Home ›› 06 Aug 2022 ›› Editorial
The recently appointed Bangladesh Bank Governor Abdur Rauf Talukder in his first press conference pointed out that control of inflation is his first priority. He also expressed his concerns about exchange rate management and depleting foreign exchange reserves. Controlling inflation is not only the priority for Bangladesh, this has become a matter of grave concern throughout the world, especially in the developed countries– this probably is the first time when the inflation rate of developed countries is higher than developing countries.
The Monetary Policy Statement (MPS) is an important tool to control inflation and avoid recession. A contractionary monetary policy has been announced on June 30, 2022, simultaneously with the approval of the budget for 2022-23. For certain reasons, some indicators are common in both the national documents.
These indicators created the background of the announced MPS which has primarily targeted containing inflation, maintaining GDP growth and creating jobs. The budget was discussed extensively throughout the whole month of June and a number of discussion/dialogues were held. On the other hand, though the MPS covered the whole economy, it is not much of an openly discussed issue. The reason could be that MPS is much more technical and the mass public does not have much to do in changing monetary policies.
MPS targeted inflation at 5.6 per cent for the FY2022-23 while present inflation is 7.2 per cent. Inflation was 5.56 per cent in June 2021, CPI-based inflation was 5.99 per cent in May 2022 while the target was 5.30 per cent. GDP has been targeted at 7.5 per cent. It is of course believed that inflation is much higher than the officially announced rate. However, controlling inflation and keeping GDP growth can create a difficult situation. Usually many countries in the world use OMO (open market operations), to buy and sell securities and banks are forced to buy. Banks then can charge higher interest rates, which slows economic growth and contain inflation.
There is a money supply cap set at 12.1 per cent, economists viewed it as a mismatch. In the case of calculating GDP growth, BBS needs to follow international projections to ascertain credible GDP growth. At L/C margin announced at 100 per cent, loans will be difficult to get – businesses will need to avail themselves of the post-import finance. Now the lending rate is lower than the real inflation rate (actual inflation rate is believed to be 11 per cent). Experts suggested lending rate adjustment, otherwise, businesses will be hampered.
Bangladesh Bank has taken several initiatives to contain inflation, and declared a higher LC margin for luxury goods, such as; canned and processed foods, non-cereal foods, and fruits to restrict imports and reduce the burden on foreign exchange reserves. There were some debates in defining luxury goods, whether complete ban or discourage these products, as there are some consumers who use these items as one of their necessities.
Imports are an integrated part of the economy. Imports comprise some important specific products such as; petroleum and oil products (more than 11 per cent), cotton and textile( 11 per cent), food items( 9 per cent), iron and steel(7 per cent), edible oil (4 per cent); chemicals(4 per cent), yarn, plastic, rubber items(4 per cent), machinery, equipment, computers( 11-16 per cent). Then there is the case of the imports of raw materials. Exports are dependent on imported raw materials while there are other large industries and small industries dependent on primary and secondary imported raw materials. So an import ban would be difficult; rather increasing duties could give result in discouraging some imports.
In this respect, NBR issued an SRO imposing some supplementary duty (SD) on a total of 242 products under 68 heads of 4-digit level products, which includes fruits, canned food and some other products, the SD rate is set at 3-35 per cent. The SRO was the same as it was in the year 2021. How it will reduce imports is not clear. There were supply chain disruptions, shipping cost increases, making raw materials costly and because of many reasons plus restrictions on some manufacturing areas, China following zero COVID Policy , further intensified price pressure.
MPS observed that the balance of payment (BOP) was a surplus of USD 7.5 billion in FY21, turning to a deficit of USD 3.7billion from July-April of FY 2022. The current account deficit was USD 1.7 billion (0.4 per cent of GDP), while the current account deficit is USD 15.3billion (3.3 per cent of GDP) in 2022. Most importantly exchange rate of the taka was USD 84.81 reached USD 92.95 in 2022.
BB has taken measures to tighten the money supply, reducing liquidity in the market, which will make the loan more expensive. Banks also have to maintain a statutory liquidity ratio (SLR) at a fixed rate which is 13 per cent, and 5 per cent by the Islami Shariah Bank, in which for SCBs, they buy 4 per cent in cash while the remaining has to be bought from the securities in a different form. In that respect cost of banks will be increased to maintain their SLR. At the same time, with the increase of policy rate, the deposit rate will increase (inflation adjustment-cost of the deposit will increase), and money will be costly for Banks.
Banks want to provide credit to industries that create jobs-MPS has not mentioned policies and plans to do about retail loans. The ultimate target is to make a retail loan (purchase transaction) low, otherwise import will increase and import control will be difficult which was USD 68 billion in July-April 2022( L/C opened USD 77 bn), it was USD 46 billion(L/C opened USD 53 bn) in the corresponding period of last year. MPS shows that large-scale manufacturing output was 4.15 per cent in July Feb 2021, large, medium-scale manufacturing output increased to 17.05 per cent (July-February), and import increases could have contributed to increasing output.
Classified loans have climbed to 8.53 per cent from 7.93 per cent at the end of the last quarter of the last year 2021. BB has not, of course, mentioned the NPL which has been increasing and the amount is about taka 1.03 trillion or 3.0 per cent of GDP-which can be a cause of inflation in addition to imported inflation. MPS has not mentioned anything in that respect.
MPS believes that money velocity will continue to rise in 2023-supported by Padma Bridge connectivity, since money velocity will be positive, the M2 growth ceiling would be smaller than the nominal GDP growth target of 2023. Padma Bridge will definitely increase money velocity, however, it needs some time.
Private sector credit increased to 12.94 per cent year on year at the end of May 2022, the target for private sector credit growth was 14.8 per cent last year. Cross Country comparison in the MPS has shown credit growth in Vietnam (16.9 per cent), India (12.0 per cent), and Indonesia 9.0 per cent). The target of credit growth in the MPS is 14.1 per cent. Increased output growth needs to support private sector credit. Growth of export in July-May 2021 was 13.64 per cent, increased to 34.09 per cent July-April 2022, target is USD 80 billion ( 2021-24 Export) and USD 58+9(service)=USD 67 billion for the current fiscal.
MPS has shown that investment as a percentage of GDP increased gradually from 28.1 per cent in FY15 to 32.21 per cent in 2019, in 2020 it decreased slightly to 31.31 per cent and 31.02 per cent in FY21, however, it rebounded reaching 31.68 per cent in 2022. Public investment increased by 7.6 per cent while private investment increased to 7.2 per cent; probably because of several mega projects.
Increasing interest rate and reduced credit -these two policies may reduce credit flow to the private sector, after the pandemic shock businesses were just starting to turn to normal. To reduce import and increase import substitute manufacturing items a new refinancing scheme has been announced; a long-term policy of the government is export-led growth. This refinancing scheme to support import substitute manufacturing items will of course need preparation time.
BB has taken several liquidity enhancement measures in FY22 for creating investment momentum, such as; softened loan classification, loan rescheduling, one-time exit facility especially for agriculture. MPS also talks about stimulus packages which have benefitted 161,250 CMSMEs. Moratorium has been extended up to Dec 2022, meaning that the number of defaulters is increasing. The stimulus package is supposed to be a revolving one- to accommodate more business entrepreneurs in three years which has become uncertain.
A refinance scheme of BDT 5 billion has been announced for returnee ex-pats, there are a number of internal migrants who have not been identified and have not received any benefits. For technology development and up-gradation it has announced EMV compliant QR standard(ISO 18004-compliant) named Bangla QR and personal retail account for boarding micro and nano merchants with minimum document requirement which is a good move( circular issued on June 2, 2022).
The loan is to be disbursed from Taka 500-50,000, however, instalments is on monthly basis. The benefits of QR codes will increase interoperability which will be helpful for users. For the capital market to ensure liquidity reinvested funding amount has been increased from Taka 153 crore to 1009 crore. The corporate tax cut has been helpful to the listed companies, however tough conditionalities against availing the tax cut may not allow entrepreneurs to avail the full benefits.
Pandemic, the war in Europe and worldwide inflation have made business and investment challenging. In this situation investment as per 8th FYP target of 37 per cent should get priority so that job creation is not hampered. Open market operations need to be crafted carefully taking care of the overall macroeconomic situation.
The writer is CEO, BUILD-a Public Private Dialogue Platform works for private sector development. She can be contacted at ceo@buildbd.org
