Home ›› 18 Jan 2023 ›› Editorial
Apart from some local problems, the length and intensity of the Ukraine-Russia war; the spree of interest rate hikes by the US Fed; and the re-emergence of Covid-19 and its severity in China are responsible for present condition of inflation, shortage of foreign currency and others. Bangladesh is experiencing inflationary pressure simultaneously being pulled by demand and pushed by cost. Bangladesh Bank (BB) has decided to announce the monetary policy twice every year, instead of once, following since 2019. The decision is in line with International Monetary Fund’s conditions.
In the Monetary Policy H2 2022-23, the governor claim that this monetary policy’s measures will contain the inflationary and exchange rate pressures and support the desired economic growth by ensuring the necessary flow of funds to productive and employment-generating activities.
The government aims to contain inflation at 7.5 per cent in FY23 and this is the responsibility of the Central Bank through monetary policy to achieve it. The general point-to-point inflation rate stood at 8.71 per cent in December last year. Economists said the policy rate hike is good but it would not bring any positive impact because of the lending rate cap.
BB projected that export would grow 7.5 per cent to $52.9 billion while imports will fall 10 per cent to $80.2 billion by the end of FY23. It also projects that remittance inflow will grow 4 per cent to 21.9 billion and forex reserves will rise to $36.5 billion in FY23 because of all these. Economists said that it would be very difficult to raise the reserve size by $4 billion during such a challenging period.
“BB’s monetary and credit programs for H2FY23 will pursue a cautiously accommodative policy stance to contain inflationary and exchange rate pressures, support desired economic growth, ensuring the necessary flow of funds to the economy’s productive and employment generating activities,” BB Governor claimed while unveiling the MPS at BB office at Motijheel.
In the new policy, private sector credit growth was expected to remain unchanged to 14.1 per cent while the public credit growth ceiling increased to 37.7 per cent for June from the previous ceiling of 36 per cent.
BB proposes to take necessary measures to gradually move towards a market-based, flexible, and unified exchange-rate regime. The monetary policy talks about bringing the dollar price differential to 2 per cent by the end of this fiscal year. But, it laid out no effective steps to reduce foreign exchange shortage. The experts have reservations. Without flexible interest rates, there is no chance for a turnaround of the existing balance-of-payments (BoP) situation. The country's financial account, a key component of the BoP, has now been in deficit which a year back was nearly $14-billion surplus. When the rates will pick up, the financial account will go into surplus. The Balance of Payment will then be in a comfort zone.
BB relaxed the interest rate for consumer credit to vary up to 3 percentage points along with the complete removal of the deposit floor rate. This mean, the interest rate on consumer loans can go up to 12 per cent. People may not benefit from the lifting of the deposit rate ceiling as the central bank is sticking with the 9 per cent lending rate cap. Banks may not hike the deposit rate as the cap on interest rate of loans remains.
Deposit interest rate floor has been removed. However, with the lending rate cap in place, it is not very feasible for banks to increase the deposit interest rate. Banks that are small in size and have low customer confidence are forced to pay high rates on deposits.
The growth of deposits is much lower than that of credit. Banks have no other option but to work hard to increase deposits. At the same time, steps should be taken to boost customers' confidence in the banking sector and inspire the expatriates to send remittances through legal channels.
Inflation is now above 8 per cent, BB proposed to bring down it down to 7.5 per cent by next June. There is a dollar crunch and fuel crunch especially in gas supply. Then there is the power supply uncertainty as diesel, furnace oil and LNG cannot be imported due to dollar crunch.
The steps taken in monetary policy to control inflation are insufficient. On top of that, the central bank has monetised it to lend to the government, which increases inflation. There is a question about how much productivity can be increased with only some of the recently announced refinancing facilities.
The central bank has made money costlier to discourage banks from borrowing from the central bank. The governor maintained that banks could borrow from the refinancing schemes at lower rates when borrowing from the central bank will be expensive for them. The minimum interest rate of refinancing scheme loans is 1.5 per cent and maximum rate is 4 per cent when the borrowing rate from the central bank is 6 per cent, he added. The governor believes, in this process, the central bank will contain inflation by providing money from refinancing schemes for the productive sectors at lower interest rates.
The repurchase agreement rate (repo) rate, which is the rate at which commercial banks borrow money by selling their securities to the central bank to maintain liquidity has been increased. It increases the policy rates by 25 basis points, the repo rate to 6.0 per cent from 5.75 per cent. The reverse repo rate, which is the rate at which the central bank borrows money from commercial banks by buying their securities, has also been raised to 4.25 percent from 4 per cent as part of the current policy state.
This is a good side of the policy that can help increase the consumer loan interest rate to up to 12 per cent, but the consumers’ credit accounts for 7-8 per cent of the total credit in the banking sector, according to industry insiders. However, this will reduce the demand for consumer credit but may not bring any effective result.
Besides, the government's deficit financing so far is being managed from the central bank's own coffers, meaning it is basically printing money. This fresh money will fuel inflation further.
It is believed that some banks can take additional benefits due to no deposit rate floor. Consumer loan rates have gone up to 12 per cent but interest rates on industrial loans or other loans remain the same. Those with higher industrial loans can lower the deposit rate below 6 per cent. But banks with high consumer loans can offer deposit rate above 6 per cent.
The target of Bangladesh Bank is right, they have increased the credit growth slightly, but increasing the repo rate at the same time is somewhat contradictory. Raising the repo rate in the current liquidity crunch may be more counter-productive. Keeping the repo rate at the previous rate or reducing it a bit seems to be more reasonable amid the existing liquidity crisis in the market. Adapting contractionary policy to control inflation will not be very effective in the case of Bangladesh. The lending rate is not changing. Liquidity crisis may worsen with increased repo rate.
If the dollar and fuel shortage continues, producers would not be able to import raw materials, capital machinery and fertilisers, so the many refinance schemes intended to expand the farm and industrial output will end up fanning inflationary fires.
BB wants to support production through the refinance schemes. But if the power, energy and dollar crises are not resolved, borrowers may not use the loans in productive sectors and it will push inflation further.
The Bangladesh Bank (BB) also believes that the new monetary policy statement or MPS bears measures that will support desired economic growth (6.5 per cent) and ensure the necessary fund flow into the economy's productive and employment-generating activities.
The declared Monetary Policy Statement (MPS) may not sufficiently address the crisis with the proposed increase of inflow of export earnings and remittance from expatriates and reduction of inflation.
The writer is Non-Government Adviser, Bangladesh Competition Commission. He can be contacted at [email protected]
