Mop up excess liquidity to curb asset bubble: CPD

The Bangladesh Bank should raise the cash reserve ratio to mop up excess liquidity from the banking system, said the Centre for Policy Dialogue yesterday as it put forward a set of proposals for the effective implementation of the monetary policy.

Some portions of the excess liquidity, which reached an all-time high of Tk 231,462 crore in June, are being channelled to the unproductive sector due to a lack of room to make investments in the productive sector.

"The central bank should strengthen its monitoring on the surplus fund as it has already created a bubble to some extent in the capital market," the CPD said.

"The central bank should follow a cautious expansionary monetary policy to check the flow of funds to the unproductive sector."

The think-tank came up with the suggestions at a virtual press conference on "MPS FY2021-22: To what extent does the monetary policy meet the needs of the economy?"

In April last year, the BB cut the CRR, which determines the portion of customer deposits that commercial banks must keep as a reserve with the central bank, by 100 basis points to 4 per cent to offset the business slowdown caused by the coronavirus pandemic.

While unveiling the monetary policy for the current fiscal year on Thursday, it kept the rate unchanged. A higher CRR means banks must hold higher reserves and thus tighten the flow of cash.

"The central bank should also reduce the injection of the reserve money while implementing the stimulus packages," said Fahmida Khatun, executive director of the CPD, while presenting the keynote paper. The think-tank particularly expressed its concern about the implementation of the stimulus packages.

Khatun said the stimulus packages provided through banks had created a new avenue for corruption and malpractices.

"The repayment of loans may become a cause for concern in the coming days."

Mustafizur Rahman, a distinguished fellow of the CPD, echoed Khatun, saying there had been allegations that some portions of stimulus packages had been misused.

"A section of borrowers has misused the loans, ignoring their commitment to investing in the productive sector."

The government and the central bank are implementing 28 stimulus packages involving Tk 131,000 crore, most of which is being channelled by the BB.

The BB has issued more than 100 circulars related to the packages over the past year. But the regulatory gaps have not been addressed yet, the CPD said. 

"This has made some of the liquidity support packages available also for banks that are weak and poorly governed. The packages were also made accessible to loan defaulters."

The BB has already asked banks to send details of the clients who got loans from the stimulus packages to determine whether the low-cost funds went to productive sectors.

The BB can rein in the injection of funds from its coffer as banks had excess liquidity, Khatun said.

"Inflation will rise if the excess liquidity cannot be used in the productive sector. On top of that, the excess liquidity has also brought down both deposit and lending rates."

The government should consider withdrawing the 2 per cash incentive on remittance as it put pressure on the excess liquidity, she said.

The robust flow of the money sent by the migrant workers has created a surplus foreign fund in the financial sector, adversely affecting the exchange rate between the taka and the US dollar.

The central bank buys US dollars from the market regularly by injecting reserve money to halt the depreciation of the US dollar against the local currency.

Rahman urged the government to roll out a bond so that remitters could invest in the instrument.

"This will allow the government to use the fund to implement infrastructure projects and control the excess liquidity."

He demanded the central bank investigate to unearth whether money launderers were bringing in money in the form of remittance after laundering them abroad.

Khondaker Golam Moazzem, research director of the CPD, said the investment in doubtful stocks in the capital market had been on the rise.

Although the economy is not in good shape because of the pandemic-induced slowdown, the key index of the Dhaka Stock Exchange has gone up to a large extent, he said.

"This means a bubble has been created. The Bangladesh Securities and Exchange Commission should beef up its monitoring."

Fahmida Khatun said a multi-stakeholder task force should be formed to monitor the stimulus packages and assess their effectiveness.

There has been concern about whether the loans under the stimulus packages are being disbursed effectively. From the outset of the unveiling of the support packages, banks have been willing to lend more to large borrowers than small borrowers, paving the way for a "K-shaped" recovery of the economy.

A K-shaped recovery takes place when different sectors experience different rates of recovery after a recession.

The design of the stimulus packages and their distribution will mainly support a "K-shaped" recovery, the think-tank said.

As a result, large firms and public-sector institutions with direct access to the stimulus packages will make some areas of the economy recover faster, but SMEs and the under-pressure middle class would be left behind, Khatun said.

She called for cash support for the poor during the pandemic to help them tackle the economic hardship.

"In addition, funds should be available for micro-entrepreneurs."

Moazzem suggested the central bank increase the grace period for stimulus packages as many borrowers were still struggling to keep their businesses afloat due to the recent wave of infections.

At least 30 per cent of the SME stimulus package should be disbursed among the new entrepreneurs, and the central bank should take measures to this end, he said.

Towfiqul Islam Khan, a senior research fellow of the CPD, said credit demand from businesses was facing sluggishness, so the private sector credit growth target might not be achieved.

The private sector credit growth stood at 8.40 in the last fiscal year against the target of 14.80 per cent.

"The economy will not get the growth momentum back riding on the recovery of the outside world. Internal recovery is the most important factor to make the economy vibrant," Khan said.

According to the CPD, governance of the banking sector would be an essential determinant for the better recovery of the economy.

"Unfortunately, reforms in the banking sector remains outside the radar of the central bank."

Khatun said the severity of high non-performing loans was currently invisible due to the measures taken to relax loan classification.

"Once loans are classified without any special considerations, the volume of NPL may rise significantly."