The two crucial demand management policies, fiscal and monetary, were announced by the Government of Bangladesh in a narrow band of the time. The twin objectives of the policies are to maintain price stability and ensure growth by keeping aggregate demand at an optimum level and manipulating the supply of money conducive to economic growth and inflation. The monetary policy was announced on June 18, 2023, and the budget for FY 24 on June 1, 2023. Monetary Policy Statement [MPS] is now a bi-annual feature H1 and H2; the first one was published in January with explicit objectives of containing inflationary pressure.
The MPS for H2 is formulated on the structural requirement of the IMF loan of USD 4.70 billion to fulfil the Quantitative Performance Criteria [QPCs].
Indeed, there are a few positive elements, such as the withdrawal of the rigid band on the interest rate and a single nominal exchange rate instead of multiple exchange rates. The interest rate is now tagged to the average 182 days of maturity treasury bills. The average rate was about 7.12 per cent during the last six months. Thus, a markup of 3 per cent and 5 per cent for the banking and non-banking financial institutions may be viable alternatives on the interest rate spectrum and help the depositors to earn positive real interest. The interest on credit card borrowing at 20 per cent could be a glitch in the growth of consumer credit, a salutary effect on inflation.
The current repo of 6.50 per cent from 6.00 per cent and the reverse repo of 4.50 per cent from 4.25 per cent manifest a contractionary effect on the money supply as borrowing from the central bank would be expensive for the banking sector. However, there is an incentive that the central bank is willing to pay more when borrowing from the banking sector. The target for credit growth in the private sector for the next six months is projected very close to realized target of 11 per cent against the projected target of 14 per cent. The public sector credit growth is projected to be 43 per cent against the realized target of 40 per cent.
The prevalence of multiple exchange rates can drain reserves in disguise and constitute a severe leakage in a chaotic foreign exchange market. Now exchange rate of 1 USD = Tk 108 may help to arrest jittery in the foreign exchange market with a beneficial impact on the level of reserves. It is also prudent to follow the international norm in calculating the level of foreign exchange reserves and be cautious about maintaining an optimum level of reserves to keep the currency value steady, which keeps the balance of payments at a healthy state with a balance in the current and financial account.
There are many challenges in the successful implementation of the MPS, both internal and external. There must be concerted efforts to check the outlets through which the deficit in the financial accounts could be narrowed. The stability of the exchange value, an optimum level of reserves, and the pursuance of a market-based interest rate are a few essential determinants. The external environment hinges on the sound interest rate policy of the FED and the European Central Bank.
The previous MPS failed to halt the spiralling price hike; against the historical inflation target of 6 per cent in the budget and the monetary policy. A review of the price of staple items such as coarse and fine rice, wheat, edible oil, sugar, pulses, potato, onion, fish, egg, and meat between January 2020 and January 2023 depicts a heavy loss in real income and without the proportionate wage hike; a severe drop in the standard of living. A comparison between the price of January 2023 and June 2023 indicates convergence at the individual price level except for a few items such as meat, eggs, and sugar. However, the overall price level is beyond the reach of the working class. The wage-push inflation yields buoyancy in the living standard of the workforce in the developed world, unlike the LDCs and the developing world. Policy planners are worried about the price spiral. Still, they are not convinced by the idea that higher international price is not the reason instead, domestic policy on the price of a few commodities fueling the price hike. A report published by the Tariif Commission indicates that Bangladesh lags in the speed of adjustment of a fall in international prices with domestic prices.
Unfortunately, the MPS and Budget could not provide a road map to contain the bulging non-performing loans that could exceed one lakh seventy thousand crores if the trend continues and the concessions go unabated. You study the segmented historical growth, review the policy pursued during the last couple of years, and study the trend of concessions in interest exemption and the institutional structural deficiency; the NPL could destabilize the whole macro framework of the economy.
The latest Moody’s ranking of the banking sector in Bangladesh and the overall economy manifest the cruel truth. The State-owned Commercial Banks [SCB] and the Development Financial Institutes continue to record high levels of NPLs due to the implementation of new and higher loan classification and provisioning standards and approval of large loans without adequate collateral. Four SCBs are banking on the incomes from the investments in bonds and bills for existence as they fail to generate revenue from their core lending business. The private sector is immune to NPLs to some extent. However, Moody’s recent downgrading of ranking from B3 to B2 of a few private banks manifests weakness in the banks’ operating environment or material deterioration in the banks’ solvency or funding.
The writer teaches at BRAC University and BIDS as an adjunct Faculty in the Master’s Program in Economics. In addition, he taught at the North South and United International University. His email address is [email protected]
