Reflection of IMF conditions included in monetary policy

New monetary policy on Sunday

Special Correspondent: The new monetary policy for the next financial year partially reflects the conditions of the International Monetary Fund (IMF). The IMF had six conditions to include in monetary policy. Among them, the condition of disclosure of net account of foreign exchange reserves is being fully implemented as per international standards. The remaining five conditions are partially reflected in monetary policy. Steps will be taken to implement these conditions in stages. Bangladesh Bank will announce monetary policy on Sunday. This information is known from the relevant sources of the central bank.
This year’s monetary policy will be investment and employment friendly and supportive of inflation control. Because there was a shadow of recession in the economy since 2019. In 2020, it became evident due to Corona. A global recession began in February 2022 due to the Russia-Ukraine war before the shock of that recession was overcome. Due to these reasons, the economy of the country is also affected by recession. This has reduced investment, negatively impacting employment. Basically in 2019, the employment field of the unemployed has shrunk. which is still ongoing. For this reason, this year’s monetary policy will focus on increasing investment. For this reason, incentives will be continued in some sectors.
According to the sources, according to the conditions of the IMF, the net account of the reserves should be published according to the international standards by this June. The Central Bank has decided that there will be a formal announcement in this regard in the next monetary policy. Currently, the central bank publishes the gross account of reserves, but the net account of reserves will be published from July. Through this, another condition of the IMF is being implemented.
According to the terms of the IMF, the exchange rate of money against the dollar, the determination of the unit rate of the dollar and the interest rate of loans are not left entirely to the market. It will have partial control of the central bank. The price of the dollar will be determined by the Bangladesh Foreign Exchange Dealers Association (BAFEDA), the association of executives of banks licensed to deal in foreign exchange. Which is still happening. It will not be left to the market at all. The central bank will determine the price of the dollar that the central bank sells from the reserve in coordination with the market. This too will not be left to the market. However, the gap will be reduced with the market rate. Currently, there are various rates of dollar in the market. The IMF has a condition to bring them to a single rate. The central bank is working on it. That’s why it’s not possible right now. For now, the dollar will have different rates for different instruments. Gradually the dollar buying and selling price will be brought closer to the rate. to reduce the gap.
The 9 percent cap on interest rates on loans will be lifted. But the interest rate will not be left to the market. Like the London Inter Bank Offer Rate (Libor), there will be a cap of 3 percent adjusted to the average interest rate on 6-month Treasury bills. That is, the banks can increase the interest rate of the loan up to 3 percent above the interest rate of the treasury bill.
Another condition of the IMF was to take steps to renew defaulted loans and disclose data on defaulted loans in the annual financial stability report by June this year. The central bank is taking steps in this regard. They also have conditions to reduce defaulted loans. In this, government banks will be reduced to 10 percent and private banks will be reduced to 5 percent. Non-performing loans of public sector banks are well above 10 percent. The central bank is taking steps in this regard. Most of the private banks have non-performing loans below 5 percent. According to the conditions, this process should be implemented by 2026.
Earlier, the central bank did not talk about defaulted loans in monetary policy. The monetary policy of the current financial year has started talking tough about defaulted loans. This year’s monetary policy will also have a tough talk on defaulted loans.
Monetary policy involves reining in the flow of money to control the rate of inflation. But the current inflation is not due to increased money flow. These are due to dollar appreciation, commodity prices in the local market and supply shortages. As a result, inflation will not be able to be controlled by monetary policy.
In this context, the executive director of the Policy Research Institute (PRI) Ahsan H. Mansur said that the supply of import-dependent goods has decreased due to prolonged import controls to deal with the dollar crisis. Due to which their prices are increasing now. Due to this, the price of domestic products is also increasing. Imports have been controlled to deal with the dollar crisis, but now the rate of inflation has started to rise. For this, remittances and exports should be increased. Demand should be curbed by reducing the flow of money.
He also said that using monetary policy, Europe, the United States, and even India have brought inflation rates down. Bangladesh can’t. Because no one controls the market here.
According to the sources, it has been said to follow the policy towards consolidation in the budget of the next financial year. IMF calls for contractionary monetary policy to control inflation. But even if the central bank follows the policy of reducing the flow of money overall, the flow of money will increase in the manufacturing sector. Meanwhile, a report of the central bank shows that many of the targets of the monetary policy for the current financial year have not been achieved yet. Among them, the new monetary policy is being announced. In this context, an official of the central bank said that the implementation of the monetary policy will be clearer when the June data comes. Central banks send a message to the market through monetary policy. The private sector can take steps accordingly.
The report also shows that the trade deficit has narrowed recently due to lower imports. The monetary policy for the current fiscal year had a target of limiting the trade deficit to $2,900 million. But till April the deficit is $1,310 million. In the same period of the last financial year, the deficit was $2007 billion. The central bank expects the deficit to be within the target by the end of this June. The reason for this is said to be that the prices of almost everything, including energy products, have fallen in the international market. It has also reduced import costs. The monetary policy for the current financial year had a target of keeping the foreign exchange current account deficit at $6.82 billion. But in July-April the deficit was $3.77 billion. The central bank hopes to keep the deficit within the target in this sector as well. Financially, there was a surplus in the last financial year. In the current financial year as well, it was aimed to keep a surplus of $2.8 billion. However, as of March, there is a deficit of $222 million. As such, the deficit may increase further. The target was to increase the domestic credit flow by 18.5 percent in the current financial year. But July-April increased by 11.07 percent. This target will not be achieved even by June. The central bank believes that the credit flow has not increased due to lack of demand in the market during the recession.
In the current financial year, the target of 37.7 percent increase in credit flow to the public sector was set. But it increased by 25.36 percent from July-April. There will be deficit in this sector at the end of the year. The government debt did not increase as the implementation of development projects was hindered by the dollar crisis.
The target was to increase the credit flow to the private sector by 14.1 percent in the current financial year. July-April increased by 7.86 percent. Even in this the target is not being achieved. Because the private sector is suffering from uncertainty in the domestic and global situation.