Mohammed Forkan Uddin
Bangladesh’s economy has showcased robust resilience and impressive growth in recent years. The post-pandemic recovery saw substantial progress, notably in the industrial and service sectors. But a combination of global inflationary pressure and supply disruptions owing to the Russia-Ukraine War, a rising US dollar, increasing international inflation rates, and the emergence of recessionary fears in advanced economies created a hostile economic environment for us.
According to the International Monetary Fund (IMF), Bangladesh is navigating multi-faceted economic challenges. Continued global financial tightening, coupled with existing vulnerabilities, has challenged near-term macroeconomic management.
The organization has suggested focusing on containing inflation and rebuilding external resilience. It also called for calibrated monetary policy tightening, supported by a neutral fiscal stance, and greater exchange rate flexibility to alleviate foreign exchange pressures and rebuild buffers.
Bangladesh Bank also acknowledged that the economy is striving to restore the stability of the exchange rate and manage inflationary pressures while dealing with the lingering issue of high non-performing loans. The increasing costs of essential imports and the strain on the country’s foreign exchange reserves add complexity to the domestic economic challenges.
In this context, Bangladesh Bank has recently announced the Monetary Policy for January-June, 2024, which also includes credit policy for the period. So here needs understanding and analysis on the ins and outs of this Monetary Policy in light of expert opinion and views.
With no surprise, the repo interest rate is considered the policy rate, which has been increased by 25 basis points from 7.75 percent to 8.00 percent. The reverse repo rate, which is now called the Standing Deposit Facility (SDF) rate, has been increased by 75 basis points, moving to 6.50 percent from 5.75 percent. The Standing Lending Facility (SLF) rate, which is considered a special repo, has been reduced by 25 basis points to 9.50 percent from 9.75 percent. As a result, the policy rate corridor has been reduced to 150 basis points, which was previously 200 basis points. According to Bangladesh Bank, the goal of this action is to allow liquidity management to be performed more precisely and efficiently.
The Central Bank expects that average general inflation will align with the government’s revised 7.5 percent target by next June. It also noted that the country’s economic outlook at the end of FY24 remains positive, with expectations of robust real GDP growth targeted at 6.5 percent.
The BB has set a lower private sector credit growth target of 10 percent. The projected growth in public sector credit is 27.8 percent. Considering both public and private sector credit, domestic credit growth is projected at 13.9 percent by the end of June 2024.
To mitigate downward pressure on the Taka, the Central Bank has introduced a new exchange rate system called the ‘Crawling Peg System’. It is an interim measure before transitioning towards a free-floating exchange rate regime, as stated by the BB.
The primary goal of Monetary Policy is to ease inflationary pressure, and the goal of exchange rate policy is to ease the balance of payments pressure. It is the duty of the Central Bank to control the money supply by adjusting the policy rate to achieve these goals. Bangladesh Bank has been doing the same for years. I would not say that it was without errors or deviations. The experts present here can speak well about it. I will highlight just a few things.
The main challenge is controlling bull name inflation. It eats up the money and increases the suffering of the poor. The target of 7.5 percent is still too high. We are optimistic that inflation is starting to come under control. However, due to the probable instability in the market during Ramadan and Qurbani, there are doubts about how successful Bangladesh Bank will be. It should apply as many mechanisms as necessary.
Another crisis that is still persisting is the scarcity of dollars. As summer approaches, this dollar crisis should not lead to an energy crisis. The new mechanism introduced, called the crawling peg, will hopefully stabilize the exchange rate.
It must be remembered that the practice that favors someone or a particular group is not policy; it is impolicy. Sometimes there are policies, but they are not properly enforced. Such practices also create holes in society and the economy, which hinder the realization of the public good. So effective policy and proper implementation is badly needed now.
The writer is the president of the President of the Institute of Chartered Accountants of Bangladesh
