Outgoing BB governors' final battle against inflation

Asjadul Kibria | Saturday, 2 July 2022

The day the national parliament approved the budget for the fiscal year 2022-2023 (FY23), Bangladesh Bank (BB) also announced its annual monetary policy statement (MPS). It is the last MPS unveiled by Fazle Kabir, the outgoing BB governor of the central bank. After completing his two terms of six years, he will retire today. The new governor, Abdur Rouf Talukder, will take charge formally on Monday. Like his predecessor, he is also a former secretary of the finance division.

The six years of Fazle Kabir, the 11th governor of Bangladesh Bank, were remarkable for various reasons. Mr Kabir was appointed as the central bank's chief on March 20, 2016, following the resignation of Dr Atiur Rahman, the 10th governor. Atiur stepped down as Bangladesh Bank governor on March 15, 2016, amid intense criticism over his mishandling of the US$101 million cyber-heist from the foreign exchange reserve of the central bank. The hackers, however, finally managed to transfer $81 million from the BB's New York Fed account that the central bank has been maintaining since 1973 to conduct its international transactions in US dollars.

Thus, Kabir took charge at a critical time. During the last six years, little progress could be  made towards  recovering all the stolen money. However, Bangladesh managed to get back around $15 million, while the rest $66 million is yet to be recovered. The central bank filed two separate cases with two US courts in Washington and New York. Although the task of recovering the stolen money does not entirely fall within the remit of Bangladesh Bank, it has no doubt the prime role. So, Mr Kabir in that respect is leaving  a rather disappointing legacy for his successor.

Initially, Kabir was appointed for four years. Later, to reappoint him, the government in 2020 amended the relevant act by enhancing the age limit of the governor to 67 from 65. Thus he got an extension of two more years, drawing criticism from various quarters.

Kabir used to avoid the press and virtually curbed the long practices of his predecessors' regular and direct communication with the print and the electronic media. Only on a few occasions he faced the media and the announcements of the MPS took place during some of those rare occasions. He also changed the announcement of MPS from a half-yearly event to an annual one. His first MPS was announced for the first half (July-December) of FY17. Later he announced five more half-yearly MPS and finally switched to annual MPS in FY20. The move helped him to cut the formal direct communication with the media.

Since the introduction of the public announcement of the MPS in January 2006, when Dr Salehuddin Ahmed was the governor, it was a half-yearly disclosure. Kabir, however, discontinued the 14 years' trend, which ultimately raised a question about the transparency and effectiveness of the monetary policy.

Theoretically, the ultimate objective of the monetary policy is to control the overall money supply to keep inflation in check and achieve sustainable economic growth. In fact, monetary policies in different countries seek to maintain price stability underpinned by sustained stable output growth in the face of internal and external shocks that are faced from time to time.' Accordingly, Bangladesh Bank is also responsible for 'attaining and maintaining price stability, high levels of production, employment and economic growth.'

By using the projected real Gross Domestic Product (GDP) growth and the targeted inflation rate, Bangladesh Bank designs its annual monetary programme with reserve money (RM) and broad money (M2) as operating and intermediate targets, respectively. The ultimate target is inflation.

Thus, the success of a monetary policy mainly depends on the country's price situation, which is reflected in the rate of inflation. It is also a critical benchmark to evaluate the performance of the central bank governor. Fazle Kabir's performance in that respect is indeed dismal. During his tenure, only in FY17 and FY19 he succeeded in keeping inflation under check, below the target set in the MPS.   In FY18, the annual average inflation rate stood at 5.78 per cent against the target of 5.50 per cent. In FY20, the actual inflation rate reached 5.65 per cent, breaching the target of 5.50 per cent. It was, however, the year of the Covid-19 outbreak, and like the other central banks' governors, he had little room for manoeuvring. Providing the support to keep the economic activities on track was the main challenge of that time. So, Bangladesh Bank increased the money supply, cut the policy rates, and continued the relaxed monetary stance in FY21 to support the economic rebound. The outcome is a surge in GDP growth to 6.94 per cent in the year from 3.45 per cent in FY20. At the same time, in FY21, the annual average inflation rate slightly came down to 5.56 per cent against the target of 5.40 per cent. It appears that in the growth-inflation trade-off, the outgoing governor preferred growth in line with the finance minister's stance.

In the just-ended fiscal year or FY22, the last year of Kabir's governorship, inflation surged further and reached 6.0 per cent on average. His effort to cap the rate at 5.30 per cent failed. Though in developing countries like Bangladesh, the central bank is not solely responsible for curbing the relentless inflation, it needs to use its tools prudently and timely. Kabir, however, was widely handicapped. By bowing to the finance ministry's pressure, he agreed to fix deposit and lending rates at 6.0 per cent and 9.0 per cent, respectively. Thus, his space to use the policy rates was squeezed significantly. Moreover, he was not initially keen to hike the policy rates when inflation started to surge more than six months ago. He, however, maneuvered exchange rate policy and applied some restrictive measures to contain imported inflation. 

As inflationary pressure continued, Bangladesh Bank finally raised the repurchase agreement or repo rate on May 29, after 22 months, acknowledging the gravity of rising inflation. And it raised the rate again in the last week while announcing the MPS for the new fiscal year. By switching to a tight monetary stance without withdrawing the lending and deposit rate cap, the BB governor put his last effort into winning a  battle against inflation, and his successor will undoubtedly face a tough challenge.

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