Economy’s three looming challenges
A persistent higher rate of inflation, the upward trend of the foreign exchange rate and deepening liquidity crunch could pose major challenges to the economy as the government looks to keep up the current economic recovery and accelerate it further.
Both the government and the Bangladesh Bank should address the issue promptly, or else the economic rebound will stumble in the coming months, economists say.
Although the major shocks stemmed from the overheating global economy, there is enough room for the government to deal with the three challenges.
The global economy has given a signal that the ongoing inflationary trend may continue for at least one year, handing a serious blow to the common people of Bangladesh already struggling because of higher consumer prices.
A debate among the economists globally has already broken out whether stagflation will hit the economies in the eurozone and the United States.
Although Bangladesh seems to be immune from stagflation, which takes place when an economy faces a persistent high inflation combined with high unemployment and stagnant demand, the probable stagflation will create several downside risks for the economy, which is reliant on the external markets for remittance and exports.
Higher global inflation has already raised Bangladesh's import payments to a large extent, putting a pressure on the foreign currency reserves and the exchange rate.
The reserves, which rose to record highs on the back of lower imports, moderate exports, and record remittance, are already falling and the decline may continue in the days ahead.
As demand has picked up locally and globally, the central bank of Bangladesh is injecting a large amount of US dollars to help businesses settle import bills. But, this has already created a liquidity stress in the banking system as lenders have to purchase the American greenback in exchange of the taka.
So, ensuring an adequate credit flow to the private sector, one of the key driving forces of the economy, will face hurdles in the coming months.
Tackling inflation: Govt should take fresh measures
Both the central bank and the government will not be able to arrest the higher inflation as the commodity price in the global market has increased sharply.
The US inflation surged to a 39-year high last month and the eurozone inflation registered a 25-year high.
Against the backdrop, Bangladesh's import payments surged 51 per cent to $23.90 billion in the first four months of the current fiscal year.
The soaring import payments have already played a major role in sending inflation in Bangladesh to a 12-month high of 5.7 per cent in October, above the government target for the full fiscal year of 5.3 per cent.
The prices of major commodities, including fuel, capital machinery and industrial raw materials, have seen sharp rise in the global market, owing to pent-up demand, higher shipping costs and supply chain disruptions.
Shah Md Ahsan Habib, professor of the Bangladesh Institute of Bank Management, said that the global higher inflation might persist for long.
"Higher inflation will repeatedly hit the poor. And there is no room to avoid it," he said, urging the government to widen its social safety net programmes for the poor so that they can fight against the price increases.
He called for a new stimulus package for cottage and micro enterprises to offset the inflationary pressure.
Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, echoed, saying the government should increase food supply under the social safety net programmes to tame food inflation.
The central bank's stimulus package of Tk 20,000 crore for cottage, micro, small and medium enterprises should be implemented in a prompt manner, he said.
Banks disbursed only Tk 2,800 crore from the package between July and November. "If small enterprises get loans, they will go from strength to strength," said Mansur.
Salehuddin Ahmed, a former Bangladesh Bank governor, said that the inflation would ease to some extent if the government removed supply chain barriers in the domestic sector.
Taka should be devalued despite high inflationary risk
Mansur said that the central bank should depreciate the taka more against the US dollar in order to discourage imports.
"Although the depreciation will increase the inflation a bit, it will help keep the macro-economy stable."
The BB now intervenes in the foreign exchange market by injecting US dollars to keep the exchange rate stable. It pumped a record $2.17 billion between July 1 and December 12.
The dollar injection has already hit the reserves badly. It surpassed a record $48 billion in August only to decline to $45 billion on December 9.
"Devaluation of the local currency will help protect the reserves," said Mansur, adding that there is a room to deprecate Tk 2-Tk 3 per dollar.
The exchange rate of the taka stood at Tk 85.80 per dollar yesterday, down from Tk 84.80 a year ago, down 1.17 per cent.
Reconsider 9% interest rate cap on lending
A majority of banks have come under liquidity crunch as credit demand has gone up. On top of that, cash has dried up as lenders are purchasing the greenback from the central bank in exchange of the taka.
Syed Mahbubur Rahman, managing director of Mutual Trust Bank, said that his bank would not disburse any loans below 9 per cent interest rate at this moment.
Banks had disbursed loans at the interest rate of 6-7 per cent a couple of months ago, but time has changed, he said.
The cost of deposits has gone up to 6 per cent after remaining at a range of 2 to 4 per cent three-four months earlier.
"The deposit rate will increase further within a month or two amid liquidity stress. If the rate goes up, it will be difficult for banks to give out loans at 9 per cent," said Rahman.
"This will discourage banks from lending as they have to keep an additional one per cent in provision against the fund."
Under the circumstances, Treasury bills and bonds will be popular among banks as the yields of the government securities are on the rise. But this will deprive borrowers.
"The central bank should consider the overall situation in the interest of the economy," Rahman said.
A BB official says that the excess liquidity in the banking sector is still high, but it has not had much impact since the crunch is largely limited to a few banks.
The surplus fund stood at Tk 2.17 lakh crore in November, down 1.36 per cent from a month ago and up from 11.60 per cent year-on-year.
Zahid Hussain, a former lead economist of the World Bank's Dhaka office, says the injection of the dollar in exchange of the taka has put pressure on the interest rate spread, the gap between the interest and the deposit rates.
"This will discourage banks from lending at 9 per cent."
The government set the lending cap in April 2020.
He urges the government to reconsider the interest rate ceiling given higher inflation.
"If banks don't disburse loans as per requirement of the private sector, the ongoing recovery will face obstacles."
Private sector credit growth in Bangladesh accelerated to 9.44 per cent in October, the highest in 13 months.