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A record government borrowing in recent months has helped Bangladesh Bank's reserve money grow by 5.27 per cent as of last May.
Economists and bankers, however, are of the opinion that the net domestic-asset part of the reserve money or RM grows largely with gains from government borrowing of 'high-powered money or printed money which contributes to stoking inflation.
On the other side of the RM is foreign net asset, which contracts mainly for lower inflows of foreign currencies and BB funnelling of dollars into forex-scant commercial banks.
After negative growth in the financial year (FY) 2021-2022, the reserve money (RM) with the central bank registered a positive growth of over 5.0 per cent year on year at the end of May 2023 mainly because of significant rise in net domestic asset (NDA), officials said.
They said around fourfold rise in NDA came mainly from gains from record borrowing by the government from the central bank over the last one year to make up for budget-financing shortfalls.
According to the latest statistics of the central bank, the RM reached Tk 3.42 trillion until May 2023, up 5.27 per cent from corresponding period when the size of reserve money was Tk 3.31 trillion.
In FY'22, the volume of RM declined slightly to Tk 3.47 trillion from Tk 3.48 trillion recorded in the previous fiscal of 2020-2021, the official data showed.
Seeking anonymity, a BB official says RM has two components - NDA and net foreign asset (NFA). "The NDA increases hugely recently due to record government borrowing from the BB since July last year."
The official said the government had borrowed around Tk 800 billion from the central bank up to June 2023 through the devolvement mechanism, and it is helping increase the NDA.
On the contrary, the central banker said, the NFA declined 19.80 per cent to Tk 2.75 trillion until May 2023 from Tk 3.43 trillion recorded one year ago.
"The drastic fall in NFA comes because of record sale of foreign currencies amounting US$ 13.58 billion by the BB to the commercial banks in the just-past fiscal year (FY'23)," the official said.
According to the data, the NDA rose to Tk 824 billion at the end of April 2023, 3.88 times higher from Tk 212 billion recorded a year before.
Another BB official says the reserve money having registered 5.27-percent growth was insignificant compared to the target level of 14.00 percent at the end of June 2023, due to substantial decrease in NFA.
Contacted for his view, former lead economist at the World Bank's Dhaka office Dr Zahid Hussain told the FE that the BB keeps injecting huge volume of newly circulated money over the last one year into the government coffer through devolvement instrument that increased its NDA by huge margin.
"And the central bank keeps saying that it lifted out huge volume of local currency in the form of selling record number of greenback to the commercial banks facilitating them to meet their overseas transactions amid forex dearth," he says explaining stress on the reserve money.
He notes that the commercial banks purchased the US dollars from the central bank through the excess liquidity, which was idle money and not directly active into the economy.
"But the government borrowed high-powered money or print money from the central bank and keeps spending into the market that started working into the economy. It raises either productivity or price of products," he says.
The former World Bank economist finds current macroeconomic context of the economy not suitable for production because of many factors--like forex dearth, drastic fall in import orders.
"So, it would possibly contribute to a raise in inflation further, which is a matter of serious concern."