A major development in the money market during the third quarter (Q3) of the current fiscal year (FY06) was the increased intervention by the Bangladesh Bank (BB) to maintain monetary stability. There were also recurring episodes of instability in the foreign exchange market during this quarter. The BB responded by further tightening its monetary policy by way of an increase in the treasury bill interest rates. This action led to a significant reduction in the excess liquidity in the banking system, which fell to Tk.37.0 billion at the end of March 2006 from Tk. 113.0 billion at the end of June 2005. There was also a drastic fall in credit growth to the private sector -- to 14.9 per cent in December 2005 from 18.07 per cent in December 2004 -- although the target of credit growth for private sector as set in the BB's monetary policy statement was 15.2 per cent for December 2005. Despite the more-than-target achievement of the tightened monetary policy as reflected in the reduced credit growth to the private sector, the instability in the foreign exchange market increased during the quarter under review.
As for the money supply, the twelve-month growth of broad money or M2 was 18.1 per cent in February 2006 compared to 16.2 per cent in February 2005. During the same period, the growth of the more liquid narrow money (M1) declined from 18.6 per cent to 17.0 per cent. The banking system's credit was solely responsible for the expansion of the money supply while the effect of the increase of net foreign assets of the banking system was negative. During the same period of the previous year, 80.0 per cent of the expansion of the money supply was accounted for by the banking system's credit while the other 20.0 per cent was the effect of the increase of net foreign assets of the banking system.
In February 2006, the year-on-year growth of domestic credit was 19.8 per cent, compared to 19.2 per cent in February 2005. The rise in domestic credit during the period was essentially due to the rise in public sector credit, which went up by 31.6 per cent between February 2005 and February 2006 compared to 16.9 per cent between February 2004 and February 2005. While the growth of net credit to government increased to 21.0 per cent in the period between February 2005 and February 2006 from 19.0 per cent during the same period in the earlier year, the growth of credit to the other public sector increased significantly to 58.2 per cent from 11.9 per cent, and the growth of credit to the private sector declined to 16.2 per cent from 20.0 per cent.
Net disbursement of industrial term loans during July-December 2005 stood significantly higher at Tk. 15.78 billion compared to Tk. 0.23 billion during the same period of the previous year. The increase in net disbursement was, however, mainly due to a much lower recovery of industrial term loans during July-December 2005 than during the same period of the preceding year.
Disbursement of agricultural credit during July-February 2005-06 was Tk. 35.31 billion, which was 16.3 per cent higher than last of July-February 2004-05. However, the recovery of agricultural credit during July-January 2005-06 also stood markedly higher at Tk. 30.62 billion, or 58.0 per cent higher than that of July-February 2004-05. As a result, the net disbursement of agricultural credit stood at Tk. 9.32 billion in July January 2005-06 compared to Tk. 13.91 billion in July-January 2004-05 -- a 33 per cent decline.
Public Finance: The collection of tax revenue worsened during the quarter under review. In the January-February period of Q3 during FY06, total tax collection (National Board of Revenue -- NBR -- portion) grew by 10.23 per cent compared to 14.61 per cent in January-February in FY05. During July-Feb of FY06, total revenue collection by NBR was 17 per cent short of the target, although it increased by 13.09 per cent during the period as against 10.75 per cent increase in the corresponding period of the previous fiscal year. The increase in tax revenue receipts was led essentially by the collection of supplementary duties, Value Added Tax (VAT) and income taxes. The collection of VAT marginally increased by 17.77 per cent in July-Feb, FY06 compared to 17.0 per cent growth in July-Feb, FY05, while the collection of supplementary duties (SD) increased by 13.70 per cent from 1.9 per cent, and the collection of income tax revenue by 17.91 per cent from 17.59 per cent. On the other hand, the collection of customs duty decelerated to 3.74 per cent in July-Feb, FY06 from 7.1 per cent in July-Feb, FY05.
Implementation of Annual Development Programme (ADP) in July-January 2005-06 was only 37 per cent of the target, which is the lowest during the past four years. In the same eight-month period of FY05, ADP implementation rate was 40 per cent of the target. In the previous two fiscals -- FY03 and FY04 -- the implementation rate was 38 per cent. Except in the Ministries of Agriculture, Local Government, and Women and Children Affairs where the implementation rate was 58 per cent, 56 per cent and 47 per cent respectively, the ADP implementation rate in the current fiscal was below 37 per cent in all other implementing Ministries and Divisions.
A worrisome development in the current fiscal up to January of the third quarter is the government's growing reliance on domestic financing, and, thus, on the build-up of domestic debt, for financing the budget deficit. Total deficit financing of the government during July-February, 2005-06 was Tk. 59.04 billion, of which domestic financing was Tk. 36.72 billion (or 62.2 per cent of the total) and the remaining Tk. 22.32 billion (or 37.80 of the total) came from foreign financing. The situation was completely the opposite during the same period of the preceding fiscal when 64.4 per cent of the deficit was financed with foreign funds, and the other 35.6 per cent, with domestic financing. Outstanding domestic debt of the government at the end of February 2006 thus increased by Tk. 36.72 billion to Tk. 642.91 billion or by 6.06 per cent over June 2005.
Out of the total domestic debt of Tk. 642.91 billion at the end of February 2006, the borrowing from the banking sector was Tk. 273.81 billion, and the borrowing from non-bank sources stood at Tk. 384.38 billion. The government will need to borrow an additional sum of Tk. 14.50 billion from the banking sector in the remaining months of FY06 for the implementation of the second phase of the National Pay Scale, and another Tk. 23.00 billion for paying the enhanced wages and benefits to the public sector employees in accordance with the Wage Commission Report announced earlier last month.
The review of the latest economic situation in Bangladesh by the MCCI is being accommodated in three parts, instead of two which was announced in yesterday's issue of the FE. The third and concluding part of the review will appear in this page of tomorrow's issue of the FE