Second half-yearly monetary policy faces challenges

Five months have passed since the interim government took office, but there has been little sign of success in the economic sphere during this period. The interim government has been focusing more on addressing political crises rather than economic issues. The formulation of the new monetary policy is nearing completion. The Bangladesh Bank has started discussions on the proposed monetary policy with stakeholders. If everything goes as planned, this policy will be approved in the Bangladesh Bank board meeting on January 22, and then it will be published. This will be the second monetary policy of the current fiscal year and the first of the interim government. This will also be the first monetary policy under the new governor of Bangladesh Bank, Dr. Ahsan H Monsur. Since taking office, the new governor has taken several practical steps, including initiatives to make the foreign exchange rate and bank lending interest rates market-based. However, these steps should have been taken earlier. The previous governor failed to take effective actions in these areas, which led to a sluggish and downward-moving economy. Among all the recent monetary policies issued by Bangladesh Bank, none has been as challenging as the proposed policy.

Formulating and implementing a monetary policy in an economy like Bangladesh's is always a difficult task. The most significant challenges in the proposed monetary policy will be increasing revenue collection and reducing the high inflation rate, which has persisted for over two years, to a manageable level. It is crucial to coordinate monetary policy with revenue policies to control inflation. However, the question remains: how will this coordination be achieved? Recently, the National Board of Revenue (NBR) increased the value-added tax (VAT) and supplementary duties on over a hundred goods and services, some of which saw VAT rates doubled. The NBR expects that this will significantly increase revenue collection. A key condition for the release of the $4.7 billion loan from the International Monetary Fund (IMF) is that the revenue collection rate must be increased. To meet this condition, the NBR has raised tax rates on various products. However, local businesspeople argue that increasing tax rates will only worsen the situation for businesses, without significantly boosting tax collection. They point out that corruption within the tax collection system remains a major issue. Unless steps are taken to curb this corruption, it will be impossible to increase tax revenue. Instead, businesses that are unable to pay the higher taxes will try to evade taxes, further exacerbating the situation.

It is worth noting that Bangladesh's tax management system is highly flawed and outdated. As a result, taxpayers are more inclined to evade taxes rather than pay them. Every year, the revenue collection target set in the national budget is never met. Due to the inability to collect sufficient revenue from internal sources, the trend of borrowing foreign loans to finance development is steadily increasing. According to recent data, Bangladesh’s foreign debt has surpassed 100 billion USD. If this situation continues, Bangladesh will soon be recognized as a heavily indebted country in the international arena. While we hear many stories about the country’s development, most of them resemble fairy tales. The progress of a nation’s development can be measured through various indicators. One such indicator is the contribution of domestic sources to the country’s development financing. Domestic financing for development primarily relies on revenue collection. However, our weakness in this area is quite evident. Among South Asian countries, only Sri Lanka has a lower tax-to-GDP ratio than Bangladesh.

Bangladesh’s tax-to-GDP ratio stands at 7.5 per cent, while Sri Lanka’s is at 7.4 per cent. Among other South Asian countries, Japan’s tax-to-GDP ratio is 34.01 per cent, South Korea’s is 32 per cent, China’s is 20.01 per cent, Vietnam’s is 19 per cent, Thailand’s is 16.7 per cent, Malaysia’s is 12.2 per cent, Bhutan’s is 11.3 per cent, and Pakistan’s tax-to-GDP ratio is 10 per cent. Therefore, it is easy to see where we stand. With such a low tax-to-GDP ratio, a country cannot realistically finance development activities on its own. As a result, the previous government became excessively dependent on foreign loans for development financing. The advantage of a foreign loan-dependent development strategy is that it minimizes accountability, and there are more opportunities for embezzling the money allocated for development.

The revenue targets set in the national budget for the current fiscal year will be extremely difficult to align with the monetary policy. Therefore, to make the monetary policy realistic, many targets will need to be revised. The GDP growth target for the current fiscal year is set at 6.75 per cent. This target is not achievable under the current circumstances. Therefore, the GDP growth target must be revised downward. The GDP growth achieved in the last quarter was less than 2 per cent. It is unlikely that conditions will improve significantly in the near future.

For a long time, there has been a stagnation in private sector investment. The share of private sector investment in GDP has been hovering around 22-23 per cent. Despite this, the budget for the current fiscal year has set an unrealistic target of increasing private sector investment to 27 per cent of GDP. This target is simply not achievable. In the past six months, the growth of bank loans to the private sector has been just 7.5 per cent, the lowest in the last four years. The import of capital machinery, raw materials, and intermediate goods for industry has significantly decreased. In this context, how can private sector investment reach 27 per cent of GDP? The only viable solution is to reduce the target for private sector investment in the monetary policy. Without an increase in private sector investment, new employment opportunities will not be created in the country. And without adequate job creation, poverty alleviation will remain unattainable.

The banking sector in the country is currently in a very precarious situation. At least 30 banks are facing difficulties, and 10 of them could face severe crises at any time. The government had planned to borrow 1.375 trillion taka from the banking sector to implement development projects in the current fiscal year. This plan is unlikely to be realized, as most banks are now suffering from a severe liquidity crisis. In this situation, these banks are unable to meet the investment needs of customers. The Bangladesh Bank had previously stated that printing more money would not resolve the liquidity issue in the banking sector. However, recently, the Bangladesh Bank has deviated from this commitment and printed 22,500 crore taka in notes to provide liquidity to several troubled banks. Printing money to provide liquidity to the banking sector will have severe market repercussions, leading to even higher inflation.

Since the interim government took office, the policy rate of Bangladesh Bank has been increased multiple times. Three years ago, the policy rate was 5 per cent, but now it has risen to 10 per cent. In the past, although the policy rate was increased, the interest rate on bank loans was capped at 9 per cent, making it relatively easier to obtain loans from banks. The interest rate on loans was even lower than the prevailing inflation rate, which allowed a certain class of businesspeople and entrepreneurs loyal to the government to take loans and channel them into other sectors, even laundering them abroad. As the interest rate on bank loans has been market-based, it has now increased to 16-17 per cent. Bangladesh Bank may again consider increasing the policy rate, but economists believe that such a move will have negative consequences for the economy.

The amount of non-performing loans (NPLs) in the country’s banking sector is reported to be 2.84 trillion taka, but the actual figure is much higher. A responsible official of Bangladesh Bank stated that if written-off loans, rescheduled loans, and loans under litigation are included, the total amount of NPLs will exceed 6 trillion taka. The white paper committee formed by the interim government has reported that during the 15 and a half years of the previous government's rule, 23,400 crore US dollars (equivalent to 28 trillion taka) were siphoned off abroad. This means an average of 1.8 trillion taka was siphoned off each year. Furthermore, the amount of money transacted abroad is even higher. While it is important to consider how to bring back the money smuggled abroad, this issue is not directly related to monetary policy.

In recent months, there has been increased dynamism in remittance flows, largely driven by the relative stability of the US dollar exchange rate. Previously, under the previous government, the exchange rate of the US dollar was fixed at 110 taka. At that time, in the kerb market, the exchange rate was 120-122 taka per US dollar. In anticipation of receiving a higher local currency, expatriate Bangladeshis would send their earnings through informal channels like hundi. Recently, following Bangladesh Bank's adoption of a 'crawling peg' system for determining the US dollar exchange rate, it increased from 110 taka to 117 taka per US dollar overnight. Efforts are also underway to liberalize and make the exchange rate market-based, which will likely lead to a significant increase in remittance inflows. Additionally, the tendency for export earnings to be repatriated quickly will also rise. Currently, not all export earnings are coming into the country immediately, and there is a need to transition to a fully market-based exchange rate. At the same time, initiatives must be taken to enable Bangladeshi banks operating abroad to collect remittances from the residence of expatriates. It should be noted that hundi operators collect remittances directly from expatriate Bangladeshis through agents at their place of residence.

Given the current state of Bangladesh's economy, formulating a new monetary policy will be both difficult and challenging. It remains to be seen how Bangladesh Bank, keeping in mind the demands of the moment, will frame the new policy. However, in developing the new monetary policy, it is important to prioritize realism over emotional responses. Additionally, the Bangladesh Bureau of Statistics must ensure that the data it publishes on various economic indicators is accurate and reliable. It is important to remember that it is better to embrace the truth, even if it leads to failure, rather than living a lie. There is no merit in presenting economic success based on falsehoods. The monetary policy must be designed in a way that can meet the demands of the time.

MA Khaleque: Retired Banker and Writer on Economic Affairs.