Some applying for grants Bangladesh Bank’s next monetary policy statement
Another monetary policy statement (MPS) of the Bangladesh Bank (BB) will be announced at the same time when the economy is in a deep recession, unemployment is large, millions of folks and households have grown to be poor overnight, and the infection level is still on the rise.
Economic activity has resumed but seriously handicapped by suprisingly low domestic and foreign demand and there is absolutely no result in sight for the flattening of the infection curve.
People (jobless workers) and entrepreneurs turn to the government for help in pulling them out from the gut.
Various countries have undertaken significant fiscal and financial interventions to pull their economies out of this devastating situation.
We also must acknowledge that so long as the elephant is in the room, i just.e., coronavirus caseload is normally increasing, private sector investment will not come back.
Businesses will never be in a position to operate with entire capacity and financial activities will come to be limited by a sub-optimal level -- well below the 2019 level in real conditions (except for agriculture).
Fundamentally, what I wish to underscore is that the BB shouldn't expect that the economy will be rebounding strongly, like after pushing a reset button beginning on July 1.
The central bank shouldn't reduce its credibility by projecting that economy will be growing at 8.2 per cent in real terms.
No country on the globe can achieve this lofty goal found in 2020 amid a good pandemic.
At the same time, the MPS must obviously declare that the BB will be following an expansionary monetary plan (MP) -- by growing its balance sheet -- and accommodate the original credit needs of the economy to get economic recovery.
HOW THE MONETARY Insurance policy SHOULD RESPOND TO THE CURRENT PANDEMIC SITUATION
The huge logjam created by any crisis of the proportion should be cleared with enough injection of liquidity for the wheels of the economy to start turning again.
Just how much liquidity will be needed will be extremely difficult to predict.
However, the BB should err privately of injecting a touch too much rather than injecting inadequate under current circumstances.
Close monitoring of the liquidity situation of banks, large enterprises and SMEs will be important in this regard.
In particular, the BB should look at just how much credit has been expanded to enterprises, including and excluding the unrealised interest accrual that is capitalised into the spectacular loans by the banks.
The capitalisation of accrued interest will continue steadily to grow fast as borrowers wouldn't normally manage to service their debt properly and can continue to be protected by the BB regulations without impairment of their mortgage quality.
Just how much additional financing has truly gone to the enterprises of different kinds should be viewed continuously.
WHAT OUGHT TO BE THE APPROPRIATE MIX BETWEEN MONETARY AND FISCAL Plans IN TODAY'S BANGLADESH CONTEXT
The policy response to the pandemic has been asymmetric regarding the mix between fiscal and monetary policies.
While the BB will probably inject liquidity to the tune of Tk 74,000 crore, spending budget support for creating domestic demand and support for workers' jobs and livelihood have remained modest.
Total budget subsidy embedded within the monetary stimulus package was estimated to be no more than Tk 3,000 crore and perhaps another Tk 2,000 crore out of the interest held on the suspense account.
Unfortunately, the budget doesn't have domestic resources to provide a significant sum of income or livelihood support without making the already announced deficit even larger.
In my own view, this is not a standard year and there is no reason behind the fiscal deficit to be limited by 6 per cent of GDP.
It could certainly rise to 8-9 % for one year to improve up domestic demand and offer employment and livelihood support.
SHOULD WE BE CONCERNED ABOUT INFLATIONARY PRESSURE UNDER CURRENT CIRCUMSTANCES?
Generally, we would not expect significant inflationary pressure under the current deflationary situation.
Thus, non-food inflation is usually likely to decelerate in the coming months mainly because home rent, wage costs and THE cost of many services are anticipated to decline or at best remain unchanged.
In contrast, food inflation as definitely will continue to be supply-driven and the federal government must remain vigilant about accurate production and offer situation.
Rice price has increased lately adding to the spike found in food inflation last month.
There is no reason for the existing boro paddy price to be at or above Tk 1,100 per maund in a variety of districts even prior to the flood.
This is an indication of a potentially tight supply situation that may also get aggravated by the loss of entire Aus crop because of the ongoing flood.
The high paddy price, like in 2017/18, may give us an awful surprise.
The government is going easy on domestic procurement and inspire the private sector to import 1-2 million tonnes of rice from India within the next 1-2 months through reduction of customs duty.
We wish farmers to get fair prices, that ought to be about Tk 900-1,000 per maund of paddy.
On other materials like fish, poultry, beef, vegatables and fruits, the issue is an efficient transport program and restoration of marketing chains amid the expanding coronavirus caseload.
The end result is that, if the federal government will keep rice price stable and less than what it really is now and assist in improving domestic transportation and marketing bottlenecks, there must be no increase in inflationary pressure.
WHAT SHOULD BE THE STANCE ON THE EXCHANGE Charge AND RESERVE MANAGEMENT?
On the exchange price, the government has for long been following the coverage of retaining the nominal exchange rate nearly unchanged against the dollar. This did not support the export sectors incorporating garment.
The government had to provide various budgetary incentives to partially compensate because of this loss of competitiveness. The earlier we escape this convoluted arrangement, the better it really is for the funds and the export sector.
Recently, with the influx of remittance and a sharp decline in imports because of collapsed domestic economical activity, there's been a surplus supply of dollar in the interbank industry. This is simply not an unusual phenomenon.
India can be experiencing a surge found in reserve build-up due to a collapse in domestic demand and negative growth (-5 per cent to -9 %).
My spouse and i fear that the Bangladesh economy is also going through a contraction (negative growth) though official data isn't reflecting that.
India has massively built up foreign exchange reserves as their trade deficit has declined to a historic low. We are seeing an identical picture in Bangladesh.
The BB should take this possibility to build-up reserves at a fast pace -- perhaps and when possible -- by one billion us dollars per month before economy comes from the guts.
India is accumulating at the fee of $12-15 billion per month. The consequent injection of liquidity would help increase deposit growth in the banking system and help grow credit to both private and open public sectors.
In regards to the prime minister's desire to work with dollars for funding development budget, as you know very well, the budget does not need dollar -- it requires taka to financing its projects and other operations.
The government can borrow from the bank operating system, including also from the BB (that will total the creation of high-powered money) in taka to finance its advancement programme.
If it requires to import anything it can open letters of credit rating in taka and the BB and banks can offer the necessary forex.
The government budget does not have any use for forex -- what it requires is taka. The federal government must produce efforts to increase the National Board of Revenue's collection by undertaking forceful and correct reforms -- not bad reforms by hearing the vested groups.
The BB can, however, propose to determine a Sovereign Infrastructure Fund by diverting $5 billion roughly to market public-private partnership investment in major infrastructure projects.
The finance ministry and the BB exercised such a scheme in 2017, but also for some unknown reasons, despite cabinet approval, it did not start to see the light of your day.
That proposal may be presented to the PM for reconsideration to market $40-$50 billion worth of PPP infrastructure investment in the united states.
WHAT'S THE OUTLOOK FOR RESERVE BUILD UP AND WHAT'S ITS IMPLICATIONS FOR LIQUIDITY MANAGEMENT AND Household INFLATION?
In my view, Bangladesh comes with an opportunity to build-up reserves, when possible, up to $0.5-$1.0 billion monthly for the next half a year.
This technique of accumulation will inject an additional Tk 30,000-50,000 crore liquidity to the economy.
That would get a sizable amount and alongside the planned refinancing facility will head out quite a distance towards alleviating the liquidity problem and deposit development of the banking system.
My personal feeling is that inflows of remittance will nose dive after a couple of months once the transfer of savings by the returning workers is completed.
Many workers on Saudi Arabia and other Gulf countries are without jobs and so are sending their savings.
Nobody has gone outside Bangladesh as workers after February and the outlook for the approaching months is fairly grim.
So we need to protect our reserves for the times when domestic demand will grab and imports are certain to get back to its normal growth path.
Remittances may not be accessible in abundant quantities at that time.
I do not assume that liquidity growth through reserve build-up will fuel inflation under recent circumstances.
You will have no need for mopping up operations through the issuance of BB bills.
WHAT WILL BE THE TECHNIQUE FOR GROWING OUT OF YOUR HUGE UNDERLYING BUILD-UP OF DEFAULT LOANS?
The default mortgage loan situation of banking institutions will certainly get many worse once proper reporting is resumed.
At the moment, banks are capitalising the unpaid interest obligations, thereby artificially fuelling domestic credit expansion to the personal sector in the reported data.
The banks' default loans are certainly going to increase by at least Tk 60,000 crore or even more by the finish of the year.
Banks should be heavily provisioning against such an outcome and the BB should inspire and mandate the banking institutions in going toward that approach.
The BB shouldn't ease its macro-prudential conditions like credit reserve ratio, loans-deposit ratio etc any further.
The central bank should prepare a contingency plan for merger, acquisition and liquidation of weak banks. It will have a strategy for dealing with large delinquency of banking institutions and non-bank finance institutions.
I do not support the public sector asset management business in a region like Bangladesh with serious governance problems.
This only will allow private and public sector banks and financial institutions to dump their bad assets to the institution at inflated recoverable asset values and the federal government and citizens will be carrying the liabilities of the bad assets forever.
Instead, the BB should urge the financing ministry to create a regulatory framework for establishing private sector asset management corporations and the financial institutions should manage the private asset management corporations without the risk/liability to the public sector.
WHAT HAS TO BE DONE BY THE REGULATOR REGARDING SME LENDING?
SME sector needs particular attention in every region. In Bangladesh, we built SME lending nearly impossible because of the 9 % cap on the financing fee, with a de facto 6 per cent cost of fund.
The 3 % spread is not very attractive enough for banking institutions to lend to the SME sector, supply the risks connected with such lending and the high cost of administration in managing such portfolios.
The BB has finally decided to decrease the partial risk guarantee for SME loans at a cost of 0.5 % (from the formerly proposed 2 %). That is welcome.
I believe, in this moment of crisis, more should be done to market SME lending.
Either the BB makes it possible for the financing cap for SMEs to be increased to 12-13 % or provide subsidy to the finance institutions for SME sector lending in the amount of 3-4 per cent yearly. The subsidy could result from the financing ministry or the BB itself.
Similar issues exist in relation to cottage and micro enterprise (CME) financing through microcredit institutions.
The BB should check out the problems seriously if it wants the credit to be disbursed to the CME sector expeditiously.
STIMULUS Bundle AND ITS OWN CLOSE MONITORING
I actually welcome the initiative by the BB to put pressure on the banking institutions to disburse almost all of the stimulus package related loans to damaged companies within August.
While this timeframe is indicative, the BB should put in place a monitoring cell with representatives from the finance ministry, banking institutions and the relevant sectors.
The committee should meet with sector representatives and banks weekly to monitor the stream of loans predicated on daily reporting by banks in prescribed formats.
A progress report ought to be made by the monitoring cell and disseminate that to the stakeholders along with media every fourteen days.
The progress report should review the performance of every bank by sector (SME, agriculture, large industries etc.) and also discover the impediments, if any, predicated on stakeholders' consultations or inputs.
The monitoring cell also needs to help identify whether the allocated cash are satisfactory for the demands of the sectors and get tips in this regard.
The sectoral allocations announced ought to be viewed as starting points and the endpoints ought to be determined predicated on sectoral demands and the state of recovery of the economy and the sector.
AUTOMATION OF BB AND THE BANKING SECTOR
Finally, I would demand the BB to take the chance of the pandemic to move fast towards paperless banking transactions and operations.
All submissions to the BB should be mandated to be achieved electronically and the authorities should prepare the BB infrastructure and staff accordingly.
There is no reason behind banks to submit bundles of papers to the BB regularly.
The BB should set a target to make all banking-related transactions in the paperless form within 3 years and force all banking institutions and the central lender staff to attempt necessary preparations in that regard.
