Dr. Atiur Rahman
SAARCFINANCE seminars are by now regular events drawing together policymakers and practitioners in member central banks for sharing experiences and ideas on issues of topical importance. Peer group networking created through such seminar events are affording them deeper insights and perspectives in dealing with similar issues in differing specific member country contexts. Such region-wide forging and deepening of contacts for mutual learning and experience sharing are indeed the building blocks of regional integration that we are aspiring for in South Asia to hasten its emergence as a global growth hub of major significance.
In today’s globalized world economy external trade openness is crucially important for growth as it frees up efficient domestic producers from demand limitations of the local markets. But besides heightening instability risks from demand volatilities in external markets, trade openness also brings in major adjustment pains, with the opening up rendering many domestic output activities uncompetitive. Openness to global capital flows likewise spurs growth by attracting investment inflows, but at the same time heightens instability risks from volatile trends of global capital flows arising both from speculative position taking and from spillovers of persistent imbalances in major economies. External opening up also poses new demands on approaches in safeguarding of monetary and financial stability. Increasing openness to external capital flows entails decreasing effectiveness of money stock targeting approach in monetary management, requiring increasing reliance on policy rates based approaches that in turn require fuller flexibility in market interest rates and exchange rates. Again, increasing openness to external capital flows heighten exposure of domestic banks and financial institutions to destabilizing surges of global fund flows, calling for appropriately strengthened regulatory and supervisory regimes fostering buildup of financial sector institutional strength to withstand such destabilizing pressures.
We in the SAARCFINANCE member economies are managing our external sector openness in trade and investment flows striking careful balance between the imperatives of promoting growth and safeguarding macroeconomic and financial sector stability. Specific country circumstances being different among the SAARCFINANCE members, their approaches in external sector openness will necessarily bear divergences as well as commonalities, with some members ahead of others in the extent of openness. A topical issue right now is how individual SAARCFINANCE member economies are going to be impacted by the incipient rise in interest rates in major currencies consequent to QE phase out in large advanced economies, and how they can best respond to these impacts.
While the instability risks can be particularly severe for smaller open economies, even the larger economies with deep, large domestic markets are far from immune, as seen in the last global financial crisis. Regional integration initiatives shore up defenses against external instability, putting up a collective front as a single large economic region.
(Adapted from the inaugural address of the Bangladesh Bank Governor made at the SAARCFINANCE seminar on Management of external sector openness-South Asian country experiences) – Source: BB press release