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Money Supply Equation of Bangladesh Revisited

To measure a country's money supply and liquidity, we often use broad money (M2). If we want to understand what drives the money supply in Bangladesh, we can look at the breakdown of the M2 and understand how each driver of the M2 is affected. 

Here is a visual representation of the breakdown of M2. Net domestic assets and net foreign assets sum up the broad money. 
Source: Bangladesh Bank
Broad Money Growth: As of Jun'24, net domestic assets contribute 85.6% to the total broad money, M2. The rest is contributed by net foreign assets. At its peak since June 2001, net foreign assets contributed 26.2% to the total broad money Broad money growth has been growing at one of the slowest paces in recent two decades. See chart below. 
Source: Bangladesh Bank
Net Domestic Assets: Net domestic asset growth has also slowed as of Jun'24, however, it was on the higher side as of Jun'23 and Jun'22 which were offset by negative growth of net foreign assets. 

Source: Bangladesh Bank
Net Foreign Assets: Net foreign assets have been declining for the last three years. Since 2001, negative net foreign asset growth has occurred only four times. \
Source: Bangladesh Bank
Drivers of Broad Money: Net domestic asset is a function of the central bank's monetary expansion or contraction and overall money circulation in the financial system. 

The net foreign asset is a function of the balance of payment (foreign currency inflow minus outflow) surplus/(deficit). When there is a surplus in the BoP, net foreign assets grow, and when there is a deficit, net foreign assets decline. There were five occasions when net foreign asset growth dropped to zero or went negative, corresponding to the BoP deficit since June 2001. 
Source: Bangladesh Bank
Outlook on the Broad Money Development: Growth in net domestic assets is likely to remain subdued for some time as the central bank continues the tightening measure amid high inflation. 

However, as and when inflation cools, we may see accelerated growth in net domestic assets. Growth in net foreign assets will depend on the BoP situation. There are some early positive signs, like robust remittance inflow, declining global commodity prices, and foreign loan commitments that may boost BoP. 

These are some of my observations on the dynamics of the money supply equation in Bangladesh. 

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