Key takeaways from the Monetary Policy Statement 2023

Bangladesh Bank (BB) has announced its half-yearly Monetary Policy Statement (MPS) for the January-June period of the fiscal year 2022-23, which was a regular practice during the January 2006-June 2019. It may improve governance and monetary management system, one of the primary requirements at this stage of Bangladesh Economy.

MPS also planned to go for a concise evaluation of the last monetary policy stance and essential background information and rationale before taking monetary and credit programmes for H2FY23, which can make the announced MPS more trustworthy and effective. 

Thus, MPS has given an overview of H1FY23 and the measures taken as a learning for present MPS. It is seen that MPS of H1FY23 was to contain inflation associated with expansionary fiscal and monetary policy against that H2FY23 has pursued for a cautiously accommodative policy to contain inflation and exchange rate pressure, ensuring necessary flow of funds for productive and employment generating activities. 

MPS has given a summary of the global and local context of MPS for H2FY23, and thus global growth, inflation, interest rate and trade environment and domestic growth and inflation outlook. Liquidity situation, money and credit markets, overview of external sectors, exchange rates and foreign exchange reserves and capital market development prospects. 

In regard to the near term macroeconomic challenges, it identified the length of Russo-Ukraine War, the spree of interest rate hike by the Fed and re-emergence of Covid-19 situation in bilateral partner countries specially China. It means that success of MPS depends mostly on external issues while preparation of internal issues are also similarly important to fight against adverse conditions mostly maintaining discipline in the money market. 

It expressed concerns on high NPL ratio and the issue of good governance in banks and NBFIs for the financial stability of the economy and to overcome the challenges of announced  measures, such as raising policy interest rate and quantitative easing through the selling of huge amount of Dollars in the market, continuing the repo and liquidity support for banks and NBFIs, extending refinancing facilities, discouraging the imports of luxury items, improve export receipts and inward remittances. In view of this MPS for H2FY23 has rightly placed a cautiously accommodative policy.

One of the major objectives of MPS is to increase employment through creating investment. Private sector investment was not healthy in 2021-22 FY. As per Bangladesh Economic Review, public investment was 24.6% of GDP while private sector investment was only 7.62% of GDP. 

MPS increased the policy rates which had been much discussed. Meanwhile, the repo rate rose to 6.00% from 5.75%, and the reverse repo by 4.25% from 4.00% as a part of the current policy stance. Lending rate cap for consumers credit has been relaxed to vary up to 3% points, along with the complete removal deposit floor rate. 

There is no cap on credit card loans, removal of the remaining lending rate cap will be considered later.  A market-based flexible unified exchange rate regime (within 2.00% variation) by the end of this fiscal, as mentioned by the MPS. BB has followed Keynesian economic tools to control inflation such as increasing policy rate (quantitative tightening), this stance may attract the scattered cash to be deposited in the banking system. 

The latest MPS stated that private sector credit increased by 12.76% (year-on-year) in December 2022 against an increase of 10.68% in the same period of last year. The medium and large scale manufacturing output registered 7.42% growth during July-Sept 2022 compared to 9.13% during the corresponding period of the last year which is worrisome as MPS wants to see improved investment and employment growth as one of the main objectives of the policy. 

MPS has given a comparison of other countries credit growth such as in India (13%), Vietnam (11.6%), Indonesia (10.5%), Pakistan (9.6%) and believes that private sector credit growth has been strong in H1FY23 due to the reversion of momentum in economic activities after overcoming the impact of corona. In near future it will again turn to positive when the external impact will  turn better. 

One of the major objectives of MPS is to increase employment through creating investment. Private sector investment was not healthy in 2021-22 FY. As per Bangladesh Economic Review, public investment was 24.6% of GDP while private sector investment was only 7.62% of GDP. The interest rate cap along with 14% private sector credit growth is not aligned with the projected economic growth. This could be at least 16% to contain present investment induced employment growth.

Public sector credit growth was estimated at 36% at the end of this half which is now 26.6%, it would end up with consumption tax to pay the interest against credit taken from the banking system, this interest payment is part of yearly budgetary expenses of the government. It may induce a certain percentage point of inflation in the next fiscal year. Call money rate and interbank borrowing rate has recently spiked as high as 10%, evidencing a severe liquidity crisis in the banking sector.

Consumption loan increased to 12%, meaning tightening consumers loan, which consists about 8.44% of the total loan portfolio of banks (July–September, 2022). The consumption loan areas are: credit card loan, auto loan, house loan, personal loan (for buying household goods). It will contain inflation on one hand,  however it may impact domestic sales.  

Some people feel this is an open testimony of favouritism to the super rich people. Consumption loan by NBFI also contributes a lot starting from flat purchase, educational expenses, treatment expenses etc. However, during the same period consumer finance from Banks is much higher at about Tk1.12 trillion (30-09-2022), from NBFI it is Tk106.4 billion during the same period. 

Inflation analysis, which considers only two items (food and rice), does not give the price level fluctuation of other necessary  non-food items (drugs, crude oil, clothing).  Import dependent  inflation can be included in MPS that may help to diagnose with monetary tools like Nominal Effective Exchange Rate (NEER) adjustment.

Net-foreign asset (trade credit) of the banking system adjustment estimation is quite lofty.  Slow  inward remittance, net FDI flow, decreasing foreign exchange situation, increased trade credit causing net foreign asset growth is -22.6% (December 2022), the targeted growth for this half is -2.1%(June 2023) will be difficult to achieve.  

Furthermore, the BoP situation of July-October 2022-23 published by BB is -$4.87 billion which is much higher (-$1.339 billion) than the previous fiscal year. FDI and net inflow of remittance need to be increased. Exchange rate management, transparency of maintenance of foreign exchange,  traceability and inventory management information could give more importance. 

Non-performing loans (NPLs) in the country's banking sector increased to Tk1.34 trillion which was Tk1.03 trillion in 2021, this situation occurred due to poor governance of the banking system. MPS endorsed it as one of the concerns for the financial stability of the economy, but measures need to be mentioned separately. 

Calibration of monetary policy tools does not have an effect on the governance factor of the banking sector. In the Banking Regulation Act, there could be a measure in that respect, otherwise only expressing concerns will not improve the situation.

Differences of weighted average of nominal interest rates (lending and deposit rates) is 7.18% and 4.22% meaning spread is around 3%, which is almost constant in  the MPS H2FY23. Cost of funds increases because of a number of issues, such as other charges, classified loan and NPL etc, that is why cost of capital is getting high and contributes to inflation adversely. At the cost of the rich, the poor are getting the pain. MPS has not given any direction in that respect.

Higher Yield curve for second half than first half of 2022 FY shows investment in government securities (Treasury Bond- no written limit, however, cash has been taken away from Banks) is safe, but the policy tightening like maximum cap of investment (e.g., savings certificates) will make the thing difficult, investment volume  in this instrument is lower (Tk1.08 trillion) than the previous year (Tk1.12 trillion).  Policy tightening and strategic tightening would need to be balanced as per policy statement.

Under-invoicing and over-invoicing is a serious issue,  the government should seek information from Banks and reprove importers who are largely responsible for laundering $8 billion annually from Bangladesh as per WBG data.  Bangladesh Bank  guideline of Trade Based Money laundering (TBML), has given a number of cases, it is seen that  there are different techniques and types involved for  these under-invoicing. 

Transacting parties conduct business out of a address or provide only a registered agent's address, too many intermediaries making transactions overly complex, not only that transaction structure appears unnecessarily complex or unusual and designed to obscure the nature of transactions, customer engages in transactions that are inconsistent with the customer's  business strategy profile or it happens that the transactions are not in line with the customers line of business. 

The trade finance transactions contain a number of non-standard terminology and/or non-standard clauses which are beyond inco- terms practised globally. Also transactions face a number of amendments or cancellation; even some transactions appear to involve the use of front or shell companies for the purpose of hiding the true partners. 

Invoice showing significant amount of misc charges e.g., handling charges, there are indications of double invoicing/multiple invoicing, changing the place of payment, i.e.,  payment is to be made to the beneficiary's account held in another country other than beneficiary's stated location etc. As these are already identified, ADs need to work in addressing these problems. 

MPS has got a number of  good initiatives, at this stage contractionary monetary policy could be the best recipe, however in some cases it may not prove worthy such as NPL growth vs Inflation (this money is in the market), rather these have been restructured annually, categorising it as a classified loan with some conditionalities, maximum cap on saving certificates through strategic tightening etc. 

Sketch: TBS

Ferdaus Ara Begum is the CEO of Business Initiative Leading Development (BUILD).

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.