The Bangladesh Bank is set to unveil the Monetary Policy Statement (MPS) for the first half of FY24 on Sunday, at a period when the economy faces tremendous pressure due to persisting foreign exchange crisis and skyrocketing inflation.
Central bank Governor Abdur Rouf Talukder will reveal the statement at 3pm at the Bangladesh Bank headquarters in the capital, under the watchful eye of people from every sector of the country, who have been struggling to survive amid the economic headwinds.
The inflation raced to an 11 year high of 9.94 per cent this May, show data from the Bangladesh Bureau of Statistics (BBS). Many however argue that the actual inflation is more than what the official data represents.
In the upcoming fiscal year, the government target is to keep the inflation rate at 6 per cent.
“We would not follow a textbook solution to tackle the ongoing economic hardship,” Abdur Rouf Talukder had said back in January, when he unveiled the MPS for the second half of FY23.
Withdrawing the lending rate cap to tackle inflation is a textbook solution to him, but the central bank chief will withdraw the 9 per cent cap in this MPS to meet the International Monetary Fund’s (IMF) prescription, insiders say.
There are also some policy reforms in this MPS as per IMF recommendation. The global lender had approved $4.7 billion loans for Bangladesh as the country has been facing big challenges since the Covid-19 pandemic, which was followed by the Russia-Ukraine war.
Instead of a 9 per cent lending rate cap, the Bangladesh Bank will introduce Short-Term Moving Average Rate (SMART) on lending.
As part of the move, the central bank will fix a 3 per cent interest corridor on the average interest rate of 180 days treasury bills for lending.
The average interest rate of 180 days treasury bills currently stands at 7 per cent, and when the 3 per cent corridor is added, the maximum interest rate would be at 10 per cent.
It should be noted that the banking regulator is introducing a new lending rate system after three years, as it had fixed the 9 per cent lending rate in April 2020.
At least three senior officials of the central bank, who were involved in formulating the MPS, told The Business post that the foremost priority in the MPS this time is to tackle the rising inflation.
The central bank policy rate is likely to be hiked in this MPS for making money costlier, they added. This policy rate is the interest rate at which the central bank is lending money to commercial banks. The regulator influences money supply in the economy through this rate.
Repo rate, which is the rate at which commercial banks borrow money from the Bangladesh Bank, currently stands at 6 per cent. Meanwhile, the reverse repo rate, which is the rate at which the central bank borrows money from commercial banks, is now at 4.25 per cent.
Zahid Hussain, former lead economist of World Bank Dhaka Office, said, “We may not see any proper solution in the MPS to tackle the ongoing economic hardship. The upcoming monetary policy will be as usual, except a few policy reforms to meet the IMF recommendations.
“The interest corridor on lending and a uniform exchange rate are two major reforms in the upcoming MPS, but how the central bank manages the interest rate corridor is going to be very important.”
The ambitious governor of Bangladesh, when he started working in the position last year, had told the media that there will be no foreign exchange crisis from January 2023.
His promises however did not come true, because the country’s forex market is still in crisis owing to the deferred payments and high outflow against low inflow of USD.
The forex crisis lingers despite the downward trend of imports and high USD selling spree by the central bank. A major portion of the banks are not able to open letters of credit (LC) for high volume imports due to USD shortages.
During the July-May period of FY23, opening of LCs fell by 25.34 per cent, and LC settlements fell by 9.76 per cent owing to the austerity measures by the government and strengthened monitoring of imports by the Bangladesh Bank.
The banking regulator had pumped over $13 billion into banks from July to June 15 of this fiscal year. The country’s gross forex reserve came down to $29.83 billion on June 14, from $41.43 billion compared year-on-year, data from the Bangladesh Bank show.
Industry insiders say different USD rates in different segments are a major cause behind forex market volatility.
On the issue, Zahid Hussain said, “The interbank exchange rate is almost inactive as the rate is higher in the market than the rate the central bank shows on its website. This is fueling volatility in the forex market.”
Officials say the Bangladesh Bank in its MPS will introduce an exchange rate corridor.
The monetary policy would be a cautious one as the country is facing several challenges, including a crisis in the foreign exchange market, said the central bank’s Chief Economist Md Habibur Rahman.
He added that taming inflation is the foremost priority in the upcoming MPS, while the interest rate corridor system, uniform exchange rate and reserves calculation will be emphasised as well.
