Monetary policy alone can’t help economy rebound

The extent to which the various targets set in the monetary policy announced for FY22 will be achieved depends on whether the economy will remain buoyant or not.

Where will the investment come from if the current disruptions to economic activities continue?

A large part of the demand for loans in the private sector comes from investment or term loans. And the demand for some loans comes from imports-exports or the trade sector.

It has to be considered that the biggest problem of our economy is on the supply side. It is not possible to play a major role in solving this problem by expanding or shrinking monetary policy. The supply of money to the economy is determined by monetary policy.

But, if there is a bottleneck on the supply side of the economy, if factories do not operate properly and if economic activities remain halted, investment cannot be increased even by announcing an expansionary monetary policy.

Last year, Bangladesh reduced CRR and policy rates, and introduced new refinancing schemes. The new money created as a result of all these initiatives has been added to the liquidity.

Excess liquidity in the banking sector has doubled compared to the previous year. This money did not actually enter the economy. This money is in the banking sector i.e. in the account of Bangladesh Bank and in the liquid treasury bill.

In this situation, the new monetary policy has kept the targets expansionary but no new expansionary measures have been taken. And this is logical in the present reality.

Now there will be no benefit by further reducing the CRR or policy rate. Doing so will only increase the surplus liquidity. Such liquidity will create new risks in the economy.

Increased liquidity will create new risks in unproductive sectors, such as the stock market or land purchase, creating instability in the financial sector.

Such problems have arisen in the Western economies. In all those countries, the interest rate and policy rate are close to zero.

Even though the interest rate in our country has not come down to zero, the call money rate has come down below two.

Keeping the economy afloat is now more challenging than increasing money circulation. If the supply side problem is not resolved, there will be a big deviation in achieving the loan disbursement target like last year. The situation will be the same in the future as well.

To keep the economy active, major initiatives need to be taken under monetary policy as well as revenue policy. The economy would have been a little stronger, had adequate support reached our major employment sectors on time last year.

The Bangladesh Bank's monetary policy statement says efforts will be made to make sure stimulus packages are distributed properly. But no new stimulus has been announced.

Already, 85% of the running stimulus packages have been implemented. This means the target is all about implementing the remaining 15%.

One initiative that appears new in the monetary policy is that credit guarantee schemes will be operationalised in several sectors, including SMEs.

The scheme was initiated earlier but could not be implemented due to various complexities. However, nothing has been mentioned about how this measure will be launched now.

The new monetary policy also speaks about loans for teachers and students to purchase digital devices including tabs. The matter is very important but it is not said exactly how it will be done.

In overall judgement, there was no reason not to opt for expansionary targets within the current limitation.

Excess liquidity has already created some risks. However, this liquidity will serve as a great opportunity, if an investment-friendly environment is created. Entrepreneurs will be able to get loans easily without any new policy, if the domestic economy revolves around them.

Financial assistance is needed to sustain the purchasing power of people in crisis at the moment. On the one hand, people will be able to survive in the lockdown. On the other hand, domestic demand will also increase. In this situation, expansionary measures are needed also in the fiscal policy by coordinating with monetary policy.

Zahid Hussain, former lead economist, World Bank Dhaka office, spoke to Jahidul Islam of TBS over the phone.