Fiscal policy needs to be aligned with monetary stance

The fiscal policy of the government needs to be aligned with the monetary policy to meet the challenges of controlling inflation, financing industrialisation and reducing the pressure on foreign exchange reserves and exchange rates.

The government is putting these two policies into conflict by preparing to implement a large budget dependent on borrowing, while reducing the interest rate on national savings certificates in the name of reducing expenses and imposing caps on the interest rate of bank loans.

It is obvious that the main focus of the upcoming budget should be on controlling inflation, but monetary measures alone like raising interest rates will not work sufficiently to achieve the target as the origin of the ongoing inflation is from the supply side, not demand.

The Bangladesh Bank should increase the supply of credit with some control, targeting the productive sector. Loan approval in the hospitality and trading sector should be tightened.

It is the reality that our banking system historically denies providing loans for small industries. Special attention should be paid to increasing the supply of money to cottage, micro, small and medium enterprises (CMSMEs).

Such companies produce daily essential commodities from food to other products. Import substitute products of CMSMEs would help to reduce pressure on the forex reserve and exchange rate also.

Adequate flow of money to labour-intensive small enterprises could help speed up the economy by creating domestic demand through boosting employment and income of people.

There is still a cap on interest rates in the banking sector, which should be removed completely and the interest rate should be left to the market.

Even if loans are disbursed at 9% interest rate, the real interest rate comes down to around 0% considering the current rate of inflation. There is no justification for giving loans so cheaply to big and solvent businesses.

By lifting the cap, the interest rate should be determined based on the cost of funds, with the addition of operation cost and some profit of the banks.

But it is not right to allow the interest rate to go up to 18-20%. In my opinion, the spread between the interest of a deposit and a loan should be 3-5 percentage points.

Instead of a cap on deposits and interest rates, monitoring and supervision should be increased to implement spread rates. As a result, credit demand will be somewhat controlled and supply will also increase slightly.

The government borrowing from the banking system is increasing recently. The government should borrow as little as possible from banks for financial stability. But the problem is, the Bangladesh Bank is not able to say it directly.

There is already some liquidity crunch in the banking sector. People are also keeping fewer deposits. In this situation, the increase in public debt from banks will reduce the flow of credit to the private sector.

The deficit should be kept in control by reducing unnecessary allocations and domestic resource mobilisation should be enhanced to reduce the deficit. People should be encouraged to save by providing a justified interest rate on savings certificates.

Non-performing loans are increasing in the banking system, which is supposed to be controlled through monetary policy. However, the government has to take a decision on increasing the supervision in the banking sector to control it.

Several banks, especially government-owned banks, are now suffering from funding crunch due to unregulated lending. Loss-making banks should not be recapitalised by budgetary allocation. Why will the people's money be given to a bank that failed in business? The lending operations of such banks should be limited to the extent that they mobilise deposits.