Govt wants to raise money supply by over 15% even amid soaring inflation

Infographic: TBS

The government is going to increase the money supply in the next fiscal year to 15.4% – highest in the last seven years, which appears to throw a spanner in its own efforts to tame rising inflation.

Economists say such an uncalculated target of broad money growth will further stoke inflation in Bangladesh.

They suggest reducing money supply by keeping aggregate demand in check.

"Broad money" – or M2 – is a calculation of the money supply that includes all components of "narrow money", such as cash and checking deposits, and also "near money" such as savings deposits, money market securities, and other time-related deposits.

M2 is a broader measure of money supply and is being closely watched as an indicator of money supply and future inflation, and as a target of central bank monetary policy.

If broad money exceeds nominal GDP growth, commodity prices will take another steep jump, leaving limited-income consumers and the poor to bear the brunt of the increasing squeeze on the cost of living, they fear.

At its coordination council meeting, the finance ministry said the country's economic growth target has been projected at 7.5% and inflation at 5.6%. Nominal GDP will stand at 13.1%.   

As per such calculation, the estimated broad money growth target for FY23 is 2.3% higher than nominal GDP, economists think.

An analysis of the finance ministry's proposal shows that the seven-year high money supply target has been set to take domestic credit flow to 16%.

In the revised budget of FY22, to meet the government's extra demand for bank borrowing, domestic credit growth has increased to 17.8% from 14% set initially in the main budget.

Broad money saw a 13.6% year-on-year growth in FY21. Till February of the current fiscal year, money supply grew to 9.46% against the yearly target of 13.8%. In the revised budget, the target has been raised to 15%. 

Economist Ahsan H Mansur told The Business Standard that money supply needs to be curbed to cope with inflationary pressure as a free flow of money will lead to a rise in prices of goods and services following a surge in demand. Moreover, if demand goes up, so will imports, putting forex reserves under stress.

There is no alternative to increasing money supply to meet capital demand for boosting economic growth. But keeping people's purchasing power intact by reining in commodity price hikes is now more important than growth, he noted.

Monzur Hossain, director of research at Bangladesh Institute of Development Studies (BIDS), said controlling inflation at any cost should be a top priority in the next budget. The decision to raise money supply growth conflicts with this priority.

If money supply falls globally, so does demand, he said, adding that to reduce credit flow to the private sector, the Bangladesh Bank has already raised the repo rate, which might further go up in the future. 

In this situation, there is no rationale for supplying extra money to the economy, Monzur Hossain added.

In the budget for FY23, private sector credit growth has been projected at 15%. The growth target has been set at 14% in the last few years, but the gain remains at 8% on average. 

However, in April this year, private sector credit grew to 12.8%, the highest in the last three years, according to the Bangladesh Bank.

Dr Salehuddin Ahmed, former Governor of Bangladesh Bank, said new money supply will not pose much risk if private sector credit flow is kept in the right direction by identifying growing sectors for investment.

Stating that there is both demand-pull and cost-push inflation in the country's economy, the economist said, "If we can increase investment in the potential private sectors, production will increase and costs of production will fall. 

As a result, prices of goods will drop, leading to a fall in inflation and a rise in people's income, he pointed out.

However, money supply alone cannot have much impact on increasing investment in Bangladesh because there are various obstacles at every stage of running a business from the beginning. 

If problems such as bribery, corruption and extortion are solved, the flow of money will ensure an increase in investment. Otherwise, new money supply will only give a rise to inflation, he continued.

At the coordination council meeting, Finance Division Secretary Abdur Rouf Talukder said the amount of broad money growth is very low in Bangladesh. Although it has been rising for several years, it is still below 70% of GDP. 

In neighbouring India, broad money is close to 90% of its GDP. It is more in other countries, including Thailand and Vietnam, he noted, adding that increasing money supply will help increase government funding for budget implementation.