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Budget unlikely to rein in inflation, meet growth target


23 Jun 2022 00:00:00 | Update: 23 Jun 2022 01:10:42
Budget unlikely to rein in inflation, meet growth target

The proposed budget, being dependent on bureaucracy and administration, cannot curb inflation and meet the growth target. The monetary policy being followed to support the budget has to be expansionary. Private sector credit must be used in the productive sector to ensure employment generation and increase income. This may reduce the heat of inflation a little bit, former governor of Bangladesh Bank (BB) Dr Salehuddin Ahmed told The Business Post’s Talukder Farhad in an exclusive interview.

The budget has set an inflation target of 5.6 per cent and a GDP growth target of 7.5 per cent. What kind of monetary policy do you think is needed to meet this target?

There is no downward trend in inflation in sight. Point-to-point overall inflation surged to eight-year high of 7.42 per cent in May. In such a scenario, if the prices of fuel and electricity are increased, it will be difficult to rein in inflation.

If tightening monetary policy is adopted to arrest inflation, then private sector credit growth will be hampered. On the other hand, the government will borrow more than one lakh crore taka from banks to meet the budget deficit. This will create a crowd-out scenario for the private sector debt.

Private sector is our big growth driver to generate employment. In this situation, the upcoming monetary policy should be expansionary. If the central bank ensures the use of credit in the productive sector it will enhance people’s income lessening inflationary pressure on them.

In this scenario new employment will be generated and income will increase.  As a result, people will feel less pressure from inflation along with an increase in the GDP growth.

How to coordinate monetary policy and fiscal policy?

Fiscal policy is a little expansionary because of the country’s economic growth. The central bank ensures that there is a need for cash flow for the expansion of economy. If the government wants to increase or decrease the flow of credit, the central bank takes that initiative.

In this case, coordination with fiscal policy is required to determine whether the loan is being used in the productive sector and whether it is being properly invested in the private sector. Without this coordination, the desired level of development is not possible.

How will the central bank ensure the flow of credit to the productive sector?

Unrealistic number in monetary policy at will the way it is used in the budget is not good. Instead, we need to take realistic targets and implement them. And not only should the central bank be warned of the uses of loans but also action should be taken if the banks do not grant loans to increase trade and investment.

We need to make sure that the loans are used properly and stop the misuses. Banks should focus on the SME sector for more lending, because our 80 per cent employment is generated in this sector.

Is it possible to achieve 7.5 per cent growth in the ongoing pressure of the economy?

I mean real growth is in the productive sector. Now the GDP growth is being boosted by increasing financial transactions, transport movement and project costs. In the new financial year, it does not seem to be possible to go on with this tendency. So I don’t think growth will be achieved as per the target.

Now the biggest pressure on the economy is the volatility of the exchange rate. What needs to be initiated to bring stability?

Foreign exchange reserves need to be increased. Therefore, to increase the export earnings import must be rationalized. It needs to be seen whether anyone is laundering money under the foreign trade. Export earnings need to be repatriated on time.

And it remains to be seen whether the products being imported (apart from consumer goods and fuel) are being used for the unproductive sectors. Imports of luxury goods must be stopped completely. There is no need to import products which are produced in the country.  

During the pandemic the repatriation tenure of export earnings increased from 120 days to 210 days. Exporters want that benefit again. What is your suggestion?

Time should not be extended. If done, it will be abused. Now we need more and more foreign currency. Some exporters may have problems. They will inform the banks. Then the central bank examines and can extend the time if needed on a case-by-case basis.

The finance minister hopes that during the upcoming financial year the exchange rate will be stable. Do you agree?

Exchange rate instability challenge may not be handled properly. Who knows when the dollar price will reach Tk100? The situation in the neighbouring countries is not good. Sri Lanka is an exceptional case but the rest of the countries’ currency has been devalued.  However, India is in quite a better situation because of its large economy. But it will be difficult for us to get back on track.

In the budget, the finance minister has set a target of exporting 8 lakh manpower this year. What role will it play in increasing remittances?

It is good to increase manpower exports. I hope this will increase remittances. In particular, arrangements need to be made to send manpower to Malaysia quickly. It has been 5/6 months already. The complexity is still there. The government will have to take steps to resolve it in coordination with the Malaysian government.

But the Malaysian government has fixed 25 recruiting agencies for manpower export there. Will it create problems?

No, that’s not right. But if it (Malaysian government) sets the condition then we have nothing to do. If there is a good company, if the track record is good and if they can be brought under monitoring then this number can be increased to more than 25.

In the upcoming financial year, in the budget the government decided not to provide capital injections into the state-owned banks. How do you view it?

Let us look at the performance of the banks without capital injections. Besides, the government should need to tell those banks what to do. Banks should prepare themselves to face challenges. Those who do well should be rewarded by the government.

How do you see the possibility of introducing digital currency mentioned in the budget?

I don’t know exactly what the finance minister meant by digital currency. We usually mean crypto currency and Bitcoin by it. The central banks of most countries in the world do not approve this currency nor does Bangladesh Bank.

The budget also mentioned digital banking and the central bank has also started working on it. What is your viewpoint?

I think banks need to focus on making their services more digital. They should focus on mobile financial services (MFS) and agent banking services can be made easier and enhanced to prevent fraud in those services and surveillance should be mounted.

In your opinion, what are the good and bad sides of the proposed budget?

The good side of the budget is that it has acknowledged the current problems and the bad side is that there are no effective guidelines to solve those problems.

Corporate tax exemption is a good way to increase investment but the personal tax-free income limit should not be kept at Tk3, 00,000 at all. It could have been Tk4, 00,000. The amnesty on the laundered money is the worst side.

In my view it is a budget as usual, nothing special. My guess is that there was not much discussion on the government side about the budget. It is dependent on bureaucracy and administration.

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