Is the monetary policy failing?

The current monetary policy was set in motion at a time when the economy was in a dire state. The inflation rate was trending upwards alarmingly and the national output was sluggish. Amidst rampant corruption and large-scale looting of the economy by the gangs of Hasina the income of the ordinary people was eroding, and a large number of people were falling into poverty. In this milieu the implementation of the monetary policy did not show much result, on the contrary the economy fell into a cesspool of spiralling inflation and low growth. In this desperate economic and suffocating political situation the student community miraculously organised the entire national population in a street protest to successfully dislodge the utterly incompetent and predatory government. A new government, led by the widely respected Nobel laureate, Doctor Mohammad Yunus, took over which gave the people much hope of a recovery. His government is apparently working hard to fulfil its promise.

While the government went through a revolutionary transformation, there was no significant change in the monetary policy. This means that the monetary policy of the ousted government that was devised with the help of IMF, is still in operation. The current governor, a former IMF staff, is strongly motivated to make it work. He has already initiated some changes to stabilise the monetary economy, in particular the banking sector.

This monetary policy has been in operation for over two years. By any reckoning this is a long enough period for a monetary policy to show its magic. But so far there has been no magical relief from the crisis that the people had expected. Many of them are now losing hope.

The principal objective of monetary policy is to maintain stability of the monetary and the financial sectors. This requires that the inflation rate be restricted to a low level, say, 2-4 per cent. The foreign exchange rate must also be kept under check to prevent the erosion of the exchange value of the domestic currency. The maintenance of the growth rate of GDP at an acceptable level is also regarded an objective, especially in the developing countries. Hence, the success of a monetary policy has to be judged in terms of the fulfilment of these objectives.

The consumer price index of Bangladesh began a northward march from the beginning of 2022, and it continues until now. It rose sharply in July 2024 to 11.66 per cent. It maintained the double-digit inflation momentum through much of the rest of the year despite the fact that a supposedly contractionary monetary policy was in operation for nearly two years with gradual tightening during this period. The USD exchange rate rose in tandem resulting in a depreciation of Bangladesh taka more than 40 per cent during this time. This gave a powerful upward push to the prices. The monetary policy seemed powerless to contain the inflation, stimulate the economy or prevent the steady depreciation of the taka.

The inflationary pressure and the exchange depreciation had forced the hands of Bangladesh Bank to continually raise the interest rate and reduce the monetary growth. This is seen clearly from the trend of the monthly call money rate which doubled between 2021 and 2024. The Bangladesh Bank was certainly not deficient in its effort to tame the wayward economy, but unfortunately short in results.

An important thing that has not attracted much attention of analysts is that this inflationary period was also accompanied by a considerable weakening of the economy. There has been a substantial reduction of the real GDP growth between 2021-22 and 2023-24.Various reports and opinions in newspapers as well as personal experiences of the ordinary people also strongly suggest a significant downturn in income. Trade has declined substantially with both export and import nose diving. This is obviously the direct consequence of the economic crisis and the contractionary responses of the authorities.

Much of the excess demand pressure of the earlier years was built up by the Hasina government who set the budget spending as high as possible in order to siphon off substantial part of it to maximise its own kickbacks. But the excessive graft dried up funds quickly and the government was forced to reduce spending at home and seek more funds from overseas. This became evident by 2023. The real budget spending declined by 2.62 per cent in 2023-24 from an increase of 1.87 per cent in 2022-23. The available data on budget implementation for 2024-25 (Jul-Oct) show a massive decline of 31.5 per cent year-on-year. Hasina government was forced to solicit funds from overseas but with no luck. Thus, at this stage the domestic aggregate spending was already tepid.

The focus of the current monetary policy was perhaps determined by 2022 or earlier data when the economy was still buoyant (which could be due partly to the shameless doctoring of the data by Hasina gang). The IMF staff apparently regarded the economic problems of the time as the outcome of excessive spending and blithely recommended heavy doses of demand management medications to tamp down the perceived temperature. However, by this time the economy was already contracting as it was also facing cost-push factors. The deflationary impact of the demand management policies was not sufficient to offset the inflationary cost-push pressure such that the economy ended up with higher inflation as well as falling output, i.e. a stagflation.

The exchange rate must have played a critical role in giving the cost push. Until 2020-21, the exchange rate was virtually constant for four years, and so was the inflation at a relatively low rate. The exchange rate had risen very slowly in the previous seven years. However, from the beginning of 2021-22 the exchange rate (Tk/USD) started increasing by leaps and bounds. By the end of 2024, it had increased by more than 40 per cent. Unfortunately import price pass though is very quick in Bangladesh implying that the higher taka import cost was quickly transmitted to the product prices giving rise to the double-digit inflation.

It is obvious that the current monetary policy has done a good bit of damage to the economy, and it is no longer appropriate for the current situation. Perhaps Bangladesh Bank should fundamentally revise it when it brings down the next edition of the monetary policy.

The author is an adjunct professor of economics at Independent University, Bangladesh.

m_a_taslim@yahoo.com