Hiren Pandit: Bangladesh Bank has announced the monetary policy for the second half (January-June) of the current financial year 2022-23. The Central Bank announces the monetary policy twice every financial year. Once at the beginning of the year, and another time in the middle of the year. The monetary policy generally projects currency movements. One of its functions is to play a role in controlling inflation. Monetary policy is formulated with an emphasis on the rise in the price level of consumer goods, especially food. It can be said that economic instability is dealt with by controlling inflation through monetary policy. This time also the monetary policy has been formulated with the same objective. Bangladesh Bank has been made with the aim of controlling inflation, the currency market, and interest rate. According to Bangladesh Bank, this year’s monetary policy stance is ‘cautiously accommodative’. Cautiousness is said to be due to monetary policy that will reduce demand by raising interest rates on consumer loans and restricting non-essential imports to reduce inflation. The biggest challenge now more than ever is keeping inflation under control. This situation has arisen due to the global recession.
The significant aspect of the new monetary policy is that the minimum interest rate limit on deposits has been completely lifted. Through this, customers are encouraged to keep money in the bank. But monetary policy has increased the interest rate on consumer loans, from 9 percent to 12 percent. This will increase the cost of borrowing for the middle class. However, the interest rate has not been increased in the case of industrial loans and other loans. Bangladesh Bank says opening up deposit rates and slightly relaxing loan rates will help raise deposit rates. It may be noted that the banks have been demanding the withdrawal of interest rates on loans and deposits for a long time.
In fact, banks’ lending funds have decreased as deposit growth has slowed. In this situation, Bangladesh Bank has decided to increase the supply of money in the market. Through this, the supply of credit to the productive sector will be increased. Government debt will also increase more than before. However, many economists think that if the crisis is solved by printing new money, the dollar crisis will increase. As a result, inflation will increase. In this context, some economists think that an attempt should have been made to deal with the situation by completely lifting the loan interest rate limit.
Food prices play a role in overall inflation. In other words, if the food price is bearable, the overall inflation is also low. According to researchers, the effect of the money supply on inflation in the country is very limited. So, trying to control inflation by increasing or decreasing the money supply is not effective. Keeping food prices affordable is a big challenge and the food price depends mainly on the food supply situation and food availability. Besides, the cases where the central bank can play a role in controlling inflation should be implemented properly.
The proper implementation of Bangladesh Bank’s monetary policy is largely dependent on the revenue success of the government. If the revenue collection is low, the government’s dependence on the banking system will increase for the implementation of the budget. Government borrowing from commercial banks amid prudent monetary policy may further reduce private sector inflows. This will reduce production. Again, if the central bank provides money to the government, the goal of reducing the money flow will not be achieved. In order to fully implement the monetary policy, the efficiency of banks and financial institutions has to be increased, which is currently raising many questions. Not only this, unethical practices in this sector are tainting the overall achievement, which is visible to many. Establishing good governance in the financial sector is the demand of the time. If the central bank increases monitoring to change the behavior and attitude of scheduled banks towards transparency and accountability, the rate of implementation of monetary policy will increase to a large extent. The increase in defaulted loans should also be curbed. In this case, only the debt court is not enough, but special tribunals should be formed to settle the cases quickly. Bangladesh Bank, the National Board of Revenue and the Anti-Corruption Commission need to take joint measures to stop money laundering through trade. Effective measures should be taken to increase export and remittance flows.
Announcing the monetary policy for the country at such a critical moment is really a big challenge and Bangladesh Bank has been able to fulfill this challenge. While announcing the monetary policy, the Governor clearly mentioned three challenges and they are—. Duration of the Russia-Ukraine war, the central bank of America, the Federal Reserve’s high benchmark rate policy and China’s new Covid situation. While the third issue may not seem like such a challenge, the first two issues are real challenges that the Governor has identified.
Generally, the impact of the announced monetary policy on our country’s economy and currency market is not seen in that way. The main reason for this is that even though our country’s economy has made incredible progress, the structures of the economy have not been developed in such a way or the economic elements have not become sensitive in such a way that changes in the monetary policy will affect the elements of the country’s economy and currency market. The main objective of monetary policy is to keep inflation at the desired level, increase employment and contribute to economic growth. Due to the chaotic and diverse market system of our country, inflation measurement criteria have not been developed and cannot be developed easily.
There is a huge difference in commodity prices between the urban and local markets. Even in multiple markets of Dhaka and in different places, extreme differences can be observed in the price of goods. Not only that, the market system of our country is such that morning-afternoon price difference is observed. In such a random market system, how will accurate inflation be determined, and how will the inflation be controlled through the declared monetary policy?
Another important issue is foreign exchange reserve management. The International Monetary Fund is questioning its calculations. There are reports that the money given by Bangladesh Bank Reserve to the exporters is not coming back. Moreover, whether this money has been invested in the productive sector is also a question. The monetary policy also does not mention what action will be taken if the money is not returned. Little action has been taken to stabilize the value of the dollar and increase remittance flows to the formal sector. Different rates of foreign exchange are creating volatility in the market. Importers and exporters are affected. As the dollar rate is high in the informal market, remittances coming through formal channels are low. In this year’s monetary policy, some targets have been set, some information has been given. This policy is big business-friendly, not small business-friendly. There is even doubt about whether it will be very helpful in improving the quality of life of people. Now we need to increase real production. Ensuring production and free supply of food, medicine, and essential services sectors. Such strategy and guidance are absent in announced monetary policy. It should be noted that since monetary policy and fiscal policy are closely related, if the positive effect of the former is on employment, production and income, then it is bound to have an effect on the latter. However, if the production environment is created by increasing investment, it will have a positive impact on employment, income and revenue collection.
Similarly, the nature of employment in our country does not create or shrink employment opportunities by measuring the performance or productivity of human resources as per the requirement. Whether public or private—everywhere some manpower is recruited as per need, which is continuous and no manpower is laid off unless there is an extreme crisis. In the developed world, large-scale layoffs occur when profits fall slightly, and large-scale hiring occurs when profits rise. As a result, employment opportunities in those countries fluctuate daily, weekly, and monthly, which are greatly influenced by the announced monetary policy. How far the announced monetary policy will play in boosting employment in the country may tell the future. Despite this, the importance of the monetary policy of the country is immense and from that consideration, the central bank of the country has announced its monetary policy.
For the first time, this monetary policy has brought a new challenge to the banking sector of the country. The maximum limit or cap has been removed from the interest rate paid on bank savings. As a result, from now on, various banks and financial institutions will set interest rates on savings according to their needs. The announced monetary policy may play a helpful role in controlling the country’s high inflation rate, creating employment and above all stabilizing the country’s currency market, including the dollar, and we hope so. But due to this monetary policy, the country’s banking sector will face a direct challenge, how it can be taken down is now a matter of consideration.
The economy slowed somewhat as imports were reined in to maintain reserves; Production is affected by the energy crisis. In such a context, the policy of Bangladesh Bank should be on the one hand to control high inflation, on the other hand, to help increase investment and production. At the moment, there is a liquidity crisis in the banks. Bangladesh Bank should keep a watchful eye so that the liquidity crisis does not increase while reducing the flow of money. Because investment has a positive relationship with employment and income.
The writer is a researcher and columnist. He can be contacted at hiren.bnnrc@gmail.com