In recent times, macroeconomic indicators in Bangladesh have come under a wide range of criticism. The present situation in the current account and financial account, which are key components of the balance of payment, is worrisome. The country’s foreign exchange reserve is gradually depleting resulting in rising chaos in the foreign exchange market. The price level already reached beyond the capacity of the commoners.
The inflation rate was recently recorded at 9.94 per cent, the highest in eleven years. It is important to note that economic growth has broken all records. The average growth was close to seven per cent over the past decade. Now, the growth came down to 6.3 per cent indicating that policy reform is badly required.
Among key policies in Bangladesh, monetary policy is one. Monetary policy is drafted based on considering the current needs of the economic situation. Since the economy is in a disorderly situation due to global affairs, monetary policy is facing challenges in stabilizing the economy. The core objective of monetary policy is to control the money supply given the inflation rate. Usually, monetary policy promises to minimize price levels by injecting the required volume of money into the economy. Besides, monetary policy plays an important role in stabilizing the macroeconomic situation.
Very recently, the central bank of Bangladesh unveiled the monetary policy statement in public for the period from June 23, 2023 to December 2023. This monetary policy has been designed in light of IMF directives. The withdrawal of the lending rate cap and introduction of a unified exchange rate were IMF’s demands among others. The monetary policy statement has followed the guidelines imposed by the IMF. Six-month moving average rate ( SMART) of the treasury bill plus a 3.0 per cent margin has been taken into account in fixing the lending rate. In respect of non-banking financial institutions ( NBFI), a 5.0 per cent margin shall be added and 4.0 per cent for consumer loans. SMART or reference interest rate in respect of fixing a bank’s lending rate is not wise. Since the interest rate of the treasury bill will be fixed by the regulator, the bank’s lending rate must have fluctuated. Reference rates might not be beneficial for the economy. Right now, borrowing costs must be expensive in taking into account inflationary pressure.
Bangladesh’s foreign exchange market has so far experienced a volatile situation for multiple exchange rates of dollar currency. The exchange rates for exporters, remittance senders and importers were different resulting in creating a disorder situation in the market. It is good that monetary policy came up with a unified exchange rate for the dollar- US currency. If the market sees less than the expected dollar amount, there is the possibility of a rising disorder situation like before. The policy deserves appreciation for taking the plan in respect of the reserve calculation method. In line with the 6th edition of the IMF’s the Balance of Payments and International Investment Position Manual ( BPM6), the gross international reserve will be calculated. As the issue concerning the reserve calculation method was criticized by the IMF management, the monetary authority adopted a new way.
To contain the money supply, the policy rate or repo rate has been increased from 6.0 per cent to 6.50 per cent. On the contrary, reverse repo has been raised to 4.50 per cent from 4.25 per cent. The special repo has been decreased from 9.0 per cent to 8.50 per cent. Reverse repo and special repo must be termed as special deposit facility (SDF) and special lending facility (SLF). SLF is mainly for banks that are severely in a liquidity crisis.
Bangladesh’s economy exclusively depends on the private sector. Eye-catching investment and employment generation are made by the private sector. There is no alternative to supporting private sectors in seeing the expected growth rate in the economy. The monetary policy statement set 10.9 per cent private sector credit growth for the period between July 2023 and December, 2023. Previously, the target was 14.1 per cent from January 2013 to June 30, 2023. Around 11.0 per cent has been estimated to be achieved. On the contrary, the national budget set a 7.5 per cent GDP growth target for the 2023-2024 fiscal year. How possible to achieve the growth target through decreasing private sector credit growth target? public sector credit growth target has been set at 43.0 per cent. It would be better to increase private sector credit growth. As of May 2023, the private sector credit growth rate in India is 14.6 per cent, above Bangladesh.
Reducing inflationary pressure is now a pressing demand. This writer is doubtful whether the inflation rate will be coming down or not. This monetary policy is supposed to control the money supply to contain inflation. The budget for the 2023-2024 fiscal year set target to borrow 1 lakh 32 thousand crore from the banking system. If the government decides to borrow from the central bank, inflationary pressure must be fueled. High-powered money that is printed, naturally creates inflationary pressure, no doubt. If the government manages money from commercial banks in addressing the budget deficit, the private sector credit growth target might not be achieved. In the meantime, many economies in the world have reduced inflation rates through demand-reducing policies. Why Bangladesh lags in controlling the inflation rate is unknown to this writer. According to the respective central bank website, up to April of this year, the inflation rate was recorded at 4.7 per cent, 4.2 per cent in Brazil, 4.9 per cent in the USA and up to May 0.5 per cent in Thailand, 3.1 per cent in Vietnam, 4.0 per cent in Indonesia, 8.7 per cent in the the UK.
The economy broadly demands to experience a surplus in the current account and financial account that will be supportive of the foreign exchange reserve situation. Right now, recovering non-performing loans and laundered money abroad can ease the economic pain facing now. As January-June, 2023 monetary policy has failed to achieve its target despite showing seriousness, immediately announced monetary policy might not work amidst multiple problems. We believe that the monetary policy will solve partial problems but not all of them.
The writer is economic affairs analyst. He can be reached at [email protected]
