Next to annual budget, which embodies the fiscal policy of the government, Monetary Policy Statement (MPS) made half-yearly during the fiscal year constitutes the most important policy instrument used for macro-economic management in Bangladesh. Like the annual budget, the MPS affects the entire economy with varying impact on different sectors of the economy and the consumers depending on their use of money. Unlike fiscal policy formulated by the Ministry of Finance (MoF) and presented before the Jatiya Sangsad (JS), MPS is within the jurisdiction and under the authority of the central bank, Bangladesh Bank (BB) which apparently formulates it independently and is not required to place it before the JS for scrutiny and approval. Bangladesh Bank, unlike the Ministry of Finance (MoF), does not usually consult the stakeholders before preparing the draft MPS.
All these trappings of independence of BB are, however, more apparent than real. Though not directly guided and dictated by the MoF to prepare the MPS, the central bank feels obliged as if under an unwritten law to dovetail it with the main parameters of the annual budget. This is because the main goals and some of the means for achieving the objectives of fiscal policy depend on the monetary policy and the BB, however autonomous it has been declared to be under the law, cannot afford to work at cross purposes with the MoF regarding the objectives of fiscal policy as embodied in the annual budget. Biologically speaking, the MoF and the BB have a sort of symbiotic relationship with the dependence of MoF on BB being more paramount for the implementation of the fiscal policy. In order to stick to this historic role, BB has to take into account the main parameters of the annual budget in preparing of the MPS. These are the guidelines in addition to the assessment by BB of the prevailing state of the economy particularly with reference to money supply (M2), availability of credit, inflationary level and its trend, balance of payments situation impacting on exchange rate, functioning of financial institutions and the capital market.
The main parameters of the budget for the year 2018-2019, as in all previous years, are the target of GDP (Gross Domestic Product) growth rate, the mode of financing the development and non-development expenditures of the government and the target for inflationary rise during the fiscal year. These declarations of intent, so to say, of the government articulated through the budget provide the guidelines to BB for formulating the MPS. A comparison between these major parameters in the budget and the provisions in the MPS will show how far and in what manner fiscal policy of the government has been accommodated in the MPS. The grandiloquent declaration of the budget is the setting of the target rate for GDP growth which elevates budget from an exercise of merely matching income with expenditures, as ordinary households usually do.
Budget in a developing country like Bangladesh has a futuristic vision of accelerating the national income incrementally, if not exponentially, rather than remaining content with a 'steady state' equilibrium. This becomes an overarching goal when the private sector is not robust enough to catapult the economy to ever higher levels year to year through its involvement in the economy as saver, investor, producer and dispenser of goods and services, leaving a few of public goods and services for the government to take care because of their high cost, non-profitability and externalities. Being a developing country on the cusp of graduating from LDC (least developed country) status and embarking on the growth path to attain middle-income status, Bangladesh government has set great store by the acceleration of GDP growth with public and private sector participation. To make concrete this overriding goal the budget each year sets the target for GDP growth which is the jewel in the crown of fiscal policy and enjoys pride of place. Naturally, with a degree of bravado, this target is set at a rate that is inevitably higher than the one fixed in the previous year. But it is not conjured out of thin air and has relation to a benchmark figure i.e. the actual growth rate of GDP posted by the economy during the previous fiscal. In the budget for 2018-2019 the growth rate of GDP has been fixed at 7.80 per cent on the ground that GDP growth achieved in 2017-2018 was 7.65 per cent according to the Bangladesh Bureau of Statistics (BBS). It did not matter to the government that multi-lateral institutions like the International Monetary Fund (IMF) estimated the GDP growth rate achieved during the last fiscal at 7.0 per cent. In any case, the divergence between the BBS figure and those of institutions like IMF were not large.
The implication of setting the GDP growth rate at 7.8 per cent is that at the present level of average capital-output ratio in Bangladesh the overall investment has to be around 33.54 per cent of GDP. The annual budget stipulated that out of this total 25.25 per cent has to be in the private sector and the remainder has to be made by the public sector i.e. the government. Since savings in both the sectors have historically lagged behind the investment requirement both the sectors have to resort to borrowing. The budget laid down the means of financing public sector deficit through borrowing mainly from the central bank which is a welcome reprieve for commercial banks which have to bear the brunt of providing credit to the private sector. During the current fiscal the government will be less dependent on borrowing from private banks also because of the mobilisation of funds through savings certificates. Whatever slack remains after this mode of financing the deficit, the government will turn to BB and to external sources.
These estimates about the investment-GDP ratio of the two sectors have important implications for the MPS insofar as it sets the guidelines for credit supply to the private sector by commercial banks. The MPS for July-December has set the target of increase in credit supply by 16.8 per cent for private sector and 8.6 per cent for the public sector which amount to an overall increase of 15.9 per cent in credit supply compared to 14.6 per cent during the last fiscal. Modest as this increase is, the commercial banks, particularly the state-owned ones, are hard pressed for liquidity due to burgeoning non-performing loans (NPLs). So, to bail them out BB has announced in the MPS a reduction of 1.0 per cent in the cash reserve ratio (CRR) to bring it down to 5.5 per cent from 6.5 per cent. The loan-deposit ratio has also been changed from 85 to 87.5 per cent. Simultaneously, the repo rate, the policy rate at which commercial banks borrow from the central bank, has been brought down to 6.0 per cent from the prevailing 6.75 per cent. To help augment their loanable fund, government institutions have been directed to increase the amount of deposits to be kept in private commercial banks. As a further sweetener, corporate tax on banks has been slashed by 1.0 per cent. With all these incentives extended to commercial banks the BB has required them to bring down the interest on loan to single digit from July this year. For the state-owned banks, smarting under the heavy load of NPL, the government has also decided to recapitalise with hefty amount.
From all these measures at augmenting the funds of commercial banks it is evident that the BB has left no stone unturned in respect of the policy instruments at its disposal to supplement the government measures. But like the proverbial slip between the cup and the lip, the expectation of BB, as manifest in the MPS, about enhanced private sector lending for investment may not be realised. Firstly, not many serious borrowers may come forward for investment in the real economy, given the uncertainty in the near term. Secondly, many of the borrowers may be inclined to import consumer goods which will not contribute to GDP growth and can only add to inflationary pressure. Thirdly, cost of management by the commercial banks may reduce the availability of fund for supply of credit during end of the fiscal. Fourthly, the relaxation of ceiling on investment in the capital market by commercial banks may find many of these turn to this market post-haste. What is more worrying, the incidence of over-invoicing and under-invoicing may accelerate with the availability of more funds. Finally, the culture of non-performing loans may continue unabated because of moral hazard made possible due to the generous package of incentives announced in the MPS.
The greatest weakness of commercial banks in Bangladesh is not so much the paucity of fund as it is the lackadaisical management that often verges on venality. The MPS has not outlined any roadmap for systematic measures to straighten the financial sector in spite of repeated alarm bells rung by experts. Very little attention seems to have been given to this crucial matter in the MPS.
The inflationary target of 5.0 per cent increase set in the budget seems to have been endorsed in the MPS. But with the easy money policy through measures like relaxation of cash-reserve ratio (CRR), loan-deposit ratio, lower policy rate for lending etc. the broad money supply (M2) is likely to increase fuelling the inflationary pressure. The worsening of current account through excess of import over export has already taken an alarming turn. According to newspaper reports, for the first time in Bangladesh's 47-year history, imports crossed the US$50 billion mark in a single fiscal year fuelling fears of inflation and further depreciation of the local currency against the dollar. In fiscal 2017-2018, letters of credit settlement stood at $51.53 billion, up 16.40 per cent year-on-year, on the back of rising demand for food grains and petroleum products. Imports for mega projects like Rooppur Nuclear Power Project have accounted for the second place in the overall list of import. Unlike industrial raw materials, machinery and parts, these imports are likely to add to upward increase in inflation. With 25.5 per cent increase in import during last fiscal, inflation rose by 5.8 per cent. The prospect of similar increase, if not more, in import during current fiscal bodes ill for keeping the inflationary rate at the rate of 5.5 per cent, as set in the budget and the MPS.
The fluctuating trend in remittance by wage-earners has further aggravated the crisis of dwindling foreign exchange reserve. The Foreign Direct Investment (FDI) which could as buffer has unfortunately shown a downward slide, with 5 per cent decline in 2017-2018 compared to the previous year. Outward capital transfer, for overseas investment, on the other hand, rising three times during last fiscal, as reported by World Investment, has further dented the foreign exchange reserve. Private sector borrowing from foreign capital market, if allowed at the present rate and above 5 per cent interest, can only aggravate the situation.
The MPS has rightly kept the official exchange rate unchanged and has resorted to generous sale of US dollar to commercial banks to meet the increasing demand. In spite of this the inter-bank lending rate has pushed Taka to 83 per dollar, an increase of 5 from previous year. If unnecessary imports are not controlled and flight of capital is not stopped the foreign exchange will be at serious risk.
It is evident that the MPS announced by the BB is supportive of the pro-growth policy of the government as embodied in the budget. It continues to play a complementary role to the fiscal policy. In the process it seems to have abandoned the checks and balances on the financial sector and potential fiscal profligacy. Not much time is required to see how the MPS pans out in its impact on various sectors and stakeholders. Even the near term will be sufficient to find out whether the MPS will mark a turn-around or accentuation of a monetary crisis in slow motion.