Monetary Policy: To keep pace with the economy

If we take a look at the Bangladesh Bank's monetary policy for the fiscal year 2018, we observe that in FY18 GDP growth momentum was fuelled by sturdy domestic and external demand. A surge in exports, remittances and private credit raised consumption and public and private investment. The central bank claims a rise in private investment. However, economists consider private investment sluggish. The current account deficit was further stretched and liquidity conditions deteriorated as a result of an increase in imports. Capital and infrastructure related imports increased significantly. In addition, floods from last year caused food and oil prices to soar, which further drove import growth. The GDP growth rate surpassed the targeted rate and core inflation remained satisfactory. However, overall CPI inflation was above the target. Broad money and domestic credit growth was well below the target, whereas, private credit growth was slightly above the target.

The central bank has formulated the Monetary Policy Statement (MPS) with the aim of achieving the targeted GDP growth of 7.8 per cent and simultaneously keeping inflation under control. The CPI inflation target has been fixed at 5.8 per cent. The repo and reverse repo rates remain unchanged at 6.0 and 4.75 per cent respectively. The unchanged repo rate may act as a disadvantage for commercial banks in terms of loan disbursement as this repo rate will also deteriorate and shrink loan disbursement if CRR (Cash Reserve Ratio) and SLR (Statutory Liquidity Ratio) are not synced accordingly. Bangladesh Bank aims to curb excessive lending.  Private credit, domestic credit and broad money growth ceilings have been fixed at 16.8, 15.9 and 12.0 per cent respectively. In the second half of FY18, domestic credit and broad money growth targets were fixed at 15.8 per cent and 13.3 per cent respectively. The central bank has been steadily reducing the targeted growth rate of broad money since FY2012 (from 18.5 per cent to 12.0 per cent). The broad money rate being slightly lower than the previous MPS may tighten the money supply. However, the MPS emphasises the need for reviving the bond market which will aid long-term investment financing and help plummet growth rates. The central bank aims to ensure more and better jobs by facilitating credit flows in the priority sectors which include agriculture, manufacturing and SMEs. Domestic liquidity will be improved by a reduction in interest rates. The bank should be prepared to step in for demand management when necessary, by dealing with interest rate instruments.

The increasing current account deficit driven by investment and food related imports, capital machinery imports and low export growth have created pressure on foreign exchange rates. The volatile exchange rate has escalated the cost of doing business. Sharp decline in overall balance of payment situation and negative growth of Net Foreign Assets (NFA) have further added to the liquidity shortage. This weak balance of payments situation needs immediate attention and correction. Although the MPS states inflationary expectations and mentions that food inflation is expected to rise, no measures have been suggested for combating food inflation.

The MPS claims to have had stable interest rates in the call money market which ranged from 2.0-4.5 per cent during FY18. However, aggregate NPL (Nonperforming Loan) is frighteningly high and rose to 10.8 per cent in March 2018. The repetitive scams in the banking sector have also contributed to the rise in NPL. The scams are a result of the sloppy role of the central bank in regulating the banking sector. Let us hope that the monetary policy will be able to reduce the NPL. As the Bangladeshi Taka was under pressure, measures to gain public trust in the currency are essential. 

Although there are a number of risks and challenges in implementing monetary policy, let us hope that the monetary policy will keep pace with the changes that take place in the economy, and contribute to job creation and help achieve inclusive growth in line with the SDGs (Sustainable Development Goals). A sound monetary policy along with inflows of large volumes of foreign direct investment, enhancement in portfolio investment in the capital market, diversified export basket, enhanced competitiveness, rise in remittance inflows and investment in physical and social infrastructure will allow Bangladesh to sustain its development process.

Sunera Saba Khan is Senior Research Associate, SANEM.

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