Decoding Monetary Policy Statement 2023: Was there any better alternative?

The International Monetary Fund (IMF) has released the first installment of its $4.7 billion loan to Bangladesh. But as we have known for the past six months or so, the IMF sought certain reforms in return. Assuming that Bangladesh Bank authorities were aware of the IMF requirements, it made sense that they would be reflected in the Monetary Policy Statement (MPS)-2023, released mid-January this year. 

However, while the IMF reform requirements appear to be quite ambitious, Bangladesh Bank aims to pursue a cautiously accommodative policy stance to contain inflationary and exchange rate pressures, support desired economic growth, and ensure the necessary flow of funds to the economy's productive and employment-generating activities. In such a critical time, considering both IMF's guidance and fiscal policy's targets, BB's MPS demands need to be thoroughly scrutinized. 

On a positive note, MPS-23 is evidence that BB has done an excellent job in developing policies and steering the economy. For example, it increased the policy rate by 25 basis points: the repo rate from 5.75 to 6, and the reverse repo rate from 4% to 4.25%. 

As the repo rate is the interest rate charged by the central bank when it loans money to commercial banks. Raising the repo rate when inflation is strong, encourages savings and discourages spending, which ultimately, curves the inflation down.

Furthermore, BB's move to reduce the lending cap for customers and let it vary up to 3 percentage points, eliminate the deposit floor rate, and give import-subsidy loans, are no less than noteworthy steps. 

To ease the pressure on foreign reserve and improve remittance flow, the MPS has allowed wage earners to transfer foreign exchange of any amount without any document, waived local bank money transfer costs for expatriate remitters and removed the requirement for prior authorisation to make any drawing arrangement with any foreign money exchange.

Overall, monetary policies have become more pragmatic over time. There is, however, still room for development. According to the MPS, GDP growth and inflation would be 6.50% and 7.5% in FY23 while the IMF's current World Economic Outlook predicts a 6% growth and 9.1% inflation in Bangladesh. Thus, in light of the current global economic trend and the projection for 2023, the MPS appears to be optimistic.

Putting optimism aside, the MPS has various areas of concern. 

The first concern in MPS resides in its very typology. BB has defined its MPS as a "cautiously accommodating policy," however, what this truly means —expansionary or contractionary — is left to interpretation. Though not all expansionary policies worked during the crisis, historically, whenever an economy recovered from a crisis, an expansionary monetary policy was in place. Therefore, instead of fiddling with semantics, MPS should have boldly announced itself to be an expansionary policy.

The second issue with the MPS is the lack of a concrete goal. This policy appears to address every macroeconomic variable. Although it is true that the central bank is tasked with stabilising the economy as a whole, one policy cannot prioritise all macroeconomic variables at the same time. Because the variables are interconnected, it would have been smarter for the bank to create a clear aim concerning one or two variables and proceed forward until the situation was resolved.

However, the MPS has explicitly addressed global inflation caused by the Ukraine crisis, China's zero-Covid policy, energy constraints in Europe, protectionism in the United States, and the ballooning debt burden of developing countries. However, BB did not distinguish between structured and unstructured inflation. 

Inflation caused by foreign exchange pressure is a structural problem that must be addressed. MPS has done an outstanding job in addressing this issue. However, no action was taken to combat corruption. The term "corruption" in this context refers to Non-Performing Loans (NPL). 

NPL is a bank debt that is expected to be repaid partially or late by the borrower. If the money supply is 100 and the NPL is 30, only 70 of the money supplies will be turned into production, and the 30 NPL will continue to cause inflation. Thus, maintaining production by bringing NPL near to zero is the best strategy to combat inflation. Increasing local production will naturally bring inflation under control. Additionally, when productivity rises, the need to import goods decreases, relieving strain on foreign exchange reserves.

More importantly, given the IMF's recently released ambitious reform requirements which heavily focused on reducing non-performing loans (below 10% for state-owned banks and below 5% for private banks), NPLs should have been addressed in the MPS. 

Even though MPS-23 has increased funding for supporting import replacements, until the NPL is reduced, such initiatives will barely have the desired effect. BB could have resolved this problem by favouring rural loans over urban ones. 

For commercial banks, it is more practical to lend Tk100 to a borrower rather than Tk10 to 10 borrowers as 10 loans require more work and money to keep up with than one loan. Finding a borrower with the ability to take out a larger loan is therefore quite logical and these borrowers are mostly from cities. As a result, money is concentrated in urban areas where tycoons are domiciled, making it difficult for rural residents to get the needed money. 

One might wonder, "What's wrong if urban folks take loans?" There is nothing wrong with lending money to city dwellers. The arbitrariness of the process' inherent arbitration is the problem.

For example, import-subsidy loans have a low-interest rate. Tycoons obtain the loan in the name of stimulating production, and then lend the funds to marginalised individuals at a higher rate. For example, if BB offers a loan at 1% interest, a farmer can directly lend from the bank and pay 1% interest. The loan, however, is given to a tycoon, who lends the money to a farmer at a rate of 2%. The 1% spread of the tycoon comes at the expense of farmer marginalisation. This is how the arbitration will become a greater obstacle to MPS' effectiveness.

To address these loopholes, some recommendations can be made to improve MPS' effectiveness. For example, rather than focusing on the supply side, the Bangladesh Bank should prioritise demand while developing policy. A single general MPS is no longer sufficient for the economy. Given the rate of development, a sectoral monetary policy with distinct goals and objectives is essential. 

Identification of debtors is required in addition to identifying sectors. A publicly accessible registry of defaulters should exist so that banks can refuse to make additional loans to them. 

In nutshell, monetary policy should not only be well-coordinated with fiscal policy, but it should also reach the country's niche segment.

Dr Ashraful Alam Chowdhury is an Independent Researcher and Columnist. He completed his MSS in economics from Dhaka University. Then, he pursued post-graduation and Ph.D. in economics from Emory University, Georgia, USA. He has experience of working in the USA, Bangladesh, Myanmar and India.