New monetary policy to facilitate liquidity supply, minimise gap in dollar rates

The Bangladesh Bank is formulating the monetary policy for the second half of FY23 with an emphasis on liquidity supply to the manufacturing and agricultural sectors and reducing the gap in dollar rates for export proceeds and remittance so that the country can tame inflation and have a stable foreign exchange market.

To this end, the central bank held its second meeting on the half-yearly monetary policy, scheduled to be announced on 15 January, at its headquarters in the capital yesterday and discussed the issues, several meeting participants told The Business Standard. 

Some participants also opined in favour of raising repo rate and bank lending rates at the meeting, attended by Bangladesh Bank Governor Abdur Rouf Talukder, its deputy governors and executive directors. 

They said a lack of market monitoring is blamed for increased inflation but it is not true. The current inflation comes due mainly to price hikes on international markets and the global supply chain disruption amid the Russia-Ukraine war. 

"The government on 20 December revised the target of inflation rate up to 7.5% from 5.6% and the GDP growth down to 6.5% from 7.5% for FY23. We will also work accordingly," a meeting participant said, citing Governor Abdur Rouf Talukder.

The market now has a crisis of liquidity, hence, the new policy will facilitate liquidity supply to increase production and jobs, the governor said and hoped that the good yield of aman and boro paddies this season will also ease inflation. 

According to the latest central bank data, the growth in bank deposits was much lower than that of bank loans in recent months, which led to a severe liquidity crisis in banks. For example, deposit growth was 7.35% against the 14% growth in lending in October 2022. The excess liquidity in the banking sector fell sharply by Tk33,000 crore in just three months to Tk1.70 lakh crore in September that year.

Meanwhile, a central bank executive director told TBS that the new monetary policy will prioritise stabilising the foreign exchange market. "Currently, dollar rates are Tk101 for export proceeds, Tk107 for remittance and Tk99 for banks. The governor assured of minimising the gaps to Tk2 only in phases as our remittance influx and export earnings have been on the rise and irregularities in invoicing have been on the decline."

He hoped that the greenback market will come to a stable position by next May. 

According to the weekly selected economic indicators update of the Bangladesh Bank, the country's foreign exchange reserves was $45.80 billion in 2021 which dropped to $33.83 billion at the end of 2022. 

Meeting participants also said the governor instructed all to increase vigilance to reduce irregularities in lending and take effective steps to decrease defaulted loans. "We have formed inspection committees over loan irregularities in Islamic banks and appointed observers in some banks. Some other necessary steps have also been taken," the governor said. 

"I have been appointed to keep the economy okay. I will perform accordingly. The matter of concern is that sometimes I face pressure from different groups. I am determined that I will not make any compromise," he added. 

Earlier on 5 December, the central bank held a meeting with economists over formulating the new monetary policy. It will arrange the next and last meeting with former governors and prominent economists at a hotel in the capital on 7 January. The Bangladesh Bank used to announce half-yearly monetary policies before the pandemic. In FY20 and FY21, it announced the policy for a year. 

This year the central bank has returned to its normal way. The recently visited delegation of the International Monetary Fund also suggested the announcement of the monetary policy twice a year.