Metropolis Desk-
As Bangladesh continues to struggle with significant inflationary pressure, the level of which has been falling in many nations, the central bank continues to use a potentially inflation-fueling tool—lending money to the government by printing it.
According to the most recent data from the Bangladesh Bank, the central bank put Tk10,800 crore into circulation in the first 18 days of July to cover the needs of the government’s spending. This increase in high-powered money is a result of a revenue shortfall from the aim of about Tk45,000 crore and lower-than-expected foreign funds.
More money has been injected when comparing the numbers from this year with those from the most recent fiscal year. The government borrowed Tk1,24,122 crore from the banking system in FY23, with the central bank contributing Tk78,140 crore, or an average of Tk6,500 crore each month. The central bank gave the government Tk6,529 crore even in June, the final month of FY23.
In contrast, during the first 18 days of the current fiscal year, the central bank has already provided Tk6,074 crore through 91-day and 364-day Treasury Bills, and an additional Tk4,715 crore through 2, 5, and 10-Year Treasury Bonds.
This process of devolving undertaken by the Bangladesh Bank involves the central bank buying treasury bills and bonds from the government instead of raising funds from commercial banks by selling treasury bills and bonds.
In FY24, the government planned to borrow Tk1,32,395 crore from the banking sector and Tk1,02,490 crore from external sources. If the government borrows from the central bank by devolvement, it means an injection of fresh money into the economy.
To reduce the chance of escalating inflationary pressures in the economy, economists say the central bank must monitor and control these financial systems carefully.
The executive director of the Policy Research Institute, Ahsan H Mansur, commented on the central bank’s devolvement plan and stated that it strives to maintain the interest rate on treasury notes low. He added that because the base rate of Treasury Bills is not market-based, the new landing rate calculation serves as a cap.
A top central bank official claims that the loan rate is currently determined using the Six Months Moving Average interest rate on 182-day Treasury bills (SMART). Starting in July, the central bank will also publish a new loan rate each month by adding a maximum of 3% using SMART.
Bangladesh Bank wants to keep the SMART decision process impartial. The 182-day Treasury Bill in July would not be devolved as a result, the person explained.
The official went on to say that because the market for the nation’s bills and bonds was still in its infancy, letting the market decide on interest rates might give commercial banks more sway over them.
Under the condition of anonymity, a senior central bank official stated, “The interest rate is being partly regulated by devolvement. Banks are requesting higher interest rates because the government must borrow money from these sources. Therefore, the central bank is using devolvement to keep the interest rate slightly down.”
He also noted that compared to June, the interest rate on Treasury Bills and Bonds marginally increased in July.
Money printing, according to Zahid Hussain, a former chief economist at the World Bank’s Dhaka office, is the incorrect strategy for reducing inflation.
“At this moment, it is not appropriate to speculate on how the monetary printing at the start of FY24 would enhance inflationary pressure during the entire fiscal year. But at the start of the new fiscal year, the administration is proceeding in the same manner as it did in FY23. Nothing has altered in this place, he remarked.
Borrowing money from commercial banks can lead to a liquidity crisis, Zahid said, “Borrowing from banks reduces the available money supply for lending to the private sector and this will create a crisis for businessmen. From that point of view, it is relatively easy to borrow from the central bank. Although the pressure of inflation increases on the consumers due to the borrowing.”
The huge circulation of new money caused the reserve money growth to surge to 10% this June, up from negative 0.3% in the same period last year. However, it was far lower compared to the monetary target of 14% set for the monetary policy of FY23. Though the central bank set no target for reserve money growth for the first six months of FY24, as they are trying to control the money circulation by interest rates.
The central bank’s sale of $13.58 billion in FY23 removed Tk1.41 lakh crore from the market, which is the cause of the low reserve money growth.
In May of this year, net domestic asset growth was 16.17% year over year, while net foreign asset growth was negative 15.28%, according to figures from the central bank.
The Bangladesh Bank is issuing new money against government treasury bills and bonds, which would induce inflation, which is the reason for the significant growth in domestic assets. While the country’s ability to accept international payments is declining, the negative growth of foreign assets is caused by the intense selling pressure on the dollar.
The Policy Research Institute’s Ahsan H Mansur stated, “Devolvement may increase the inflationary pressure on the economy. If Tk 1 lakh crore is added to the economy, it eventually grows to Tk 5 lakh crore, but this process takes time. Devolution as it is currently practiced may not have an inflationary effect for six months to two to three years. In other words, the full effects of the money printed in the previous year to provide loans to the government will be seen in the future. Because of this, people must deal with inflationary pressure.
The analyst suggested that the government cut wasteful spending as well.
According to Vice Chairman of the Policy Research Institute Sadiq Ahmed, Bangladesh’s inflation increased throughout FY2023 despite a substantial decline in world inflation. Significant drops in domestic inflation rates were observed in the USA, Canada, EU, India, Thailand, and Vietnam in the first half of 2023. However, in Bangladesh, it remained high in June at 9.74%.
So it is politically expedient but untrue to attribute domestic inflation to the Russia-Ukraine conflict and global inflation, Ahmed remarked.
According to him, countries with sharp drops in domestic inflation benefited from the fall in energy prices, but they also pursued sustained demand-reduction measures by increasing domestic interest rates with purpose.
Sadiq Ahmed continued, “Despite the decreases in global energy costs and worldwide inflation, Bangladesh did not experience a reduction in inflation since it did not limit demand but instead drove demand growth through interest control and increased fiscal deficit.
