AKM Asaduzzaman Patwary
Additional Secretary(R&D), DCCI
An economy is guided by some major policies. And, monetary policy is a critical policy that plays vital roles in steering and guiding the macroeconomic trend of a country. Bangladesh Bank, as the only money market regulator, declares MPS twice in each fiscal year in line with economic growth and Inflation target and other fiscal management objectives including resource mobilization and efficient Government expenditure considering our resource limitation in Bangladesh. Financial sector is blend of many stakeholders including Banking, insurance, Capital market, brokerage firms, merchant banks, exporters, importers, investors and industries. Of major stakeholders, the Banking sector is crucial part of the monetary policy. Monetary policy is usually declared to determine and regulate money flow into economy for a certain period to keep the inflation minimum and ease the desired economic growth. In Bangladesh, we are having MPS since 2010 as Bangladesh bank felt the necessity of the policy evidence as a strong instruction. Over the time, we have noticed that this policy instrument has become broad-based and inclusive covering wide-ranging issues of the economy including the aspects that have close association with financial sector and impact on major economic actor, private sector. The MPS is declared and enforced but due to many institutional capacity and efficiency limitations of the Monetary policy, the MPS does not bring effective results for all stakeholders.
MPS uses Broad money, Narrow money target, Inflation, Private and public credit growth, Repo and reverse repo targets, Foreign Exchange and international trade. and other elements to strengthen and sustain the financial sector but sometimes measures and targets of Bangladesh Bank do not function as expected and credit growth target does not realize due to diverse unavoidable and external factors including political reasons. Each Monetary Policy lasts around six months and it is limited to some aspects of the money market including credit flow, food and non-food inflation control, CRR and SLR and domestic credit growth with some indications but largely the overt limitations of the policy are not addressed.
Private sector largely sources their fund from banking sector and the trend of term-loan to Industry and SME sector looked downward and slim indicating lower private sector credit. Alongside, the nexus of private sector credit growth and low interest rate has not become tangible. Though Bank owners association of Bangladesh last year declared to keep the lending rate to maximum 9% but almost 67% banks have failed to comply with it which apparently failed the targeted private sector credit growth.
The argument and battle of low lending and high saving rate was not brought under the purview of MPS nor driven by the market forces. The rate is determined through human and bank owners intervention which is inappropriate.
To make the Monetary Policy effective, inclusive, the policy needs to address and highlight the pressing geo-economic challenges, concerns and project stakeholders.
We expect that monetary policy should be investment and employment friendly as higher economic growth requires higher private investment. The recent MPS looks cautionary though salient features of MPS like unchanged ADR, unchanged CRR, 6% repo, 4.75% reverse repo, 16.50% private sector credit growth, 10.9% public sector credit growth and 15.90% domestic credit growth targets may enrich the private sector credit flow and scale up the industrialization, employment and trade resulting into expected GDP growth during this fiscal year. Contraction of CRR and SLR rate may ensure fund flow and reduced ADR could not control the borrowing rate in the market.
However, growing non-performing loan apparently challenges the banking sector stability creating higher cost of capital incidence and limiting credit flow. MPS often expresses concern on growing NPL and but lacks stringent supervisory measures and efforts likewise other NPL success countries needs to prioritise stringent efforts to improve the current NPL state.
The other challenges in economy like capital flight, weak exchange rate, unstructured capital market, slimming FDI inflow and unemployment, negative trade balance and lack of export diversification may hold back the private sector growth and economic mobilisation.
The Monetary decisions and instruments are risked due to geo-political and geo-economic context changes. The China and USA trade war, Brexit tension and recent India and Pakistan war and unilateral tariff escalation over Pakistan and longing GCC economic sanction on Qatar cause adversity and austerity and in current account. Changing global financial and geo-economic trend offers both challenges and opportunities which need to be taken into account while drawing the MPS. The slimming FDI and Portfolio investment also weakened the Current account balance.
Coordination of the targets of the Monetary and Fiscal policies are essential to keep the discrepancy minimum in GDP growth, inflation target, investment to GDP growth target, industrialisation and source of deficit budget management. The monetary policy should encompass the guidance to ensure trade growth, single-digit industrial borrowing, easy and low-cost financing for SME, revival of capital market and strategies for addressing global trade context towards better foreign trade earning and foreign exchange retention and rational current and capital account balance for efficient financial ecosystem in Bangladesh. Correlation of Cross-border trade and currency exchange rate is instrumental in benefitting our trade earning and positive currency exchange rate. Therefore, the pegging of our exchange rate is necessary but the alarming depreciation of Taka does not give any complacence in our foreign trade earning since negative Current account balance is exceedingly on the rise around $17.27 Billion. While global inflation standard is below 2% almost all developing and developed economies maintain that but we are within 6% which is way less the global standard. The MPS 2 of FY2019 does not shed light on strategies for revival of Capital market, FDI flow and export growth.
Bangladesh Bank is required to design a balanced MPS incorporating result-oriented directives and adjusting gap of fiscal and monetary policies for leveraging all relevant stakeholders in economy securing desired low-inflationary, credit stimulating and business-friendly economic growth.
Since performance of monetary instruments play role on realization of targets in National budget as our deficit budget is incremental. MPS should hint on them for efficient management. The following issues are very relevant to consider in order to creating more positive and meaningful impacts on private sector and economy:
- Banking commission needs to be established to oversight the Banking sector operation, anomalies as the role of oversight agency and regulator is conflict of interest.
- Stringent measures are to be in place with strict enforcement in order to reduce the NPL trend. As growing NPL puts incidence on clean borrowers and cost burden on new borrowers and banks. NPL is large in amount with SoBs and most of the SoBs are underperforming, therefore, SoBs need to be merged and be limited to treasury and deposit collection.
- Corporate governance in Capital market and banking sectors need to be ensured.
- Increasing projection of global liquid fuel and dependence on imported liquid fuel and natural gas may raise current account imbalance and inflationary pressure with negative spillover impacts.
- Non-food inflation has increased to 4.51% and Food inflation declined to 6.51% in December 2018.Non-food inflation element energy has multiplier direct and indirect impacts on food item inflation. Therefore, extreme dependence on import and imported fuel needs to be gradually reduced.
- Depreciated NEER of Taka to Dollar are giving respite to certain degree to remittance and export earning but the consistent devaluation of Taka is unhealthy for our import dependent economy. Therefore, export diversification needs to be prioritized to sustain export led benefit.
- A high-level neutral national committee including representation of Bangladesh Bank needs to be formed to assess the implementation and clear implication of the MPS.
It is difficult to unilaterally decide if this MPS is expansionary or contractionary by nature or economy friendly due to overlapping features of the MPS and other unattended factors of the economy but this MPS is to some extent cautionary with limited focus on robust change and contribution to the growing and changing economic perspective in near future. The aforesaid thoughts, ideas may ease and support MPS implementation and making Monterey policy result oriented and effective for long cherished private sector led economic transformation.