary policy statement said.

“Against this backdrop, several initiatives have been taken in recent years to develop the capital market and promote investment opportunities in the country. BB has tried to ensure enough liquidity in the capital market in the wake of some economic challenges.”

“The global economy has undergone significant challenges over the past three and a half years, including the impact of the Covid-19 pandemic, followed by the Russia-Ukraine conflict.”

In parallel with the global economy, Bangladesh has also faced multiple challenges during this time, including high inflationary pressure, costly exchange rates, as well as substantial erosion of foreign exchange reserves, Abdur Rouf Talukder said.

Meanwhile, Dhaka Stock Exchange (DSE) chairman Dr Hafiz Muhammad Hasan Babu welcomed the new monetary policy, saying the central bank’s fresh policy supports are expected to become a pivot for the expansion of the country’s capital market as well as the overall economic development.

The announced monetary policy has emphasised ensuring long-term financing from the capital market. Besides, emphasis has been laid on establishing an effective bond market, the DSE chairman said in a statement yesterday.

“The DSE is trying to attract attention of the country’s policymakers on these two issues. We feel that proper strategy formulation is imperative to realise these principle objectives.”

A well-developed capital market is a must for ensuring long-term investment and the country’s economic development. But the public and private investments in Bangladesh largely depend on bank financing due to the absence of a well-steamed capital market, the central bank’s policy statement read.

“The banks usually rely on short-term deposits for long-term financing, creating a maturity mismatch in the financial system and putting pressure on liquidity management. A strong capital market, especially the bond market, can meet the huge financing requirements for infrastructure development and industrialization, and contribute to the banking system’s stability.”

“Besides, investors can reduce business costs and improve operational efficiency by borrowing from the bond market at competitive rates,” the BB continued.

The Bangladesh Bank in this context has allowed banks to maintain a general provision of 1 per cent instead of the existing 2 per cent against classified loans of brokerage houses, merchant banks, and stock dealers.

The banking regulator has also issued a directive allowing all banks and financial institutions to facilitate trading sukuk bonds in the secondary market, which is now active.

The government has made significant modifications to issuing and re-issuing of government treasury bonds to improve the secondary market.

The modifications include the introduction of the BB’s market infrastructure (MI) module platform, which is used to settle the transactions of government securities, including their listing and trading. The BB has released guidelines regarding using the MI module platform to manage secondary trading better.

To enhance the overall market growth, the Bangladesh Securities and Exchange Commission (BSEC) has emphasised the involvement of institutional investors in the capital market and taken several policy measures in this regard, BB said in the monetary policy statement.

One significant measure is the extension of investment limits for mutual funds, excluding special funds like pension funds.

In this context, the stock market regulator raised the minimum investment threshold level from 60 per cent to 80 per cent for institutional investors. Looking ahead, the BB, the BSEC, and other related government authorities’ coordinated efforts are required to promote a strong and vibrant capital market in Bangladesh, it said.

The market experienced marked fluctuations during the second half of FY23, primarily influenced by economic challenges such as high inflation, pressure on the exchange rate, and foreign exchange reserves.