Few observations on the new MPS

Md. Kamrul Bari | Tuesday, 5 July 2022

On the last of day of June, Bangladesh Bank (BB) has declared its annual monetary policy statement (MPS) for the fiscal year 2022-23 (FY23). The new monetary and credit plans are intended to pursue a cautious policy stance with a tightening bias in order to contain inflation and exchange rate pressures and promote the economic recovery process, providing flow of funds to the employment generating activities.

In order to achieve this goal, the central bank has already increased the repo rate to 5.50 per cent. The MPS sets a ceiling of money supply growth at 12.1 per cent against last FY's actual ceiling of 9.1 per cent. The target for private sector credit growth is set at 14.1 per cent slightly lower than last FY's target of 14.8 per cent. Actual credit growth to the private sector in the FY22 was 12.94 per cent. It also sets the public sector credit growth at 36.3 per cent. Last year's target and achievements were 32.6 per cent and 27.9 per cent respectively.  The new monetary policy wants to keep the inflation rate at 5.6 per cent in line with the national budget along with a 7.5 per cent of Gross Domestic Product (GDP) growth target. These targets are universal while setting monetary and fiscal policies.

Bangladesh Bank also stressed on enhancing the LC margin for luxury foods, fruits, non-cereal foods, and other commodities to support import replacement programmes. This action will help secure the FX reserves, control inflation, and lessen pressures of exchange rate depreciation. Nevertheless, the central bank will continue to support the ongoing stimulus package and refinance schemes.

The money supply cap is fixed at 12.1 per cent while a key policy rate, repo rate to be precise, is raised to 5.5 per cent from 5.0 per cent. It indicates that banks should rather take more risks to extend loans to firms and individuals. BB has made it clear that it wants to provide credit to industries that create jobs, but has not mentioned what it plans to do about retail loans. Retail loans to individuals must be kept at a minimum level. Otherwise, despite higher LC margins, imports would keep growing negating all national measures to control inflation. Additionally, the Foreign exchange reserve will be progressively depleted. A 12.1 per cent cap that was set with a 7.5 per cent GDP growth target seems unreasonable. The target GDP growth rate, which was determined based on prior GDP growth experiences, is also illogical. There is also an allegation that Bangladesh Bureau of Statistics (BBS) first decides the level of GDP and then back-calculates the rest. In other words, the information we receive from various publications on the GDP through BBS is flawed. Thus, BB needs to, at least in the background, consider internationally reported consensus projections and own calculations to ascertain a credible GDP growth rate estimate in order to establish the broad money growth cap.

Secondly, the goal for private sector credit growth needs to be reduced in order to get it even lower than FY22's actual value of 12.94 per cent. If the BB sets a higher objective, banks will be more eager to lend. Bangladesh already has a substantial knowledge gap between lenders and borrowers, which frequently results in adverse selection. The situation will be worse due to a high private sector credit growth target. Additionally, at the end of the first quarter of the current calendar year, the ratio of classified loans to total loans climbed to 8.53 per cent from 7.93 per cent at the end of the last quarter of the last year or 2021. If a higher target for credit growth is set, it is very likely that banks will start lending to less trustworthy clients pushing up rate of classified loans to total loans even further. Besides, BB made no mention of how it intends to tackle non-performing loans (NPLs). According to statistics, Bangladesh's total NPL for the previous year amounted to Tk. 1.03 trillion or 3.0 per cent of GDP. Such a large amount of NPL has exacerbated the country's inflation and banks' liquidity. Furthermore, BB just extended moratorium until December 2022. If this type of continual extension of the moratorium is kept up for a very long time, the debtors will develop a culture of default. In order to increase company productivity and stay competitive in the market, even reputable borrowers will start to default on their loans.

Thirdly, BB needs to make sure that it closely monitors the exchange rates between local currency (BDT) and United States Dollar (USD) so that it can respond wisely to a rapid decline in BDT against the USD. To keep the exchange rate stable, BB has already injected USD 7 billion into the market. However, it hasn't done much to help them achieve the goal. It's interesting that a slow depreciation benefits us and boosts export revenue. We cannot, however, allow BDT to decline suddenly and significantly. Because doing so will not only put pressure on the exporters but also dramatically raise the cost of import payments. As a result of our heavy reliance on imports, inflation will also rise domestically. Additionally, exporters will lose market share since they must raise the selling price of their goods owing to an increase in the cost of raw materials. Hence, devaluation must be done gradually in order to maintain exporters' competitiveness and effectively control inflation at the same time.

Finally, the large companies have already recovered from the Covid effect. However, the SMEs have not. The stimulus package, which was mostly funded through the banking channel, has done very little to provide them with means of recovery. So, the government needs to consider the issue and take actions in collaboration with development partners to guarantee that the informal SMEs can also completely recover from the Covid impact. Doing so will also promote the creation of new jobs in the country. Otherwise, the stimulus plan will also just increase inflation without boosting the nation's true economic growth.


Md. Kamrul Bari, MIPA AFA is a management consultant, independent researcher, and certified accountant.

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