Monetary policy for tough times ahead

In terms of international business, the world’s economies are interconnected. Bangladesh economy is no exception.

Still, Bangladesh is branded worldwide as an import-oriented economy. Its import volume is really significant compared to export earnings. The large-scale industries in Bangladesh are heavily rely on imported raw materials and machineries. Besides, Bangladesh has to import nine key agricultural products along with oil and gas.

Since the inception of Ukraine-Russia war, Bangladesh economy has started to see foreign currency reserves in a declining trend. It hardly needs emphasizing that any war brings critical moments for the world economy. In particular, Bangladesh economy has been passing dire situation in respect of Balance of Payment, forex reserve and ever increasing inflation due to war.

Monetary policy programme in economy is supposed to address economic headwinds Bangladesh is facing now. The central bank of Bangladesh came up with timely decision recently through unveiling monetary policy statement (PS) in a bid to contain the raging inflation.

Controlling of high inflation was given due importance in the monetary policy programme. With a view to addressing liquidity crunch in banking sector, the programme came as way out.

Following IMF instruction regarding freeing of foreign exchange market and removal of lending and deposit cap, the Bangladesh Bank drafted the policy. This monetary policy statement did not get a wide range of appreciation as a result of increasing policy rate, widely known as repurchase agreement rate (repo).

Though cap on deposit rate has been removed, interest rate has been increased by 3 per cent on consumers credit keeping the rate on large loans unchanged at 9 per cent. The decision concerning hike in policy rate and unchanged interest rate for large-scale loans is set to bring complex situation in economy. In the programme, the policy rate has been increased to 6 per cent from 5.75 per cent for the period January to June, 2023.

The monetary policy, that was drafted for six months of current fiscal year (2022-23) , sets goals to achieve 6.50 per cent GDP growth rate and inflation to be contained within 7.50 per cent. Is it possible to keep inflation rate within 7.5 per cent considering ongoing global turmoil?

It is essential to know that for the past six years, Bangladesh economy faced average 8.76 per cent inflation. Before Russia-Ukraine war, the inflation was 5.7 per cent on an average during July- December period 2021.

The central bank has taken decision of printing money in a bid to keep the economic wheel afloat through monetary policy was unveiled recently. The commercial banks have recently come under liquidity crunch following rumours flooded by a vested quarter.

The rumours forced the depositors to withdraw their money from the banking system. Within past five months, surplus liquidity in banking sector declined to Tk 20,285 crore. In view of worsening situation, the Bangladesh Bank came forward with Tk 30,000 crore as special liquidity support. The banking sector fell into troubles at the time of paying import payments in the form of dollar, US currency. The sector experienced dollar crisis to a great extent caused by Russia-Ukraine war. Amidst dollar crunch, the central bank sold dollar to commercial banks amounting $12.4 billion resulting in shrinking deposits in banks.

Bangladesh is a bank-based economy, no doubt. During coronavirus, more than 70 per cent finances under stimulus packages were disbursed for tackling the virus-hit economy. During the pandemic, GDP growth rate came down to 3.4 per cent from above 8.0 per cent. In this monetary policy, the banking sector has been discouraged to borrow from the Bangladesh Bank by increasing policy rate.

The Bangladesh Bank, regulator of commercial banks, already created refinancing schemes in the aim of financing in productive sectors that will help to generate employment. According to news report, Tk 50,000 crore shall have to be disbursed from newly created refinancing schemes.

This monetary programme has tightened banks freedom in respect of financing alone. The interest rate of refinancing schemes loans has been set between 1.5 per cent to 4.0 per cent. According to monetary policy statement, the banks are surely to be benefited much if loans are disbursed from refinancing schemes.

The Monetary Policy also made projections in respect of seeing foreign remittance at $ 21.9 billion and forex reserve at $ 36.5 billion. Besides, import and export target were set to $ 80 billion and $ 52.9 billion respectively. The private sector credit growth has been kept unchanged 14.1 per cent but public sector credit growth has been increased to 37.7 per cent from original 36 per cent. What should be mentioned here that broad money growth revised to 11.5 per cent from original 12.1 per cent in this monetary programme.

It is sure that stability in forex market is to be seen for announcing uniform exchange rates instead of multiple exchange rates. Ultimately, the visiting IMF team advised to follow uniform exchange rates. But, containing of inflation rate is not possible considering current global turmoil.

The people have been experiencing cost-push inflation, also known as wage-push inflation since conflict between Ukraine-Russia. According to a newspaper story, headline inflation reached 8.71 per cent in December of last year which jumped to 9.5 per cent in September, 7.56 per cent in June. Due to persisting cost-push inflation, the people are losing purchasing power capacity. Their real wage is also declining as a result of growth trend in inflation.

To see 36.5 billion foreign reserve by June 2023 will be difficult if analysed current domestic and global scenario. In view of banking rumors, the expatriates are sending their hard-earned earnings bypassing banking channel. The world developed economies have come under inflationary pressure also. The economies hit-hard by high inflation are not showing interest in importing Bangladesh-made products mainly apparel product. Amidst volatile situation, in what way export earnings will be increased is unknown to this writer that helps to increase foreign reserve.

There is no possibility of seeing low inflation rate soon. Shortly after unveiling monetary policy statement for six-month, Bangladesh government has hiked gas prices by around 180 per cent for power sector. Price hike decision in gas price helped to keep inflation rate at growing trend. Ultimately, the consumers will face impact of gas price hike. Side by side Ukraine-Russia war continuation, if the banking sector faces liquidity crunch for a longer period, projected GDP growth achievement is not possible. Hike in bank interest rates on consumer level credit will weaken aggregate demand resulting in less production and rising unemployment. I want to conclude the write-up with saying that monetary policy for whom.

The writer is an economic affairs analyst. He can be reached at: [email protected]