New monetary policy to strike a balance between credit flows and inflation

These four key issues will be at the forefront of the next monetary policy to be announced soon, senior central bank sources said after a high-level meeting Monday with the bank’s governor, Fazle Kabir, in Dhaka. .

Traditionally, monetary policies for the first half of the fiscal year were usually announced at the end of July after considering proposals and suggestions from stakeholders. Last year, the monetary policy was made public on July 29.

This year, however, the announcement date has been brought forward because it will essentially be the last monetary policy overseen by Kabir, whose term as first central banker ends on July 3.

Kabir also broke with a few other traditions in his two previous policy announcements. Instead of two monetary policies for each half of the fiscal year, he set a single policy for the past two consecutive fiscal years as the pandemic crippled Bangladesh’s economy. Citing the same reasons, he also refused to hold press conferences to officially announce the unveiling of the policies.

While the economy has slowly come into full swing, this year the challenges facing the central bank are paramount with the inflation rate soaring and a massive depletion of reserves.

The government had forecast an inflation rate of 5.3% for the outgoing budget year. In May alone, the rate jumped to 7.42%.

For the coming fiscal year, the government has set gross domestic product, or GDP, growth of 7.5%. The rate was 7.25% in the outgoing fiscal year.

The Bangladesh Bank’s chief economist, Dr. Habibur Rahman, said the teams working on the policy have acted with great caution as Bangladesh’s economy is currently in a delicate state.

“This time, the economic stakes are paramount, and they are somewhat correlated. In our simulations, it turns out that if we want to calibrate certain indices, we somehow end up affecting something else entirely,” he said.

“On the one hand, we need to control the money supply to fight inflation, while on the other hand, we need to keep an eye on the import and export situation to fix the exchange rate.”

“We kind of have to come up with ideas to restore the reserves [forex reserve] to its previous state; otherwise the currency crisis will get worse,” added an ever-cautious Habibur.

The central bank’s chief economist, however, strongly believes that these problems are manageable.

“Although this time the challenges are a bit more complex than in previous years, hopefully we can find solutions,” he said.

STAKEHOLDERS SUSPICIOUS OF THE SITUATION

Senior Bangladesh Bank officials told bdnews24.com that recommendations have already been sought from former governors, economists and stakeholders to formulate the policy.

The central bank also posted a notice on its website, seeking suggestions from citizens and organizations via email. June 16 was the deadline for submitting proposals.

Former Bangladesh Bank Governor Dr. Salehuddin Ahmed emphasized taking a balanced approach in formulating policy for the next fiscal year.

Regarding the exchange rate, he said, instead of taking a definitive position, the smartest way should be to adjust it slowly.

“We are not free to adopt an expansionist or restrictive approach [while formulating monetary policy]. I believe that by following the revenue policies structured in the draft national budget, the central bank should come up with a policy that addresses the burning issue of the inflation rate,” he said.

“Special strategies must be put in place. In particular, the central bank must pay particular attention to the fluidity of credit flows for the private sector. Monetary policy must ensure that productive sectors, especially small and medium enterprises, reap the benefits of the flow of credit.

The former governor said small and medium-sized industries tend to generate more jobs than larger industries, but receive less support than larger ones.

“It’s time to change so that they [SMEs] continue to create more jobs and strengthen the local market,” he said.

A woman bought some goods after a long wait at Mirpur Rd 14 in Bhashantek on Sunday March 6, 2022. Photo: Asif Mahmud Ove

Dr. Zaid Bakht, chairman of state-owned bank Agrani, believes that keeping the different currency indices in balance is the key to formulating a “balanced monetary policy”.

He agreed with his senior colleague Salehuddin that the Bangladesh Bank must ensure that the flow of credit for the private sector is not impeded.

“We cannot introduce an austerity measure when formulating monetary policy. We also need to pay attention to remittances to solve the problem of foreign exchange reserves,” he said.

Describing the monetary policy for the outgoing fiscal year as “expansionary and accommodative”, the Bangladesh Bank kept arrangements in place for the government to borrow 764.52 billion taka through treasury bills and auctioning of banking system bonds throughout the fiscal year to fund deficits.

Under the same policy, a private sector debt of 14.8% to GDP, or Tka 1,760 billion, has been set for the outgoing fiscal year.

Cumulatively, total domestic debt to GDP was pegged at 17.8%.

[Writing in English by Adil Mahmood, editing by Biswadip Das]

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