Rewarding The Wrong Decision

Rewarding instead of strict action Is an example of bad policy decision.

In my last piece, I hinted that govt has either to inject cash into trouble ridden banks or to shut down some of them in the wake of growing nonperforming loans. On the eve of new year, 31st December, govt provided special short credit of Tk 125 billion to 6 trouble ridden banks in a bid to improve their year end balance sheet. Earlier govt had provided Tk 220 billion to some cash strapped banks, drawing criticism from the IMF. Govt's perception is that this kind of short credit,which it intends to withdraw by selling bonds or bills, will not have any leverage on inflation. But the point is govt is providing the money to the banks to buy govt security. Against the security/treasury bond ,the banks will get interest payments. Now let's break down the things like this: a bank made a bad managerial decision and for that decision the loan became nonperforming. This bad loan is still out of bank's reach and circulating in the economy. Now, govt came to rescue the bank so that its balance sheet looks healthy and govt's cash support helped it to buy govt treasury, a secured asset in the context of Bangladesh. Instead of being strict ,govt is rewarding the banks by providing support. At the end of the day, interest on the part of loan spent on treasury plus rest of the loan will play a role in increasing the inflationary pressure. Since this govt assumed power, it altogether pumped around Tk 345 billion liquidity into trouble ridden banks amid austerity measures. At one hand, the govt is relaxing its monetary policy while inflation is high. On the other hand, it is trying desperately to get the fourth instalment of the IMF credit package. In this endeavor, govt is offering uniform 15% VAT on all goods & services. Luckily, the move is aligned with low inflationary pressure in the market: drop in vegetables prices and consideration of lowering the diesel & kerosene prices.

Amid all this, the argument of not raising the policy rate is gathering support. But the real interest rate is still negative. To contain inflation, the real interest rate should be positive and remain positive for quite some time( that means nominal interest rate should be higher than the inflation rate). Is this the case here in Bangladesh? Govt has yet to publish the inflation data for December and the Monetary Policy Statement (MPS). I personally think the central bank should make the real interest rate positive and provide extended credit to SMEs for long period to offset the loss from rising interest rate.And high policy rate will prevent misuse of public money at home and overspending abroad.

It is interesting to see what policy changes the govt proposes in the upcoming MPS. So far govt's policy focuses on raising revenue. It could also cut its spending and thereby improve the budget deficit. As part of reform packages, Pakistan is mulling to revoke 100000 posts in public service. We need similar action in this country too. Public spending without accountability and having bad nuts in public offices are more harmful than raising the policy rate.