Monetary policy meets the test of time
As expected, the Bangladesh Lender has announced a great expansionary monetary policy.
This expansionary stance has been essential given the existing economic slump and the necessity for supporting the economy with sufficient liquidity support and lower cost of fund.
Since the start of the countrywide general shutdown on 26 March, BB has been quite proactive and at exactly the same time cautious by easing the monetary plan stance in phases and assessing the economic outlook.
The policy statement for fiscal 2020-21 essentially reaffirms the continuation of this cautious easing, and I welcome this process under the prevailing macroeconomic environment of Bangladesh.
During the current pandemic, the monetary plan has to shoulder a supplementary burden since fiscal insurance policy could not be expansionary enough because of a lack of fiscal space pertaining to undertaking a much bigger discretionary spending program and the precarious point out of revenue mobilisation.
Thus, we have an uneven burden-sharing or mixture between your fiscal and monetary plans, and specifically, certain policy gaps -- such as for example providing comprehensive livelihood support for the recently unemployed -- that may be addressed effectively simply by the fiscal policy can't be filled by monetary policy.
That said, in my own look at, BB's new monetary insurance policy statement aims to make a financial environment that's conducive to the resumption of development.
The supportive environment will be performed through lower interest levels, plenty of liquidity, and partial risk-sharing/mitigation for non-collateralised micro, little and medium enterprise (MSME) lending.
To the end, BB has used all available instruments at its disposal -- to an degree and at a pace never seen in Bangladesh.
Now could be the implementation task for BB.
The policy framework is right. But if it's not correctly implemented, not merely would the economy not really gain to the extent it should, there would also be adverse reactions.
Easy money is necessary under current circumstances, but BB has to ensure it is used properly in the successful sectors of the economy.
Otherwise, we'd not get the essential and hoped job creation and positive source response. Rather, the injected liquidity will lead to asset price inflation, additional accumulation of default loans in the bank operating system and capital flight.
Thus, BB must remain vigilant about the users of the credit rating, use of the credit, and the source response and job creations resulting from the easy monetary policy.
I would strongly suggest that the BB undertake an unbiased third-party evaluation within the next 2-3 a few months to determine the performance of the bank-led stimulus program and the influence of the overall easing of the monetary plan on the broader economy.
Many considerations are beyond your domain of the central lender and that is the way it should be like far away.
For instance, BB cannot control the pass on of coronavirus in Bangladesh, and far of the economic recovery is hostage to that.
The central bank cannot support the food inflation when confronted with a potential serious supply shock and its own possible effect on non-food inflation.
Unless the distributed of coronavirus is included, the current extreme flood situation is properly maintained and domestic demand starts accelerating from current low levels, it is extremely likely that the financial policy support alone would not encourage the struggling exclusive sector to choose full capacity production and resumption of companies and investment.
Monetary revival will critically rely upon how the government tackles all of the important aspects associated with the pandemic.
The central bank's financial policy stance, as announced through the policy statement yesterday, is a crucial step in the proper direction and we fervently hope that the various other arms of the federal government play their expected roles to pull the economy from the pandemic-induced rubble.
