“In light of the current economic crisis, I emphasize the importance of controlling inflation. My primary recommendation is for the Bangladesh Bank to cease providing loans to the government through devolvement.”– Professor Wahiduddin Mahmud
Amid the unprecedented global challenges posed by the Covid-19 pandemic and the Ukraine-Russia conflict, the Bangladesh Bank (BB) has been diligently working to steer the country’s economy towards flexibility and growth. A recent meeting between BB Governor Abdur Rouf Talukder and former caretaker government adviser Professor Wahiduddin Mahmud has shed light on the central bank’s efforts to collaborate with experts and stakeholders from various sectors to effectively address these economic challenges.
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Bangladesh has witnessed a surge in consultations involving economists, bankers, journalists, and policymakers. In this chorus of voices, the prominent economist, Professor Wahiduddin Mahmud, has put forth a pivotal proposal: advocating for the Bangladesh Bank to abstain from ‘injecting fresh funds’ into government lending. This recommendation aligns with a broader initiative aimed at fortifying the proper execution and oversight of central bank policies, with the ultimate goal of restoring equilibrium to the nation’s economy.
The global economic landscape has been marred by disruptions caused by the Covid-19 pandemic and the Ukraine-Russia war. These events have had a profound impact on economies worldwide, with inflation being a common concern. Bangladesh is no exception, and controlling inflation has become a paramount priority for the country’s economic stability.
Mezbaul Haque, the Executive Director and Spokesperson for BB, acknowledged the difficulties faced by the nation. He emphasized the importance of taking prompt and effective initiatives to counter these challenges, demonstrating the government’s commitment to economic rebound and stability.
The economic challenges that Bangladesh faces have been multifaceted. Inflation, in particular, has been a pressing concern. In August, inflation surged to 9.92%, with food inflation reaching a 12-year high at 12.54%. To tackle these economic hurdles, the government resorted to substantial borrowing from the central bank for subsidies. Additionally, the devaluation of the exchange rate and rising interest rates on foreign currency sources have further compounded the issue.
A Comprehensive Approach
The Bangladesh Bank, responsible for maintaining inflation control and overall monetary stability, has committed to adopting a comprehensive approach. Recognizing the significance of input from various sectors of the economy, the central bank has embarked on a mission to consult with economists, bankers, and journalists to develop a robust monetary policy.
According to Bangladesh Bank spokesperson Md Mezbaul Haque, “Even in the midst of the global crisis, we have managed better than other countries. It is true that we are still in crisis. But we are trying to solve that crisis.” He affirmed that the upcoming monetary policy will incorporate the suggestions provided by economists, underlining the nation’s progress in alleviating the economic crisis and moving towards recovery.
Professor Mahmud’s Advice
Professor Wahiduddin Mahmud, a respected figure in the realm of economics, highlighted the importance of controlling inflation as a key element in addressing the economic crisis. His primary recommendation was for the Bangladesh Bank to stop providing loans to the government through devolvement. In response, the central bank has already refrained from implementing devolvement in recent auctions. Instead, they have urged the government to seek loans from commercial banks.
Challenges in Inflation Control
Mr. Mezbaul Haque identified three major challenges in controlling inflation:
High in Government Borrowing
During the recently concluded fiscal year, the government’s borrowing from banks reached an unprecedented historical peak, surpassing the predefined budgetary targets. This heightened dependence on the banking system for financing became necessary due to a substantial revenue shortfall and a decrease in the influx of foreign funds.
By the end of June 2023, the total borrowing from the banking system had reached an astonishing Tk1.24 lakh crore. Notably, a substantial portion of this amount, nearly Tk1 lakh crore, was obtained from the Bangladesh Bank. This significant lending activity by the central bank has resulted in the creation of fresh money, thereby exerting an influence on the dynamics of inflation.
The spokesperson elaborated on the situation, stating, “Our financial account currently carries a negative balance, primarily attributable to the elevated interest rates prevalent in developed countries. This has substantially diminished the assistance we typically receive from the international money market in terms of foreign currency.
“Immediate rectification of our financial accounts is not a feasible undertaking. Nevertheless, we have undertaken a series of measures to partially regulate the trade balance. These measures include the implementation of import controls, the stimulation of exports, and the augmentation of remittance inflows.”
Monetary policy: Mission inflation
In response to a significant rise in inflation, the Bangladesh Bank has undertaken a major shift in its monetary policy framework. This includes raising policy rates and removing the lending rate cap to address mounting price pressures.
The recent announcement of the monetary policy for the first half of fiscal year 2023-24 reveals a contractionary approach by the central bank. This strategy aims to restrict the flow of money into the private sector, resulting in a downward adjustment of the private sector credit growth projection to 11% for FY24, down from the earlier target of 14.1% set for FY23.
The new monetary policy introduces four key reforms, including the implementation of a policy interest rate corridor, the introduction of a reference interest rate for lending, the unification of exchange rates, and a revised method for calculating the gross international reserve in line with the Balance of Payment and International Investment Position Manual (BPM6). These reforms primarily seek to curb inflation within a 6% range, aligning with the government’s inflation target.
Bangladesh Bank’s proactive and inclusive approach to managing the economic challenges posed by the COVID-19 pandemic and the Ukraine-Russia war is commendable. By seeking input and collaboration from experts and stakeholders across various sectors, Bangladesh Bank is paving the way for a transition towards economic stability and growth. Inflation control, a key focus area, will play a pivotal role in ensuring the nation’s economic resilience.
As Bangladesh Bank continues to work diligently in partnership with experts and stakeholders, Bangladesh’s economy stands poised to emerge stronger from the trials of these turbulent times.