The Bangladesh Bank monetary policy statement (MPS) is focused on the second half of FY24, with an emphasis on bringing down inflation to 7.5 per cent by the end of the current financial year, and achieving 6.5 per cent GDP growth.
However, the low and middle income segments of the population – and businesses as well – have been grappling with high inflationary pressure throughout the fiscal year, with this figure hovering around 10 per cent.
Inflation in the country rose to 9.81 per cent, reaching the second highest after 9.93 per cent recorded last October.
Compared to its neighbours, Bangladesh suffered the highest inflationary pressure after Pakistan's 20.7 per cent posted in March. India witnessed 4.85 per cent point-to-point inflation, while Sri Lanka saw 2.5 per cent in the same month this year.
Central banks of the world help the government achieve the desired GDP growth by controlling inflation through the implementation of monetary policy. The Bangladesh Bank is no different in this regard.
Two monetary policy statements have been announced to contain inflation at 7.5 per cent in the current fiscal year. But the reality is that inflation was close to 10 per cent throughout the year, show Bangladesh Bureau of Statistics (BBS) data.
In response to a question on why the Bangladesh Bank is unable to control inflation, former lead economist of World Bank Dhaka Office Zahid Hussain said, “What the central bank should have done came too late and too slow. There were also signs of indecision.
“For example, the cap on interest rates has been lifted. But after that the SMART has been introduced which increases the interest gradually. On the other hand, the central bank is also responsible for the exchange rate.”
Salehuddin Ahmed, a former governor of Bangladesh Bank said, “The central bank monitoring policy has become somewhat target dependent. Targets alone will not reduce inflation. Rather, it has to decide what effective steps would be taken along with target fulfillment.
“For example, steps are implemented to provide credit support to small and marginal farmers, so that they can contribute more to production. It will not be enough to achieve the disbursement target of loans.”
Analysts say it is not possible to reduce inflation with only interest rates. Because of the devaluation of the Taka against USD, the increase in the price of power and energy is also one of the key reasons for high inflation.
Zahid Hussain added, “Electricity prices were hiked by more than 8 per cent in February. This in turn pushes up the cost of production. So, considering all the angles, we cannot really say that the monetary policy has failed.”
Central bank data shows that the official exchange rate for USD was Tk 109 in July last year, which rose to Tk 110 on April 25.
But there are complaints that banks are not complying with these rates. Businesses have to open LCs or letters of credit at a higher rate than this. On the other hand, the USD price in the kerb market is more than Tk 120.
In order to control inflation by raising interest rates, the Bangladesh Bank increased the policy rate to 8 per cent in the MPS for H1 of FY24. As a result, the interest rate in the call money market has also increased.
The overall bank interest rate rose to 13.55 per cent in April this year.
Besides, the excess liquidity in the banks is decreasing due to deposit withdrawal pressure from customers, a lack of confidence in the banking sector, the result of contractionary MPS, government borrowing from banks, and the banks buying USD from the central bank.
According to central bank data, excess liquidity in the banking sector was Tk 1,81,090 crore in July last year, which declined to Tk 162,061.35 in February this year.
The latest monetary policy has set the private sector credit growth target at 11 per cent and public sector at 31 per cent to reduce inflation by reducing money supply for FY24.
However, the private sector credit growth was 9.96 per cent in February this year, as the investments declined due to high inflationary pressure.
On the other hand, the public sector credit growth target was set at 31 per cent, while such growth was 10.22 per cent in February.
Analysts believe that this target may be exceeded at the end of this fiscal year because the government is taking out loans harshly from the banking sector to cover the budget deficit.
In this context, Salehuddin Ahmed said, “In this context, it is difficult for Bangladesh to contain the inflation by reducing the money supply, as the inflation in our country mostly depends on the supply of goods.
“So the government should keep the supply chain stable, increase market monitoring and ensure fair competition.”
Responding to the question why Sri Lanka is able to curb inflation but Bangladesh cannot, Saleh Uddin said, “The portion of the formal economy is more than the informal economy in that country.
“But in Bangladesh, the informal economy is bigger than formal. That is why, in our country, there are a lot of money transactions outside the government's purview. As a result, it is difficult to control inflation by reducing the money supply.”
