Home ›› 16 Jan 2023 ›› Front
Bangladesh Bank (BB) on Sunday unveiled the monetary policy for the second half of FY23 with little measure at a time when the country’s economy is facing mountainous inflationary and foreign currency exchange rate pressures.
In it, the central bank tried to make funds costlier by increasing the policy rates by 25 basis points to tackle the inflationary pressure but it will not bring any effective result since the lending rate cap remained unchanged.
However, it relaxed the lending rate cap for consumers’ credit.
“We are taking several special initiatives in the monetary policy for this fiscal year’s second half as the country is passing a challenging period,” said BB Governor Abdur Rouf Talukder during the policy’s unveiling at the central bank headquarters in Dhaka.
In line with International Monetary Fund’s conditions, BB has decided to announce the monetary policy twice every year, instead of once, since 2019. This was Talukder’s first monetary policy after taking over as BB governor.
He said 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. 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.
Zahid Hussain, the former lead economist of the World Bank’s Dhaka office, told The Business Post that the new monetary policy would not be able to control high inflation. The inflationary pressure will, instead, increase further due to some measures taken in the policy, he added. “If the lending cap is not lifted, the credits will remain very cheap compared to inflation.”
Consumers’ loans
As the central bank has relaxed the lending rate cap on consumers’ loans in the monetary policy, banks will now be able to hike it up to 3 per cent from the existing 9 per cent.
The consumers’ credit accounts for 7-8 per cent of the total credit in the banking sector, according to industry insiders.
This is a good side of the policy that can help increase the consumer loan interest rate to up to 12 per cent, said Zahid.
However, this will reduce the demand for consumer credit but would not bring any effective result, he added.
In the new monetary policy, BB also removed the specific deposit floor rate that was imposed in August 2021.
At that time, the central bank had asked banks not to set interest rates on fixed-term deposits below the inflation rate.
Industry insiders said that this move also would not bring any positive impact because of the lending rate cap. But it will encourage savers to park their deposits in banks.
Former researcher of Bangladesh Institute of Development Studies and Agrani Bank Chairman Zaid Bakht said that banks are already in a liquidity crisis while the call money rate has also gone up. “Under the circumstances, banks will face more trouble because of the hiked repo rate.”
Mutual Trust Bank Managing Director Syed Mahbubur Rahman also said that the fund collection will be more costly in the upcoming days due to the rising repo rate and removal of specific deposit floor rates.
“We, however, welcomed the BB’s move to relax the lending rate cap for consumers’ credit,” he added.
Gradual move
According to the Monetary Policy Statement (MPS), necessary measures will be taken to gradually move towards a market-based, flexible and unified exchange rate regime (within a 2 per cent variation) by the end of FY23.
Replying to a question, the BB governor on Sunday said that the foreign exchange market will improve within two months because they have taken several initiatives to reduce imports and increase remittance and export.
He said BB projects that export will grow 7.5 per cent to $52.9 billing 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 as a result of all these.
Economist Zahid said that it would be very difficult to raise the reserve size by $4 billion during such a challenging period.
At the policy unveiling event, asked why BB is increasing the policy rate when the banking sector is facing a liquidity shortage, Talukder said they will announce several refinancing schemes for banks to support them.
The interest rate is lower than the repo rate and it helps banks to finance the productive sectors, he added.
However, Zahid said that 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.
Meanwhile, private sector credit growth remained unchanged at 14.10 per cent for the second half of FY23. The actual growth rate in December last year was 12.80 per cent.
In August last year, the private sector credit growth was at 14.03 per cent, the highest in recent times.
BB Chief Economist Md Habibur Rahman said the growth rate mainly increased due to the price hikes in the global market and the huge depreciation of the taka against the US dollar.
Economic challenges
The MPS also said that the near-term economic outlook seems quite stable, critically depending on three external issues.
They are — the length and intensity of the Russia-Ukraine war; the spree of interest hikes by the US Fed; and the re-emergence of Covid-19 and its severity in China.
The BB governor said that the improvements in these situations will expedite the country’s future economic gains.
However, if the situations get worse, Bangladesh’s economy is resilient enough to remain insulated in its current condition, he added.
Interest rate debate
Talking to The Business Post, Policy Research Institute of Bangladesh Executive Director Ahsan H Mansur said that the new monetary policy will do little to reduce inflation.
BB should raise lending rates along with the rest of the world. As long as the return of money is not good, money will not come in from abroad and money laundering will continue, he said.
However, the central bank governor is against raising interest rates. He said the reason behind rising inflation in Bangladesh is cost-push inflation. Raising loan interest rates to control such inflation will not yield any positive results.
Disagreeing with his point of view, Zahid asked, “Then why are other countries in the world increasing the interest rates? Especially, neighbouring India has also raised interest rates and it is working there.”
In this context, Ahsan said that the investment return in India is better than in Bangladesh due to the increased interest rate. “New investments are coming into the country and money laundering has reduced.”
The economist said that Bangladesh’s main challenge now is keeping the financial account positive as before. Money coming from abroad is accounted for in this account.
According to the MPS, the financial account was $14 billion in FY2020-21 and it slightly decreased to $13.77 billion in FY2021-22. In the July-November period of the ongoing fiscal, however, it was negative $157 million.
At the end of FY23, BB hopes that it will increase to $2.8 billion, but Ahsan suspects it would not be possible if the interest rate is not increased.
