Cautious monetary approach to tame inflation

With the Ukraine War already manifesting across the global economy with signs of inflation, unemployment and jittery markets, Bangladesh Bank has adopted a cautious policy stance to keep inflation under check, ensure market stability and preserve foreign currency reserve.

As per a TBP report, the central bank has increased the policy rate by 50 basis points to 5.50 per cent and decreased the private sector credit growth target to 14.1 percent from 14.8 per cent. These steps have been elaborated in the Monetary Policy Statement (MPS).

In a time of economic upheaval across the region with Sri Lanka on the edge of a precipice and other countries tightening belts and putting curbs on the import of non- essential items, Bangladesh will be prudent to adopt a cohesive approach; encompassing austerity, preservation of foreign exchange, inflation control and cutting down unnecessary expenditure.

During July to April of the outgoing fiscal year, imports rose by 42 per cent to $68 billion while export earnings grew by 34 per cent to $41 billion, as per central bank data. The forex reserve has come down to $41.75 billion due to the growing import payments after the Covid-19 pandemic.

The foreign exchange reserve is crucial since one of the reasons for Sri Lanka’s current economic turbulence is the island nation’s dwindling forex reserve.

When condition in Sri Lanka, once deemed an economic miracle, began to unravel there were fears in Bangladesh too although the debt situation in Bangladesh is still in the green zone.

However, with back to back calamities of the Covid-19 pandemic and the impact of the war in Europe, there’s no room for complacency.

Reportedly, LC margins for luxury goods, fruits, non-cereal foods, canned and processed foods will be increased comprehensively to discourage their imports in the upcoming fiscal year.

Rising import cost along with a slowdown in remittance puts a pressure on the foreign exchange reserve, which should be an area of priority.

There are two ways to ensure steady flow of remittance and one is to immediately instigate measures to explore new labour markets for exporting manpower.

Bangladesh has been sending workers in the blue collar category for almost four decades and the key destination has always been the Middle East.

Keeping the precarious global economy in view, the focus should be to go to Africa and South America and also tap into the international market for white collar workers.

While developed nations have been eager to take semi skilled workers, for professionals they have always looked to countries other than Bangladesh. This trend needs to change because Bangladesh, can now offer top quality professionals for all sectors starting from academia to media to international development.

However, several experts have bemoaned that there was no indication in the new MPS to lift the ceiling of lending rate cap, which may not bring any positive effect to contain the soaring inflation and curb unpredictable exchange rate volatility.

The MPS further states that in order to increase the liquidity in the capital market, the size of the assistance fund for the affected small investors has been increased by Tk. 153 crore to Tk1,009 crore.

This is indeed heartening. SMEs and other mid-sized entrepreneurial ventures will require all possible incentives and banks may consider introducing grace periods for repayment of loans.

In the current volatile scenario, the other concern is the Dollar exchange rate, which has proved recalcitrant. On Thursday, the inter bank exchange rate was Tk. 93.45 while the kerb market rate was hovering around Tk. 100.

While the MPS outlines immediate measures, for longer term stability, the government should aggressively pursue foreign investment, especially for economic zones that are now only a few hours away from the capital, thanks to the Padma Bridge.