How effective the new monetary policy will be in meeting the demand of the hours?

The new monetary policy (MP) was announced on January 17 amid various economic challenges in the country. This is the second monetary policy for the current fiscal year (2023-2024) and the first of the new government. The newly announced monetary policy by the Bangladesh Awami League government, elected for the fourth consecutive term, was viewed as significant for many reasons. The country's economy is currently facing several complex problems that were not created overnight, but existed in the economy. The government might not have paid enough attention to the problems because of the fanfare centering fanfare centering on the 12th national electoral bandwagon.

The government has been in a quite embarrassing situation for more than one year, especially with the unusually high inflation rate, keeping the exchange rate against the US dollar at a justifiable level, increasing the foreign exchange reserves of Bangladesh Bank, increasing the flow of bank loans to increase investment in the private sector, and squeezing default loan culture, etc. In such a situation, economists and other concerned will naturally be interested in the Bangladesh Bank's new monetary policy.

The Economists and other stakeholders concerned expected that the new monetary policy would address these existing challenges in the country's economy. However, the latest monetary policy is conventional and contractionary. We expected an effective and realistic monetary policy at this moment. If we analyze the announced monetary policy it will clear, how effective it will be in meeting the demand of the hours.

Every monetary policy has certain characteristics which show how much it will be able to meet demand of the hours. This monetary policy focuses on the problem of unusually high inflation rate that copped up in the economy recently. This is a good sign. But economists say that unusually high inflation rate cannot be controlled by using monetary policy alone, unless the non-monetary policies issues can be handled properly. Our economy doesn’t follow any common principles or ideals. For example, let's say high inflation. We often blame it on the impact of the Ukraine war. Even the policy makers cite the excuse of the Ukraine war high inflation by policymakers. They say the prices of various products in the local market have increased due to the abnormal increase in global oil prices thanks to the Ukraine war. The supply chain disruption has played a more key role than the production losses in driving up the global inflation rates following the outbreak of the Ukraine war. At one point, the price of crude oil in the international market rose to 139 US dollars per barrel. It raised the transportation costs, leading to the global supply chain disrupt on. But within a few months, the price of crude oil in the international market fell to the range of $ 75 to 80 US dollars per barrel. But there has been no impact of this fall in oil prices on the domestic market. Bangladesh imports 25 per cent products of its total GDP from abroad and the remaining 75 per cent of products are produced locally. So why have the prices of all products increased so much?

The product price increase in the global market is not supposed to have much influence on the product price increases in the local market. But our country's businessmen are not following any economic formula. In collusion with the special quarters, the powerful business syndicates active in the market (who always take shelter under the umbrella of the ruling party) are making by increasing the price of local products. But the government or any authority of it is not taking any special measures to control them. An example can be given here. Before the 12th National Election, the prices of beef in the capital market dropped from Tk 800 to Tk 600. But the traders still did not make any lost. After the election, the price of beef again increased to Tk 700. It is certain that the price of beef per kg will rise to Tk 800 soon. Have we ever looked into, why the price of beef decreased and then increased without logical ground. The reason that is behind the rise and fall of beef prices is the main cause of high inflation rates in the domestic economy of our country. No government is taking any stern or effective action against the business syndicates.
Whatever efforts made to control unusually high inflation in line with the monetary policy, it will not succeed. The measures adopted in the monetary policy in controlling high inflation have already proved ineffective in our economy. In the new monetary policy, the central bank's policy rate (the interest rate paid by scheduled banks for short-term borrowing from the central bank) has been increased by 0.25 basis point to 8 percent. A year and a half ago, the policy rate was 5.0 per cent. Central banks in at least 77 countries around the world have been able to control the high inflation by repeatedly raising their policy rates, alongside other measures.

At one point, the inflation rate in the US economy reached a 40-year high at 9.1 per cent. The Federal Reserve Bank of America (Fed) raised the policy rate at least 13 times in two years to recover from that situation. Although there was a risk of recession in the country's economy, they managed to keep high inflation rate under control. Among the South Asian countries, India, Sri Lanka and Pakistan have also succeeded in controlling inflation by raising policy rates. A chaotic economy like Sri Lanka has also managed to reduce their inflation rate from 35 per cent to 2 per cent. But why can’t we bring our inflation rate under control? The Bangladesh Bank has changed the policy rate many times but they have not given any scope to increase the interest rates on bank loans. Until a few days ago, the maximum rate of interest on bank loans (the rate charged by scheduled banks for lending to entrepreneurs or general borrowers) was fixed at 9 per cent. So scheduled banks borrowed loans from the central bank at a higher interest rate. But they were unable to raise the interest rates when lending money to entrepreneurs. Consequently, borrowing from banks was much cheaper. Many people have taken out bank loans but, they used them in other sectors rather than the specific ones. Even it is alleged that many of them have parked the money abroad.

According to economics, if the policy rate is increased, lenders will have to pay more interest to banks than before, which tends to decrease the trend of taking loans by common people and entrepreneurs. As a result, money flow in the market will decrease which may help bring the inflation under control to some extent. But, even after raising the policy rate, the Bangladesh Bank didn’t allow an increase in the interest rate on bank loans. As a result, the trend of borrowing from banks by entrepreneurs and common people increased. A large portion of credit taken by them enters the market through various channels results and leads to further increase of inflation. A few days ago the Bangladesh Bank and allowed commercial banks, removed the maximum interest rate of bank loans to determine the interest rate of bank loans by adding an additional three percent interest to the 6-month average interest rate of the bond. So, under this system currently the bank loan interest rate stands at around 12 percent. Economists and bankers have long been suggesting market-based interest rates on bank loans. But none is paying a heed to their suggestion. At present, if the interest rate of bank loans were allowed to be market-based, the rate could have increased to 15/16 percent.

In the new monetary policy, the growth of bank credit flow to the private sector is expected to be 10 percent. The rate was 11 percent earlier. If the flow of bank loans to the private sector decreases, investment will also decrease resulting in a fall in production. There will create a barrier to job creation. It was more important to ensure that the bank loans were properly spent in the productive sector, than reducing the growth of bank credit flow to the private sector. At the same time, the target of public sector credit growth has also been reduced. In the new monetary policy, the growth target of public sector credit has been fixed at 27.8 percent. It was 31 percent in the last monetary policy.

The majority of economists disagree with the Bangladesh Bank on the regulatory for determining the US dollar's exchange rate. They suggest letting the market determine the US dollar's exchange rate, even if at a slower pace. Now, the hundi market has thrived as the Bangladesh Bank has kept the local currency against the US dollar overvalued. Multiple rates of the US dollar are there in the market which is not desirable in any way. The US dollar is being sold at Tk 110/111 in the banking channel, while it is Tk 125 to Tk 130 in the kerb market. The foreign exchange market has not been handled properly and a negative impact of it is there on the foreign exchange reserve. The country's foreign exchange reserves are gradually running low. One of the reasons behind the dollar dearth is the growing trend of sending remittances through the official hundi by expatriate Bangladeshis. There is a saying that you can't expect morality from starving people for very long. The same applies to Bangladeshi expatriates. Why will they send remittances through banking channel, if they get Tk 12-14 more per US dollar if they remit through hundi? According to economists, the market should be allowed to determine the US dollar's exchange rate. If it happens, the activity of hundi traders will decline automatically. According to the World Bank data, in 2023 Bangladesh earned 23 billion US dollars in the manpower sector. A total of 1.3 million Bangladeshis went abroad for jobs in the last one year. So why is the amount of remittance so low? As sending money home through hundi is more profitable, the expatriates are opting for hundi instead of banking channel. Bangladesh Bank has taken alternative measures to control the US dollar exchange rate instead of leaving it to the market. They have decided to use the 'crawling peg' method to determine the rate of the US dollar. That means the Bangladesh Bank will set the maximum and minimum rates of the US dollar. Banks will have to sell dollars within that range. This method does not seem to yield any effective result.

The Bangladesh Bank has emphasized import control. The governor of Bangladesh Bank has said there might have been no reserves, if imports were not controlled. It's important to keep in mind that import restrictions cannot be the only means of protecting foreign exchange reserve. What is urgent for right now, protecting the reserves is to let the market determine the US dollar's exchange rate. Furthermore, sweeping import restrictions can never have positive effects. According to the Bangladesh Bank data, the number of letters of credit (LC) opened in the first five months of the fiscal year 2023–2024 was less 14.06 per cent less than the same period in the fiscal year 2022-2023. Out of this, LCs opened for import of consumer goods has been opened less by 27.47 percent lower and LCs for import of capital machinery have been 16.98 percent lower. In the energy sector, LC opening fell by 16.75 percent, in the raw materials sector 11.62 percent, and in the intermediate goods sector 7.52 percent. There is no harm, if imports of consumer goods and luxury goods fall. Rather, the country will benefit from it. But if the import of industrial raw materials, capital machinery, intermediate goods and fuel decreases, it will have an inevitable impact on the productive sector of the country. A fall in investment in the private sector is by no means desirable.

Many economists believe that the new monetary policy will not help to achieve the goal. Many of them have said that if syndicates' activities in the market are not immediately brought to halt, the inflation rate may not decline, rather it will rise.

Author: Retired General Manager, Bangladesh Development Bank Limited and Writer on Economics.