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Monetary policy keeps the policy rate same,
Indulging in fiscal expansion may alter the game. |
The central bank unveiled the monetary policy for July-December period. Surprisingly, it did not raise the policy rate,which remains at 8.5%. I guess it will raise the rate at later stage of this period,judging the inflationary situation. What is interesting neither Bangladesh Bureau of Statistics nor Bangladesh Bank has published the data on inflation. But inflation is still high, over 10%.
Failed China trip cast shadow over budgetary assistance since China only pledged to provide 1 billion yuan during PM's visit plus another 1 billion yuan confirmed by Chinese envoy to Bangladesh,total 2 billion yuan , against Bangladesh's demand of $5 billion. Instead of narrowing the budget deficit, government faces a deep budgetary crisis. Even the PM did not appear before the local press for 48 hours until she attended prize giving ceremony of a football tournament at the Army stadium. Meanwhile, public sector job reform protest continued. By the time she arrived it reached a crescendo, claiming around 200 lives and descending the country into a curfew. Putting aside the worst political crisis during the tenure of this govt, let's confine the discussion on the monetary policy.
The government is facing now a political crisis along with an economic one.
I have not managed yet the online copy of the monetary policy as the internet was first slowed and then suspended deliberately for more than a week. The primary information I got from the press is that government will increase the borrowing from the banks,shrinking the share of private credit. Some news reports also indicated that the central bank injected between taka 320 billion and 400 billion into the banks to meet the liquidity crisis. Most of this money would end up into govt coffers as loan. It will do little help to stimulate the economy. Govt will use the money to payoff its debt. So the money does not have any productive use.
Meanwhile, non performing loans for the banks do not cease to accumulate. Unofficially it reached more than 20% of total loans. At one hand,government is failing to recover old loans. On the other, it injected money into the banks with no productive use. It is undermining the ongoing contractionary monetary policy. It will put severe strain on the economy.
Growing budget deficit and the decision of not raising the policy rate will increase the pressure on value of taka. Taka has to be further depreciated against US dollar. I think govt is ready for further depreciation of taka. In my earlier pieces,I highlighted how the depreciation raises the government revenue in times of its inadequate capacity and works as incentives to exporters and remitters.
Wrong fiscal policy appears to be bigger challenge than the transitory effect of depreciation to contain inflation. IMF also warned about this.As foreign financing and investment become limited ,increasing tendency of government borrowing to finance unnecessary development projects and injecting money into the banks may be observed. There will be higher pitch to dole out cash and incentives as a mean to mitigate the losses generated from the curfew. Central bank has to remain firm on turning down such requests.
Improvement of reserve during the pandemic may encourage the govt to prolong the curfew. Curfew to some extent works as a mean to curb import demand. Thereby it may improve the forex reserve temporarily. But prolonging it gives an indication of growing political impasse in the country,discouraging investment and economic activities in the long run. It will further hurt a cash-strapped govt.
This monetary policy comes at a moment when political differences deepen instead of waning. This will pose the risk of deteriorating the budget deficit and derailing the contractionary monetary policy. Overcoming the risk depends now on independent probe of the crisis. If investor's confidence is back and economy is in full swing soon, there maybe less worry. Otherwise, government may indulge in fiscal expansion. Central bank still has ample time to course correct its policy of not raising the interest rate. High inflation,depreciation of taka,misaligned fiscal policy and an engineered political crisis call for policy rate hike. Otherwise it will only delay the recovery.
