BB’s funds to banks complicate efforts to curb inflation

The Bangladesh Bank is injecting fresh funds into the economy despite adopting a contractionary monetary policy, a contradictory move that may make it harder to tame stubborn inflation.

The central bank suspended lending to the government at the beginning of the current fiscal year since such a fund injection fuels consumer prices. The regulator has also kept hiking the policy rate to tame inflation, which has stayed more than 9 percent since March.

The policy rate, also known as the repo rate, is a powerful tool of monetary policy and central banks all over the world regulate the money supply, inflation levels and liquidity using it.

In its new monetary policy unveiled on January 17, the BB increased the policy rate by 25 basis points to 8 percent, its eighth straight spike since the tightening cycle began in May 2022.

On the other hand, the central bank is still injecting funds into the economy in various forms, including the liquidity support extended to conventional banks, the special liquidity assistance to Shariah-based banks, and the special repo facility against the special purpose treasury bond.

Banks usually borrow from the central bank under the repo facility, the assured liquidity support facility, the assured repo facility, the standing lending facility, and the Islamic banks liquidity facility to meet liquidity shortages.

In an auction on January 28, thirty-three banks and one non-bank financial institution took Tk 10,377 crore from the central bank and the tenure of the facilities ranged from one day to 14 days.

Banks borrowed Tk 13,08,779 crore from the central bank in the last fiscal year of 2022-23 under the repo and the assured liquidity support facility, up from Tk 175,987 crore a year ago, BB data showed.

The BB has also continued to provide liquidity support to some Islamic banks against promissory notes, under which a borrower pledges to repay a certain amount at a certain time.

On December 28, the BB provided Tk 22,000 crore in emergency funds to seven beleaguered banks, including five Islamic ones, to dress up their balance sheet before the year closed. The banks are Islami Bank Bangladesh, Social Islami Bank, First Security Islami Bank, Global Islami Bank, Union Bank, Padma Bank, and National Bank.

Since January 22, the BB provided Tk 12,000 crore to six banks against the special purpose treasury bond issued by the government to settle outstanding payments for fertilizer and power.

Sonali Bank, Janata Bank, IFIC Bank, Islami Bank, City Bank and Eastern Bank took the fund, said BB Spokesperson Md Mezbaul Haque.

The conventional banks took the fund at the repo rate while Islami Bank Bangladesh secured it against the bond that carries a zero-interest rate, he added.

Zahid Hussain, a former lead economist of the World Bank, said that the central bank suspended the devolvement -- a process to print money for the government -- but monetary financing is still going on.

"The fund injection will not help the initiatives taken to control higher inflation."

He also said providing funds against bonds or any other government securities is also a form of printing money and this will further fuel inflation.

While unveiling the new monetary policy for January-June, Governor Abdur Rouf Talukder said the central bank withdrew a hefty amount of money from the banking sector by supplying US dollars. The central bank is now injecting the money into the market since banks are facing a liquidity crisis.

Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, thinks the impact is the same.

"Complications have been created because of providing funds against special bonds," he said, sarcastically adding that the BB could give the fund directly to the government instead of using the tool.

Banks are allowed to encash the fund against the bonds which will fuel inflation, he said.

Ashikur Rahman, a former teacher of economics at North South University, said the banking regulator said it has adopted a contractionary monetary policy and hiked the repo rate. On the other hand, it is printing money for the troubled banks.

"This is a contradictory move," he said, adding that when high-powered money is injected into the economy, it fuels inflation.

He added: "When Tk 22,000 crore is injected, it creates an impact of Tk 1 lakh crore in the market due to the money multiplier effect."

Rahman recommended stopping printing money for the troubled banks and restoring governance in the banking sector.