BB in a fix with next monetary policy

The Bangladesh Bank faces a complex situation as it draws up its monetary policy statement for the current fiscal year in the wake of escalating excess liquidity and ongoing business slowdown.

The central bank has followed an unconventional monetary policy since March last year when the coronavirus arrived on the shore of the country. It cut both the policy rates and the cash reserve ratio (CRR) in phases to inject liquidity into the market to make the economy vibrant.

The expansionary monetary policy has made money cheaper than ever as the BB has also supplied a large volume of funds to implement the massive stimulus packages of the government to counter the impacts of the pandemic.

Now, the BB is going to announce another expansionary monetary policy, which might be unveiled tomorrow.

But a question remains how the central bank will mitigate the downside risks deriving from the excess liquidity if it rolls out another expansionary policy.

The unconventional policy has not worked as expected since the government has been compelled to impose strict restrictions on movement from time to time to contain the coronavirus pandemic.

Despite the availability of funds, the private sector is still adopting a go-slow policy to expand their businesses as the pandemic shows no signs of abating. If the central bank continues to follow the existing monetary measures, it will create more excess liquidity in the banking system.

A number of BB officials, who are tasked with formulating the policy, said that they were still working to strike a balance between the expansionary monetary policy and the excess liquidity.

But the central bank is yet to come up with a concrete decision, they said.

Excess liquidity in the banking sector stood at Tk 231,462 crore as of June, up 66 per cent year-on-year and 9 per cent a month ago.

This has primarily happened due to the weak private sector credit growth, which stood at 8.40 per cent last fiscal year against the central bank target of 14.80 per cent.

Experts say the central bank should maintain its expansionary monetary policy. At the same time, it should also mop up the excess liquidity to protect the financial sector from downside risks.

"There is no need for such a huge volume of excess liquidity to implement an expansionary monetary policy as the surplus fund does not play any role in pushing up demand," said Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh.

Both poverty and unemployment are on the rise when excess liquidity is also showing an increasing trend.

"Institutional and individual investors now prefer unproductive zones, such as the stock market and the housing sector, to use their idle fund," Mansur said.

The benchmark index of the Dhaka Stock Exchange has surged in recent months riding on the excess liquidity. The DSEX stood at 6,389 points yesterday, up 54 per cent one year ago.

"The investment in the capital market will rise further if the central bank does not mop up money immediately," Mansur said.

"We do not want any liquidity shortage, but the excess fund is also undesirable."

Mansur, also a former economist of the International Monetary Fund, said the central bank should gradually convert its unconventional monetary policy into a conventional one.

The central bank should consider opening the windows of the reverse repo (repurchase agreement) and BB bill such that banks can invest surplus money efficiently. This will discourage them from turning to the stock market, he said.

The window of the reverse repo will allow banks to invest funds at 4 per cent at the central bank on an overnight basis.

The BB Bill is another option where banks can park funds for a maximum of 30 days. The interest rate depends on the demand.

Investment through the two windows has been stopped for more than a year, BB officials said.

They said that a concerned department of the BB had recently recommended its high-ups reopen the two windows, but another department had opposed the idea.

Several banks have shown their interest to invest their idle money through the windows, they said. 

Mansur also said that the central bank might even think of raising the rate on the CRR.

The CRR determines the portion of customer deposits that commercial banks must keep as a reserve with the central bank.

A higher CRR means the banks must hold higher reserves and thus tighten the flow of cash.

A senior official of the central bank said that the policy would emphasise attaining the GDP growth of 7.2 per cent and contain the inflation at 5.3 per cent as per the government target for the current fiscal year.

"The upcoming policy will try its best to ensure adequate loans for the productive sector," he said.

Mansur urged the government to withdraw the 2 per cent incentive on remittance as its record flow had already had an adverse impact on the money market.

The central bank buys excess dollars from banks by injecting the local currency. If the BB starts to mop up the taka, it will have to pay interest.

"The whole process will hamper the effective implementation of the monetary policy," Mansur said.

Salehuddin Ahmed, a former governor of the BB, said that the country would not face any inflationary pressure in the next two or three months.

"Still, the excess liquidity should be mopped up to ensure macroeconomic stability."

A certain amount of liquidity should be available in the market as it is required for the productive sector, particularly small and medium enterprises.

The central bank should ensure the credit flow to the agriculture sector and export-oriented industries as well, Ahmed said.

"The initiatives will improve the purchasing power of the common people."

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, said that money should be available for the people so that the fall in demand could be arrested.

He also said that the central bank might reduce the excess liquidity to some extent by following an expansionary monetary policy.

The BB will unveil its monetary policy at a time when inflation was ticking up. 

And yesterday, the International Monetary Fund said elevated inflation was also expected in some emerging market and developing economies, related in part to high food prices.

"Central banks should generally look through transitory inflation pressures and avoid tightening until there is more clarity on underlying price dynamics," the crisis lender said in its World Economic Outlook Update.

"Clear communication from central banks on the outlook for monetary policy will be key to shaping inflation expectations and safeguarding against premature tightening of financial conditions."