Enayet Karim: In May, our inflation stood at about 10 percent. Due to this inflation, people’s life has become depressed. For this reason, it has been announced to keep inflation at 6 percent in the proposed budget for the fiscal year 2023-24. But inflation can’t be controlled only through the budget, for this monetary policy also needs to have a constructive role. For this purpose, the Governor of Bangladesh Bank for the second time in his tenure announced the monetary policy for the first six months of the financial year 2023-24.
The main objective of the monetary policy for the first six months of FY 2023-24 is to maximize employment in the economy by ensuring inflation at a tolerable level (4 to 5 percent). Since recruitment data is misleading, growth is used as a substitute. According to economist Arthur Akun’s formula, when growth increases, unemployment decreases.
Above all, while maintaining financial stability and achieving the objective of creating a business-friendly environment, central banks use tools such as interest rates, money supply, and exchange rates to control inflation-like exercising to keep blood pressure in check.
If the central bank reduces interest rates and increases credit flow to the private sector, investment increases, employment increases, production and growth increase. This is called monetary loosening or ‘monetary loosening’ as this is done by increasing the money supply, which causes inflation. Then monetary tightening is needed.
Increase in interest rates is a tool of this manipulation. In the era of high inflation in the last one-and-a-half years, Bangladesh needed this tight monetary policy, which Bangladesh did not do even though all the countries of the world did it. Interest rates on loans have not increased.
Because there was a ceiling or roof on 9 percent of the political decision before covid. The demolition of this roof is a sign of rebellion against the Ministry of Finance. However, the governor defended himself by calling it a ‘political decision’. That is, banking does not follow the principles of economics. Go to political decision. This is not a good sign.
The central bank always has to fight with the government or the finance ministry for independence in policy making. Bank leadership will always want to keep its tools at its disposal. Central bank policy rates in the developed world affect personal loan interest rates and government Treasury Bill or T-bill interest rates. Here the matter is reversed.
This year’s monetary policy has brought down the government’s beloved T-bill interest rate to fix the lending rate of the banking sector. This work will be done by the central bank’s policy interest rate.
This is like the voluntary imprisonment of a British-era revolutionary. This strange innovation is another step to undermine central bank independence. It would have been prudent if the central bank fixed the method of determining the loan interest rate with a margin of 5-6 percent over the policy interest rate of its main instrument instead of just 3 percent margin over the T-bill interest rate. The interest rate on T-bills is not fixed on a fair market basis.
Here, how much the government will sell, whether the banks have that much appetite, or if not, will have to impose a certain interest rate on the shoulders of primary dealers-these factors play a role.
Bangladesh Bank plays the role of ‘catalyst’ among them. Here the qualified interest is not reflected through the healthy play of demand-supply.
Unveiling the truth
Since 2003, the currency exchange rate has been floating on the market, but since 2010, the government’s efforts to “manage” it have increased. The 1956-minded Central Bank deputies who will artificially strengthen the value of the rupee against the dollar first began in the latter part of the 2010s.
Some advisers were also of that mindset, who had a strong aversion to the market economy. Because, it reduces drunkenness. It was also used for political appeasement.
This artificial overvaluation of the rupee has caused the real exchange rate index to rise above 100 since then, which has not been ignored. The rule is to keep the real exchange rate index close to 100 even if the rupee depreciates against the dollar. Exports increase so much, remittances increase, imports are reined in. It has been neglected for eight long years and is paying the price today.
Remittances and exports have not increased as much, imports have grown enormously, which has led to a collapse in the current account day by day. While Russia’s invasion of Ukraine is to blame for this collapse, it is not even 1 percent of 10 percent responsible for the current debacle. To blame is the non-market control of the value of money, which has made foreign exchange reserves anemic day by day.
To overcome this situation, economists have recommended floating the currency at market rates, but some politicians have made them ‘unpatriotic’. Finally, the governor has announced to float the exchange rate boat in the market, probably due to the pressure of the IMF. If this work was done in the previous monetary policy, today’s disaster of remittances could have been prevented a lot.
Finance ministry bosses love bureaucratic gridlock. Maybe there was no ‘green signal’ from there either. But this belated ‘rebellion’ of the governor is commendable. If this exchange rate indirectly becomes the darling of ‘BAFEDA’ or ‘ABB’ again, then such floating will be the name of sinking.
While the increase in credit flow to the private sector was 11 percent, the growth rate of government debt was 43 percent. This sharp disparity will discourage private investment and lead to inflation. Because the government will release the money in the market.
In this situation, the ‘policy shift of BB to the instrument of interest by excluding the instrument of money supply’ will be faced due to the excessive debt of the government, which is the result of the revenue incapacity of the Ministry of Finance, which is again born from the political predilection of not being happy to impose proper taxes on the rich class.
From now Bangladesh Bank will do the net or correct calculation of currency reserves according to the IMF manual. Is it because of the lack of proper accounting that the finance minister said in the budget speech that there are now four and a half months of reserves to meet import expenses? The account does not match!
But the governor probably also said that he would not tell us this net correct calculation. Tell us a slightly inflated figure by adding ‘EDF’. Where is the fault in telling the truth? Is this the real age of ‘Haimanti’ in Rabindranath’s story, which can’t be told to the in-laws?
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