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The broad money (M2) in Bangladesh has recorded a 10.48-percent growth (y-o-y) at the end of June 2023 over the same period a year back amid the persisting high inflationary pressure on the economy.
This type of money, defined as the sum of currency outside banks and demand deposits plus time deposits accepted by other deposit corporations, was 9.46 per cent at the end of May last, according to the Bangladesh Bank (BB) data.
The BB officials opined that this rise is due to an increase in the net domestic asset (NDA) following sale of dollars to banks. But the net foreign asset (NFA) of Bangladesh has dropped, as it has sold dollars to the market.
They added that reserve money, which is also called high-powered money, has been expanding - leading to surge in broad money.
Reserve money has been rising against the backdrop of the government's borrowing from the BB. Actually, the government borrowing should have been made from the banking system or from the banks, not from the central bank.
The BB officials noted that the central bank gives money to the government from its 'devolvement' - done through earlier treasury auctions. The BB devolves at a time when the commercial banks or primary dealers hike the rates.
"Actually the broad money will accelerate as long as the reserve money expands," said one BB official.
The reserve money also rose by 10.49 per cent at the end of June 2023 over the same period a year earlier.
Another central banker told the FE that the M2 growth has been falling over the past year as part of reining in the high inflation persisting since August last, when it stood at 9.52 per cent on a point-to-point basis.
He also said Bangladesh is a country where inflation is increasing despite the fact that the growth of broad money remained slower over the past year.
He mentioned that the BB is now pursuing an interest rate mechanism to combat inflation in the economy.
"We believe that broad money has a role in inflation rate surge, but the relationship is not so strong in Bangladesh," he surmised.
Economists told the FE that the rise in broad money would fuel up inflation. There may be a debate on when inflation would rise, but inflation must go up as a result of rise in broad money, they added.
Dr. Ahsan H. Mansur, executive director of the Policy Research Institute of Bangladesh (PRI), told the FE: "The present component of broad money is the net domestic asset of the BB is rising. The net foreign asset is falling."
Under such a composition, the foreign exchange reserves have become vulnerable.
"We can create the net domestic asset by printing money, but we cannot increase the net foreign asset."
Dr. Mansur also said there is a strong relationship between broad money and inflation, adding that inflation must rise as a surge of money in the economy.
Of the sources of broad money, NFA decreased by 15.28 per cent, while NDA increased by 16.17 per cent (y-o-y) in May 2023.
On the other hand, the inflationary pressure on the economy remained high, reaching 9.94 in May and 9.74 per cent in June.