AKM Asaduzzaman Patwary,
Additional Executive Secretary, Head of R&D & PA, DCCI.
Bangladesh Bank recently declared the major policy design for the financial and banking sectors of the economy. After the national budget, the Monetary Policy Statement (MPS) is another critical piece of evidence that directs the indications and scopes of the money market, money management, and sourcing of money for economic operations including the budget. The fiscal policy has been declared in June as Finance bill 2022 mapping the national budget for Government operation for the year 2023. These two policies are much-needed and much-sought evidence having huge policy implications. Though budget gets huge attention across the country MPS does not get as widespread as budget as mass people have limited understanding of it. The national budget covers around 15% of the GDP whereas the MPS contains and upholds almost 45% of the GDP since monetary aspects and affairs of the economy are the spans of it. The entire money market is the scope of MPS. In the developed country, especially in the USA and UK, the monetary policy and central bank play critical and instrumental roles in economic operations, financial management, and the system of a country. The Federal Reserve System and Bank of England play critical roles in fiscal management, especially in interest rates and banking operations. In Bangladesh, stakeholders of the financial sector like the private sector, banks, NBFIs, insurance and industry, and capital markets have immense stakes in it and they feel the urgency and implications of it and feel the concerns of the policy. The monetary policy has been declared in such a time when the world economy has been undergoing unrest and tumultuous condition in post-pandemic time and Bangladesh has been undergoing an economic transition with the deep challenge of recovery, higher growth, and soaring inflation being infected by unavoidable global factors.
The monetary policy declared for FY2022-23 is found a cautionary policy by nature to tighten the money supply to curb inflation without hampering the country’s economic growth. It accommodates modes supporting continuing efforts of the economic recovery process maintaining appropriate cautions for overall price and financial stability. The monetary program has been formulated based on targeted GDP growth of 7.5% and general inflation of 5.6 % declared in the national budget for FY2023. The national budget of TK 6.7 trillion has been declared with a deficit of around TK.2.5 trillion and the lion’s share of the deficit budget will be sourced from the banking sector and public borrowing. Public sector expense has become a huge pie of the expense of the budget which needs to be backed by smooth and focused monetary management. TK 4.33 trillion revenue target led by 3.7 trillion NBR revenue will hardly be achieved amidst this fragile geo-economic context and dry revenue track record since the highest NBR revenue threshold never exceeded TK.2.1 trillion as of today. The discrepancy between income and expenditure budget balloon budget hikes and inefficiency in public finance. Finding no other choice, Government conventionally relies more on domestic financing for economic operations. With no exception, this budget needs spiking money supply in the economy which may cause huge cost-push inflation. The inflation has already hit 7.4% and is perceived to grow further based on the current local and global economic activities. The growing economic expense and evolving private sector need money to conduct their operations. To ensure a balanced economic condition marking the achievement of all growth targets throughout the unstable economic condition, the public sector credit was targeted at 36.3% and private sector credit was targeted at 14.1% reduced from 14.8%. Though both private and public sector credit targets were less than the strategic target in FY 2022. It is worth pointing out that private investment recorded 13.1% in last year. For cautious money stream, strategically 13% SLR, 87% ADR for conventional and 92% for Islamic banks, and 4% CRR remain unchanged which may have little impact on the monetary system in the future. There has not been any withdrawal of CAP on the interest rate which will little support the borrowers as it is an apparently wise move. As a whole, the domestic credit target was fixed at 18.20% largely contributed by public sector credit. Growing commitment of the Government to the different sectors including post covid recovery, social safety net budget and development budget, and other needs have required large public borrowing as external borrowing has been a little expensive and risky for our economy. Due to weak business and investment confidence and the slow recovery of the business, the desired investment rate in the private sector marked low. Bangladesh Bank (BB) plans to tighten money flow and private sector credit flow for holding inflation. The lower private credit flow will also squeeze local investment, employment as well private sector investment target of 24.5% given in the national budget having cascading effects on the economy through our private credit growth is claimed better than India and Indonesia.
The policy repo rate increased to 5.50% from 5% to control the borrowing spree of commercial banks. Reverse repo remains 4% likewise last year. This strategy may not help much but rather create more incidence on borrowers as hard fund supply will enhance the cost of capital.
The public sector credit may soar due to higher borrowing as MPS planned to increase the borrowing to TK. 2 trillion worth of stimulus package including social safety program aiming at covid victims.
MPS has not mentioned any means for higher stimulus reach-out to the target groups since the critical process delays stimulus borrowing for affected people. The proposed new re-financing line of credit for import-substituting products, labor-intensive MSMEs supporting import-substituting initiatives for industrial raw materials like raw cotton, yarn, textile articles, and fertilizer to minimize import and save foreign exchange reserve are encouraging. These initiatives may support new and existing investors which may offset lower private credit targets as these schemes are expected to shape up private sector elevation to some extent.
The current account deficit has widened due to low remittance influx and growing trade deficit. The negative balance of payment has gone up to $3.7 billion till April 2022. The foreign exchange reserve stood at $41.9 billion till June 2022 due to lower net foreign assets compared to last year. The import growth was 35% and export was 34% in FY2022. To continue export momentum, the import must be rationalized. Export growth targeted 13% and import 12% in the next MPS since abnormality in foreign trade may not sustain.
The foreign exchange rate volatility pushed the Nominal effective exchange rate index (NEER) to 98.8 and the Real effective exchange rate index (REER) to 116.2. Though MPS indicated this exchange rate volatility will fix soon but no clear means were given. This issue has become the much-discussed agenda in the economy now. This relentless decline caused various problems with multiplier effects in local investment, energy supply, and price hikes led to inflation as well positive trade balance. Apparently, this decline is useful for some stakeholders but the adverse impacts are more as import has exceeded $75 billion meanwhile and desired benefits remain largely unutilized. In a comparative state, Taka depreciated more than that of many other Asian countries including Malaysia, India, China, and Indonesia but their economies have limited injury as they have huge export bases and import-substitute industries unusual from our economy.
Considering the frustrating scenario of current account balance and foreign reserve, an increase in LC margins for luxury goods, fruits, non-cereal foods, and processed foods may discourage their imports though it won’t cease much import trend. Definition of luxury and essential products is needed for avoiding the confusion of importers and bankers for their business convenience. Therefore, different currency-led import deals can be made for smooth energy import. Currency swap and multiple currencies can be used with our neighboring and import partners can be considered for low-cost imports and improving foreign reserve.
MPS should have a strategy and plan of a maximum limit of devaluation and guide the industry in the next course of action. The frequent fall of the Taka will not benefit export, or investment as import is getting pricier. Inflation control measures are needed in the MPS. If inflation goes beyond 7.4%, it will affect the business environment declining economic competitiveness.
The frequent energy price hike and their increasing adjustment due to global price hikes will create uncertainty and loom a critical chapter in local and export-oriented investment and industries. If cost-efficient production is not ensured then export will lose their current market competitiveness in the global market and local producers may disinvest resulting in poverty and unemployment hike.
The monetary policy needs to present a holistic outlook of the money market and indication so that it helps the money and resource mobilization. MPS can align strategies balancing the interests of industry, traders, SMEs, banks, and other stakeholders. A nexus of monetary and fiscal policy is essential for coordinated economic development.
MPS has some measures in place to support the overall private sector development apart from lower credit target however if the macroeconomic ecosystem does not remain functional, the private sector will despair and most of the given strategies and tools will be numbed. Public sector austerity for the best utilization of minimum resources needs to be followed across the board for the interest of the economy. MPS evaluation should have been made at least four times a year for effectiveness against the target. In addition, some cautionary measures should be indicated to deal with the consequences of regional economic crises as private sector safeguard measures.
National-level consensus is needed among economists, researchers, trade analysts, business leaders, banks, and capital market regulators to assess the foreign currency market and regional and global economic dynamics to identify likely challenges and next strategies to overcome the current state sustaining our economic operation and growth easing the long-held economic transformation.