Time to mop up excess liquidity, give more direct cash to the poor: CPD

The latest monetary policy announced by the Bangladesh Bank is hardly conducive to even a K-shaped economic recovery as prospects of private sector expansion, job creation and growth in consumption look bleak, said the Centre for Policy Dialogue.

The central bank proclaimed its projection of a V-shaped recovery in January. A month later when there were signs of some sectors bouncing back while others failing to stand back up, the CPD said the economy was heading for a K-shaped recovery.

The 14% target of private sector credit growth from around 8% is not realistic, given the declining trend, the think tank said. And 7.2% economic growth target is realisable in "the most optimistic scenario of recovery from the pandemic".

If the private sector investment does not pick up, the monetary policy will not help the economy achieve the projected growth, CPD Executive Director Dr Fahmida Khatun said at a webinar on Tuesday.

"The varying speed of implementation of the various liquidity support packages has created an unequal turnaround as bigger firms have rebounded more strongly, owing to quick access to liquidity packages, while smaller firms have been largely left behind," the CPD said in its reaction to the monetary policy statement for FY2021-22.

The monetary policy will leave behind small and medium enterprises, blue-collar workers, and the under-pressure middle class, it said, adding that it seemed the stimulus packages were meant to drive a K-shaped economic recovery.

The research organisation also cast doubts over inflation calculations, given the changes in consumption behaviour and the rising cost of healthcare, house rent and transportation.

Non-food inflation does not accurately portray the behaviour of the consumers at present or the market prices prevailing at the moment, the CPD pointed out.

It questioned how the FY22 monetary policy relied on the consumer basket set in 2005 to calculate inflations, saying the figures did not reflect changes that happened in consumption patterns over the last 16 years.

In her presentation, Dr Fahmida said excess liquidity nearly doubled in the last one year leading to fall in call money rate and lending rate.

"Excess liquidity in the banking system may induce commercial banks to behave in ways which may jeopardise the stability of the financial system and make it difficult for the central bank to achieve its monetary policy goals," she said.

Banks may attempt to offset their losses from holding excess liquidity by giving out risky loans but that may lead to a higher volume of default loans, higher inflation and the creation of asset bubbles, Fahmida said.

Amid this situation, the Bangladesh Bank can increase the CRR (Cash Reserve Ratio) requirement to mop up excess liquidity, she suggested.

The CRR is the share of banks' total deposits which is mandatory to maintain with the central bank. The Bangladesh Bank reduced CRR from 5.5% to 4% during the pandemic.

The total excess liquidity in the banking sector stood at Tk2.31 lakh crore as of the end of June 2021, nearly doubled since July 2020.

Low private sector credit demand is the reason behind liquidity piling up, Fahmida said, adding that weak private sector credit growth in an economy was indicative of low investment in the sector.

Despite stellar economic growth in the pre-pandemic years, private sector credit growth targets were not met in FY14, FY15, FY17, and FY19. In response to low private sector credit growth, the central bank had to reduce its monetary policy targets in several years.

This is the backdrop to the central bank setting the credit growth target at 14.8% and only magic can help attain the target when the vaccination drive is just trying to gain speed, Fahmida said.

She also said the Bangladesh Bank should lift the 2% incentive given on remittance when sent through formal channels.

Echoing the view of Fahmida, Dr Khondaker Golam Moazzem, research director of the CPD, said credit growth ceiling could be revised down to 12%.

There is very little opportunity for fresh investments when survival is the main concern, he said, adding that the central bank should encourage banks for fresh lending.

On the suspected diversion of stimulus funds to the stock market, Dr Moazzem said Bangladesh Securities and Exchange Commission (BSEC) should find out if the rise of share prices was due to investment or injection of cheap money through illegal means. 

In the new monetary policy speech, the central bank governor addressed the risk of excess liquidity flowing to unproductive sectors.

Placing emphasis on the proper use of funds, he said appropriate prudential measures were required to prevent any sort of misappropriation.

Moazzem said remittance inflow played a vital role in increasing excess liquidity and that the Bangladesh Bank could now lift a 2% incentive from remittance being sent.

At the same time, he proposed removing the option of sending remittance up to $5000 without documentation.

Remittance inflows hit a record high with over 36% growth in the just-concluded fiscal year despite the pandemic. The figure jumped to $24.78 billion from $18.2 billion a year ago, according to the latest data released by the BB on Monday.

Professor Mustafizur Rahman, distinguished fellow of the CPD, said the banking sector was now in a vicious cycle of excess liquidity. In this case, the central bank can create bonds to invest remittance money instead of injecting liquidity to the market through purchasing dollars.

The CPD also expressed concerns over repayments of loans provided under stimulus packages.

"Stimulus packages provided through banks have created new avenues for corruption and malpractices," said the CPD in a presentation.

Once the moratorium on loan classification is lifted, the level of non-performing loans may rise suddenly, it said.

Liquidity support and fiscal stimulus packages have been rolled out without prior assessment of the ground realities, which is why the needs of the most vulnerable people in society may not be met, the think tank said.

In particular, providing loans to vulnerable individuals and small businesses may not yield the expected results. Liquidity support is inappropriate for small borrowers and new borrowers, as well as those who are the poorest and most vulnerable, the CPD said, therefore, direct cash support should be provided by the government to these groups to absorb the Covid shocks.