Bangladesh Bank should realise that it is not enough to maintain policy rate, repo rate and reverse repo rate unchanged along with maintaining the same limits for statutory liquidity ratio (SLR) and cash reserve ratio (CRR). Policy in these regards is not going to make more funds available for credit to meet the demands for private and public sectors. Stopping the hemorrhaging of commercial banks caused by NPLs has to be a priority policy concern. Adopting a soft policy for defaulting borrowers, as has been evident in a recent announcement of BB in the form of `Special policy on Loan Re-scheduling and One Time Exit' (May 2019), is not going to rid the commercial banks of their most enervating burden viz. NPLs. The silence on this in the MPS released by Bangladesh Bank for current fiscal is mind-boggling, writes Hasnat Abdul Hye
The importance of the monetary policy announced by Bangladesh Bank on July 31, 2019 cannot be missed by anyone watching this policy instrument over time. Nor can its significance be exaggerated in the overall policy environment surrounding the economy. Next to fiscal policy embodied in annual budget, monetary policy guides the growth of the Bangladesh economy with a supportive role that is all encompassing. By controlling money supply, determining exchange rate and credit growth, monetary policy enables the private and public sectors to contribute to growth of gross domestic product (GDP) in an environment of stable prices. While the private sector contributes to growth in the course of making profit, the public sector does this directly through implementation of physical infrastructure projects and social infrastructures like health, education and provision of other public goods. The annual budget sets out the target of growth in GDP for the fiscal year concerned, keeping the projection of the same in the five-year plan in view. The monetary policy, on the other hand, is designed to achieve growth of GDP, more or less consistent with the target-GDP rate in the budget while keeping inflationary pressure within reasonable limit.
It is rare, if ever, when the target of growth of GDP as set in the annual budget is ignored in the monetary policy of central bank. It is not the exercise of independence of the central bank, rather its importance and effectiveness in achieving the overarching national goal of attaining higher growth of GDP with low level of inflation that becomes relevant in monetary policy. The monetary policy statement (MPS) released four weeks back, on the heel of annual budget for fiscal 2019-2020, is the first since the current budget was finalised and as such requires to be analysed to find out how far it complements the fiscal policy contained in the budget.
Apart from the significance of the MPS mentioned above, there is a second reason to consider it as special. It has been announced by Bangladesh Bank while releasing the MPS that unlike in the past there will be only one MPS for the fiscal year. The single monetary policy announced in the beginning of the fiscal year, having aggregate programme for monetary activities and providing for mid-course modifications, makes a second MPS unnecessary, it has been pointed out by Bangladesh Bank. This assertion has made the MPS released recently not only special but also more important than previous ones. The question that arises is whether the central bank's expertise and experience are adequate to undertake the painstaking exercise of modifying the various parameters of monetary policy in operation. The half-yearly MPS resorted to so long, made the central bank alert and ever ready to monitor developments in the economy that had bearing on MPS. What is the guarantee that a built-in mechanism and a procedure will be set in motion now that will go beyond the routine activities of BB? Besides, the release of MPS is the occasion when the BB becomes a public body coming out of its cloistered sanctum and making its policy making activities transparent. In its own subtle way, the MPS makes BB accountable as an important national economic institution that works with quasi-independence to help the economy grow year to year under conditions of price stability. Both the government and the private sector have to know where the central bank stands in respect of money supply, exchange rate, credit growth and smooth functioning of financial institutions including banks. The MPS, being the document ensuring transparency and accountability of central bank, cannot be treated as a routine exercise which runs the risk of becoming shorn of the half-yearly formulations.
Being the first MPS (and perhaps the only one) after the annual budget for 2019-2020 was finalised, it has to be evaluated in the backdrop of budgetary goals and requirements. With Tk 5231.90 billion amounting to 18.1 per cent of GDP, the budget for the current fiscal is the biggest in size so far. The total amount of the budget covers both revenue (recurrent) and development expenditures in the public sector. Use of annual budget as the pre-eminent annual driver of economic growth has assumed increasing importance as the government has embarked on a strategy to become a middle-income country by 2040, graduating from the current lower middle-income status. This has required the government to set targets for GDP growth rate rising above 8.0 per cent and reaching 10 per cent by 2023-2024 and maintaining the momentum of that growth till 2040. As part of that strategy, the annual budget of 2019-2020 set 8.2 per cent as the target for GDP growth rate for the current fiscal year. Projection of GDP growth rate at 8.2 per cent in the MPS announced by BB is in line with the goal for the same in the annual budget. Keeping its other role in mind, the BB has observed that the MPS for current fiscal is `cautiously accommodative', meaning that it would strive to contain inflationary pressure in an environment of higher expenditure. Accordingly, the average inflationary rate has been set at the annual rate of 5.50 per cent.
Being accommodative with the fiscal policy to attain growth at 8.2 per cent is only a declaration of intent of the MPS. In practice, BB will have to ensure that credit requirements of both the public and private sectors are met so that their contributions add up to the overall growth rate. While both the sectors rely on borrowing from banks to finance investments, albeit in differing degrees, the public sector represented by the government may also resort to borrowing money printed by BB. The central bank cannot do this without thinking about the impact of money supply on price levels. The current MPS is not explicit on how far it can `accommodate' government request by printing money. Perhaps it will cross the bridge when the time arises. If the government fails to mobilise enough resources through revenue income and sale of savings certificates, it may turn to BB for fund and the latter may find it possible only through printing money. So far this has not been necessary, but with a mammoth budget, the likelihood of this becoming necessary cannot be ruled out. The consequent pressure on price levels can only be addressed through squeeze in credit available for the private sector. The MPS just released will require drastic revision in the projection for credit supply that may not be to conducive to promoting growth at the desired rate.
The budget sets the annual growth rate of GDP and outlines the contribution of public sector while indicating the corresponding role of private sector. This is expressed in terms of investment rates of the two sectors as percentage of GDP. The present rates of investment in public and private sectors are 6.0 per cent and 23 per cent respectively. The budget of 2019-2020 envisages a public sector-late growth strategy for the near term and has targeted an increase in public sector investment by two per cent, taking the present rate to 8.0 per cent. Compared to this, the private sector investment will have a modest increase of 1.0 per cent bringing the rate to 27 per cent. The credit growth for the two sectors projected in the MPS has to be consistent with the increase in the rates of investment. Bangladesh Bank, in its present MPS, has set private sector credit growth target at 13.20 per cent and 14.8 per cent respectively for the first and second half of the current fiscal. The rates for the public sector credit growth have been fixed at 25.2 per cent and 28.3 per cent respectively. It has been explained that the lower private sector credit growth is due to the declining trend in such credit supply in recent months following liquidity crisis in banks. While the public sector credit growth appears consistent with investment rate projected for that sector, the credit growth of private sector does not conform to its designated role in contributing to GDP growth with an investment rate of 27 per cent. It is incongruous that while the private sector credit growth was 16.5 per cent in the previous fiscal with a lower investment rate at 26 per cent, it has now been projected at 13.20 and 14.8 percent, even though the sectoral investment is expected to increase by 1.0 per cent.
It has been mentioned in the present MPS that credit crunch in the private sector was due to `liquidity crisis' without being explicit about the main reason for this viz. ballooning non-performing loans (NPLs) in commercial banks, particularly state-owned ones. It would have been fit and proper if measures for tackling this endemic malaise were outlined in the MPS. Instead, NPLs have been mentioned in connection with `stickiness' of lending interest rates. As if to address this problem, the MPS has indicated that the central bank is set to shift its monetary policy regime into interest rate targeting from the present monetary aggregate-based policy. The policy of effecting better monetary transmission through this shift in focus could work in Bangladesh if commercial banks relied on borrowing from the central bank, as is the case in developed countries. But this role of central bank is at work only occasionally when commercial banks turn to it as lender of last resort. Normally, for credit money commercial banks in Bangladesh rely on financial intermediation between depositors and lenders and as such the policy rate of central bank does not transmit to influence their decisions on interests for lending. Under the circumstances, the enthusiasm of Bangladesh Bank for interest rate-based regime for promoting economic growth and controlling inflation appears irrelevant. Instead of waxing eloquent interest rate-targeting monetary policy, Bangladesh Bank should address the problem of NPLs head on. If the near paralysing effect of NPLs is not stopped, not only funds available with commercial banks to lend will dwindle, the cost of money for commercial banks will also go on increasing.
Bangladesh Bank should realise that it is not enough to maintain policy rate, repo rate and reverse repo rate unchanged along with maintaining the same limits for statutory liquidity ratio (SLR) and cash reserve ratio (CRR). Policy in these regards is not going to make more funds available for credit to meet the demands for private and public sectors. Stopping the hemorrhaging of commercial banks caused by NPLs has to be a priority policy concern. Adopting a soft policy for defaulting borrowers, as has been evident in a recent announcement of BB in the form of `Special policy on Loan Re-scheduling and One Time Exit' (May 2019), is not going to rid the commercial banks of their most enervating burden viz. NPLs. The silence on this in the MPS released by Bangladesh Bank for current fiscal is mind-boggling.