Pivotal role of the monetary policy

When the deadly Covid-19 pandemic spread its tentacles in Bangladesh, the economy went into shambles, leading to the cessation of economic activities to a great extent. Millions of people lost their jobs (both formal and informal) apart from falling into the poverty trap. In the course of the period marked by the havoc caused by Covid-19, the poverty rate reached close to 40.0 per cent. The unemployment rate increased as well. Exporters faced cancellation of export orders worth millions of dollars. The economy failed to generate the expected amount of revenue earnings amidst coronavirus. The GDP growth rate in Bangladesh like many other countries came down abruptly. External sectors during FY2022 experienced some headwinds such as a wide range of trade deficits, current account deficits along with decreasing inflow of foreign remittance.

As a result of disruptions in economic activities in the country, the government announced a total of 28 stimulus packages worth Tk 2.0 trillion. The stimulus package amount was around 5.68 per cent of the GDP (current prices of 2021). The objective of giving out a stimulus package was to revive the virus-hit economy. Bangladesh Bank, central bank of Bangladesh, took the responsibility of implementing 10 stimulus packages out of 28. Despite providing bailout packages, the government tried to revamp the corona-ravaged economy through policy support. Monetary policy and fiscal policy are considered two key policies in respect of controlling the economy. In stabilizing the economy, monetary policy plays a vital role. Ultimately, the government took prudent policies through the Monetary Policy Statement (MPS) with the purpose of resuscitating the virus-hit economy

The world is now confronted with acute economic hardships due to the Ukraine-Russia war. The war has destroyed supply chain management and pushed up the transportation costs on the marine routes. As Russia is a leading supplier of oil and gas, many countries, especially the Europe region, which are heavily dependent for sources of energy on Russia’s oil and gas, are now bearing the brunt of the war, with their economies being adversely affected alongside the precariousness of the lives and livelihood of their people. For instance, oil and gas prices jumped manifold, resulting in the rising price level of all commodities. High inflationary pressure is a notable economic disadvantage that has been inflicted upon many countries since the start of the Ukraine-Russia war. Bangladesh is no exception in this regard. According to respective central bank websites, Bangladesh’s point-to-point inflation was recorded at around 7.4 per cent. It was 13.8 per cent in Pakistan, 11.7 per cent in Brazil, 9.1 per cent in the UK, 8.6 per cent in the USA, 7.7 per cent in Canada, 7.1 per cent in Thailand and 7.0 per cent in India. All economies including Bangladesh are taking measures for controlling the soaring inflation rate which is cost-push inflation in nature.

Monetary and credit programmes for FY23 has actually been designed to achieve 7.50 per cent real GDP growth keeping the inflation rate within the desired level. MPS is committed to keeping a 5.6 per cent inflation rate this fiscal year. If viewed on the current world economy, there is little possibility to keep the inflation rate within the target set in the MPS. According to media reports, the Russia-Ukraine war has worsened the commodity price situation worldwide. As Bangladesh is linked to international trade, the country has to face a similar situation in the coming days. Bangladesh is going through a tough situation concerning the inflation issue. In May 2022, the food and non-food inflation rate were recorded at 5.81 and 6.27 per cent respectively while the 12-month average CPI inflation rate reached 5.99 per cent. So, because of the global situation, Bangladesh might not be able to keep the inflation rate under control.

The Bangladesh Bank, at the end of this June, brought its monetary policy statement to the public. The half-yearly (July to December 2022) monetary policy statement came to us at a time when the global economy is in critical times. The impact of the Russia-Ukraine war has fallen on Bangladesh's economy severely.

This monetary policy statement is scheduled to address high inflation in particular. Bangladesh has been experiencing a US currency crisis in its reserve maintained by the central bank. Moreover, ensuring exchange rate stabilisation has become another challenge. So the Monetary Policy has been drafted in view of multiple challenges Bangladesh is currently experiencing. It is important to note that considering current non-performing loans (around 3 per cent of GDP), judicious decisions have been taken in the MPS. In MPS the private sector credit growth has been set at 14.1 per cent which was 14.8 per cent in the previous fiscal year.

This MPS heavily focused on public sector credit growth for sake of the greater interest of the virus-hit economy. The public sector credit growth target in this MPS has been set at 36.3 per cent which was close to 33 per cent in the last fiscal. An 18.2 per cent target was taken for domestic credit growth in MPS. The MPS puts forward 12.1 per cent and 9.0 per cent targets for broad money (M2) and reserve money respectively. The policy rate, known as the repo rate, was raised by 50 basis points to 5.50 per cent from 5.0 per cent aiming to manage demand-side pressure. The decision of increasing the repo rate will help to tackle soaring inflation also.

Nevertheless, a decision on preserving foreign exchange reserves is needed right now. In the MPS, the decision of promoting import-substituting economic activities and discouraging imports of luxury goods items deserves appreciation. Alongside, controlling inflationary pressure and reducing exchange rate depreciating pressure are among the top-priority tasks. According to respective central banks, Bangladesh’s currency depreciation rate against the US currency was -9.2 per cent, Malaysia -5.6 per cent, India -4.8 per cent, China -3.5 per cent and Indonesia -2.0 per cent in FY 22. Based on the currency depreciation rate, Bangladesh is clearly in great trouble and a way out is required.

Since the national budget for FY2022-23 aims to borrow around Tk 1,063 billion from the banking system, the private sector might be affected severely. Considering economic demand, the credit growth in the private sector needs to be increased. Employment generation in this period is to be scaled up and that is broadly connected with private sector development. Up to May 2022, private sector credit growth in Bangladesh was 12.9 per cent while it is 16.9 per cent in Vietnam, widely known as Bangladesh’s competitor. There is a huge possibility of achieving the 7.5 per cent GDP growth target this fiscal year because of the opening of the multipurpose Padma Bridge for traffic. The bridge will assuredly support moving the wheel of Bangladesh's economy. Contemporary research study reveals that Padma Bridge would contribute to the country’s existing GDP by adding an extra 1.23 per cent. The banking sector has to be kept free from liquidity stress for the sake of private sector development. Centring newly inaugurated Padma Bridge, many entrepreneurs are looking forward to receiving banks’ support in setting up business establishments. This year from June, the private sector businesses will be benefited due to the opening of the Padma Bridge which connects to Asian highways. The government has to stand by the privately-run businesses through policy support for the greater interest of Bangladesh's economy.

The writer is an economic affairs analyst. He can be contacted at mazadul1985@gmail.com