Financial Sector of South Asia Revisiting the Benchmark Condition

Transcription

1 Financial Sector of South Asia Revisiting the Benchmark Condition Presentation by Dr Khondaker Golam Moazzem Additional Research Director Centre for Policy Dialogue (CPD)

2 Contents 1. Introduction 2. Financial Transaction between South Asian Countries 3. Intra-regional Movement of Capital in South Asia 4. Impact of Financial Transactions beyond the Region: Exchange Rate Movement 5. Review of the Condition of the Domestic Financial Sector of SA Countries 6. Various Initiatives undertaken in the SAARC Process 7. Concluding Remarks 2

3 1. Introduction South Asian countries have exposed with different kinds weaknesses and challenges on financial issues in less than a decade Experienced with adverse impact of global financial crisis Slow recovery of the global economy has also caused trouble to SA economies Domestic challenges on financial and monetary issues At the same time, South Asian countries have taken initiatives to strengthen their financial sectors (e.g. BASEL I, II, III) Global engagement of SA countries particularly of India has been increasing Such dynamics and changes of SA countries need to take into account while discussing about financial and monetary cooperation It is important to reexamine the benchmark condition of SA countries on financial and monetary issues 3

4 2. Financial Transaction between South Asian Countries Intra-regional Trade in Goods in SA Afghanistan Export to SAARC region Import from SAARC India Export to SAARC region Import from SAARC region Bangladesh Export to SAARC region 40.0 Import from SAARC region Maldives Export to SAARC region Import from SAARC region Bhutan Export to SAARC region Import from SAARC region Nepal Export to SAARC region Import from SAARC region

5 2. Financial Transaction between South Asian Countries Intra-regional Trade in Goods in SA 7.0 Pakistan 35.0 Sri Lanka Export to SAARC region Export to SAARC region Import from SAARC region Import from SAARC region 0.0 Because of limited intra-regional trade of larger economies, regional financial transactions are likely to be increased at a slow pace Missing regional value chain hampers expected level of growth of financial transaction in South Asia Most of the transactions are taking place in US$ Due to sheer size of trade a number of countries have either pegged or adjusted the values of their currencies with Indian rupee ACU Payment process provides the settlement of monetary transactions among 5 the members of the Union. 0.0

6 2. Financial Transaction between South Asian Countries South-South trade is also visible in case of most of the SA economies SA countries are part of various bilateral, sub-regional and regional trade agreements: various production networks operate in Asia Financial transactions outside the region is dominant for most of the SA countries SA countries have become member of various financial agreements BRICS Contingency Reserve Agreements It is important to reexamine what kinds of financial and monetary arrangement between SA and non-sa countries would better facilitate the interest of SA countries 6

7 3. Intra-regional Movement of Capital in South Asia Intra-regional Investment in South Asia India contributed the overwhelming share of outward investment of the region. India s investment in South Asia is least Outward investment is not encouraged by other SA countries Non-convertible capital account Besides, regional investment is not encouraged by few countries SAARC Development Fund for facilitating projects on social issues The window of commercial investment is yet to be started India's Outward FDI Stock (million US$) Region / economy Y2010 Y2011 Y2012 South Asia Bangladesh Maldives Nepal Sri Lanka India s Outward FDI flow (million US$) Region / economy Y2010 Y2011 Y2012 World Developed economies Developing economies Africa Asia East Asia South-East Asia South Asia West Asia Latin America and the Caribbean Transition economies Unspecified

8 3. Intra-regional Movement of Capital in South Asia India s outward investment is highest in Europe, SE Asia and Africa High tech manufacturing, infrastructure development and resource extracting industries Portfolio investment in major global exchanges is growing SA countries have become member of various financial agreements India is a founder member of BRICS Bank; India and Bangladesh are member of AIIB Overall, a limited level of movement of capital in SA but growing outward movement of capital by India outside SA are the key features India's Outward FDI Stock to Different Regions Y2010 Y2011 Y2012 8

9 4. Impact of Financial Transactions beyond the Region: Exchange Rate Movement Currencies of BRICS countries have experienced fluctuating trends against US$ and Euro since early 2012 Weaken investors confidence on currencies of BRICS countries India s capital market problems partly responsible 80 Exchange Rates of BRICS Currency against US$ Exchange Rates of BRICS Currency against Euro USD/BRL(Brazil) USD/INR(India) USD/ZAR(South Africa) USD/RUB(Russia) USD/CNY(China) USD/BRL(Brazil) USD/INR(India) USD/ZAR(South Africa) USD/RUB(Russia) USD/CNY(China) 9

10 Nov 2, Nov 8, 2009 Jan 11, Jan 17, 2010 Mar 22, Mar 28, May 31, Jun 6, 2010 Aug 9, Aug 15, 2010 Oct 18, Oct 24, 2010 Dec 27, Jan 2, 2011 Mar 7, Mar 13, 2011 May 16, May 22, Jul 25, Jul 31, 2011 Oct 3, Oct 9, 2011 Dec 12, Dec 18, Feb 20, Feb 26, 2012 Apr 30, May 6, 2012 Jul 9, Jul 15, 2012 Sep 17, Sep 23, 2012 Nov 26, Dec 2, 2012 Feb 4, Feb 10, 2013 Apr 15, Apr 21, 2013 Jun 24, Jun 30, 2013 Sep 2, Sep 8, 2013 Nov 11, Nov 17, Jan 20, Jan 26, 2014 Mar 31, Apr 6, 2014 Jun 9, Jun 15, 2014 Aug 18, Aug 24, 4. Impact of Financial Transactions beyond the Region: Exchange Rate Movement Currencies of Non-BRICS countries have experienced fluctuation against BRICS currencies Adverse effect on developing countries current and capital account balances Fluctuation of currencies in short term may not cause crisis in the BoP Need support to tackle such situation if continues for long period Because of multiple linkages in financial transactions, a single currency-based financial arrangement (other that US$) would not be so effective In this context, what kinds of financial and monetary arrangement between SA and non-sa countries would facilitate most is an important issue of concern Indian Rupee vis-à-vis Chinese Yuan, Indonesian Rupiah, Argentina Peso and Bangladeshi Taka INR / IDR INR / CNY INR / ARS

11 5. Review of the Condition of the Domestic Financial Sector of SA Countries Broad Money as % of GDP Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka Broad Money to Reserve Ratio Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Liquid Reserve - Asset Ratio Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan

12 5. Review of the Condition of the Domestic Financial Sector of SA Countries Domestic Credit to Private Sector Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka Lending Rate 1990 [YR1990] 2000 [YR2000] 2005 [YR2005] 2010 [YR2010] 2013 [YR2013] Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka Deposit Rate (%) [YR1990] [YR2000] [YR2005] [YR2010] Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka Interest rate spread 1990 [YR1990] 2000 [YR2000] 2005 [YR2005] 2010 [YR2010] Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka

13 5. Review of the Condition of the Domestic Financial Sector of SA Countries Non-performing loan to Gross Loan Afghanistan Bangladesh Bhutan India Pakistan Sri Lanka Inflation Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka Market Capitalisation 1990 [YR1990] 2000 [YR2000] 2005 [YR2005] 2010 [YR2010] Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka

14 5. Review of the Condition of the Domestic Financial Sector of SA Countries South Asia s financial sector is overwhelmingly dominated by banking sector Banking sectors are at different stages of development Differences in terms of size, focus, level of efficiency, level of practices of prudential rules Diverse national policy perspectives on the development of the banking sector Monetary and fiscal policies are influenced by political perspective of the government Alternate markets for financing particularly capital market has yet to be developed Inefficient operation, poor regulatory structure Lack of harmonization of policies, regulations, operations, monitoring and enforcement and political perspective etc. are major features of SA financial sector Harmonisation and coordination are the foremost important tasks in the process of development of domestic financial sector for future cooperation 14

15 6. Various Initiatives undertaken in the SAARC Process 17 th SAARC Summit directed the SAARC Finance Ministers to chart a proposal that would allow for greater flow of financial capital and intra-regional long-term investment Draft SAARC Agreement on Promotion and Protection of Investments is long due. Sixth Meeting of the Inter-Governmental Expert Group (IGEG) on Financial Issues was held at the SAARC Secretariat on April Discussed about Public Debt Management; Development of Capital Market in South Asia; Financial Inclusion - Access to financial services and credit to financially excluded sections of the society; Experiences of Financing for Infrastructural Development; Combating Money Laundering and Terrorist Financing; Harmonisation of fiscal and trade indicators; comparative performance of key economic indicators; sharing of experience and best practices in the financial sector; greater flow of financial capital and intraregional long-term investment. Reviewed the progress in the implementation of Swap Arrangement. Two Meetings of SAARC Public Debt Managers Forum have been held in Sri Lanka and India in 2012 and 2013 respectively. 15

16 6. Various Initiatives undertaken in the SAARC Process Sixth Meeting of IGEG on Financial Issues also agreed to discuss the best practices on number of sectors during the next Meeting of IGEG. Study on codification of variations in the level of development of Capital Markets in SAARC Member States has also been conducted with the financial and technical assistance of Asian Development Bank. A Study is being conducted with the help of Asian Development Bank to examine the need to develop a Regional Coordinated Surveillance Mechanism to forecast the fallout of external shocks which may create an economic and financial dislocation within the SAARC region A regional network of SAARC Central Bank Governors and Finance Secretaries called SAARC Finance was set up in September 1998 with the objective of member countries sharing their experiences on macroeconomic policy issues At the 17th meeting of SAARC Finance Central Bank Governors, the idea of a regional payment system was agreed in principle It was decided to develop a framework tentatively called the Regional Cooperation on Payments and Settlement System. 16

17 6. Various Initiatives undertaken in the SAARC Process SAARC process on financial issues highlights on development of domestic financial sector At an early stage; knowledge-sharing stage Need a broader framework for coordination and harmonization on different financial issues Given the multiple risks, a Regional Coordinated Surveillance Mechanism to forecast the fall-out of external shocks is needed Regional investment needs to be facilitated by developing domestic, bilateral and regional policies Capital account needs to be opened up at a limited scale for regional investment by SAARC countries Barriers for bilateral investment need to be reduced Regional investment promotion and protection agreement needs to be signed by SAARC countries 17

18 7. Concluding Remarks It is too early to consider monetary and financial integration in South Asia Minimum benchmark level has not yet established Major economies have yet to develop strong resilience towards global risks It is also important to consider whether South Asia based financial and monetary integration would be effective given the growing financial engagements of most of the SA countries beyond the region? At this stage, domestic preparedness of South Asian countries needs to be emphasized most In terms of liberalization of monetary and financial indicators, capital market development and capital account liberalization 18

19 Thank you. 19