New monetary policy: Promising changes, but there're areas for improvement

We welcome the new monetary policy statement released by the Bangladesh Bank, as it signifies a shift in policy on several crucial fronts that holds promise for the future. However, while we acknowledge the positive changes, there are certain aspects that warrant further examination.

Firstly, the monetary policy statement should have acknowledged that the interest rate cap implemented since April 2020 has failed to yield the anticipated benefits, specifically in terms of stimulating private sector investment. Therefore, it is essential to engage in self-critique and evaluate the effectiveness of such measures.

Secondly, the policy interest rate corridor being talked about has not yet confirmed whether interest rates will actually be market-based. It is being said that the reference interest rate, calculated as an average of 182 days of treasury bills, will be augmented by a 3% margin to determine the lending rate. This margin will be 5% for non-bank financial institutions, while an additional 1% interest might be charged from CSMEs. There is enough room to question whether the central bank has intentionally suppressed interest rates on treasury bills through low-interest auctions, effectively limiting the involvement of commercial banks. Consequently, the prevailing treasury bill rates are less likely to reflect market-based influences. Therefore, it is crucial to see whether the central bank changes its stance on treasury bill auctions under the new monetary policy statement.

Thirdly, the introduction of market-based exchange rates and the unification of various exchange rate systems is a positive development. We are keen to see what measures the central bank takes up to implement this strategy successfully. However, challenges may arise when reconciling the unified rate with the additional 2.5% benefit granted for remittances.

Fourthly, it is evident that remittance inflows are experiencing a downward trend or growth rates remain stagnant. While the monetary policy statement anticipates a substantial increase in remittance flows for the upcoming financial year, doubts linger as to the efficacy of the 2.5% additional incentive alone in significantly boosting remittances. The prevalence of hundi, an informal money transfer system, heavily influences the decline in remittance flows. This issue is further exacerbated by the pervasive problem of money laundering originating from the country. Consequently, without concrete measures to combat money laundering, capital flight, and illicit financial activities, the likelihood of a substantial improvement in remittance inflows remains slim.

Fifthly, transparency and confidence in the banking sector could be reinforced by elucidating specific steps aimed at reducing non-performing loans. But, the monetary policy statement does not provide clarity regarding these measures, leaving room for ambiguity.

Dr Selim Raihan is the executive director of South Asian Network on Economic Modelling (Sanem)