BB sticks to expansionary policy despite liquidity pileup

Despite record excess liquidity in the banking system and depressed credit growth, the Bangladesh Bank yesterday said it would continue its expansionary monetary stance in the current fiscal year to help the economy ride out the slowdown.

Although the previous expansionary monetary policy largely failed to augment the demand in the economy battered by the coronavirus pandemic, the BB again took the same route for fiscal 2021-22 to counter the impacts of the crisis.

This means, bringing the coronavirus situation under control continues to hold the key for the economy to weather the lingering slowdown.

The annual monetary and credit programmes for FY22 are outlined to make sure that there is enough room for money and credit growth to sufficiently support the targeted nominal GDP growth while remaining vigilant about commodity and asset price movements, the statement said.

“In case of any unexpected price pressure development or formation of any sporadic asset price bubbles due to the presence of ample excess liquidity in the banking system, the BB will not hesitate to take appropriate policy action if required, throughout the year ahead.”

The existing credit programmes in the form of various stimulus packages would help give a boost to the agriculture, SMEs and export-oriented sectors.

The central bank rose to the occasion to go beyond the traditional frameworks and has loosened monetary policy tools since the start of the pandemic in Bangladesh in March last year.

But there is a doubt whether the central bank would be able to make the productive sector vibrant amid a fall in demand as the Delta variant of Covid-19, the most contagious form of the novel coronavirus, is sweeping the country.

“We have cautiously drawn up an expansionary and accommodative monetary policy by coordinating the government’s expansionary fiscal policy,” BB Governor Fazle Kabir said in a statement.

The BB stance is in line with the suggestion of the International Monetary Fund, which said on Wednesday that clear communication from central banks on the outlook for monetary policy would be key to shaping inflation expectations and safeguarding against premature tightening of financial conditions.

Because of the business slowdown and depressed appetite for loans, the BB missed the private sector credit growth last fiscal year. It achieved 8.40 per cent credit expansion against the target of 14.80 per cent.

It has kept unchanged the credit growth for 2021-22 and aims to disburse Tk 176,000 crore to the private sector.

Kabir said that the central bank would not adopt any quantitative easing measure to implement the monetary policy.

Quantitative easing is a form of unconventional monetary policy in which a central bank purchases longer-term securities from the open market to increase the money supply and encourage lending and investment.

Kabir said the BB would rein in the flow of funds to the unproductive sector and would give utmost efforts to supply money to the productive and manufacturing sectors.

As part of the move, the new policy will focus on agriculture, SMEs, export-oriented industries and the informal sector, which have been hit hard by the pandemic.

It aims to achieve 7.2 per cent GDP growth and contain inflation at 5.3 per cent in FY22. The country failed to hit its targets on the two key macroeconomic indicators in FY21.

The governor went on to express a hope that the policy would generate quality jobs by offsetting the adverse impacts of the pandemic.

Economic activities have not rebounded as expected due to the economic slowdown, which has subsequently fueled excess liquidity, Kabir said.

The second wave has created an uncertain situation, which is why the central bank hasn’t withdrawn the relaxations of various monetary tools, such as cash reserve ratio (CRR) and policy rates.

The BB earlier reduced CRR, which determines the portion of customer deposits that commercial banks must keep as a reserve with the central bank, by 100 basis points to 4 per cent.

A higher CRR means the banks must hold higher reserves and thus tighten the flow of cash.

The BB also slashed the repurchase agreement rate by 125 basis points to 4.75 per cent and cut the reverse repo rate by 75 basis points to 4 per cent to make funds cheaper for banks.

In addition, both the government and the central bank are now implementing 28 stimulus packages involving Tk 128,000 crore to help various sectors rebound.

This has created a record amount of excess liquidity, which stood at Tk 231,462 crore in June.

Cheap money created by the expansionary policy has already created some bubbles, as evidenced in the stock market and the housing sector. The benchmark index of the Dhaka Stock Exchange has surged in recent months riding on the excess liquidity.

“The central bank will use its monetary tools in the days to come to absorb any situation deriving from the excess liquidity,” Kabir said.

The central bank warned that any further deterioration of the existing pandemic amid the continuation of global price hikes and any other unexpected crop loss in the next seasons might create some undue price pressures.

Kabir said the media reported that the soft loans under the stimulus package were being misused.

“Spot inspections on banks carried out by the central bank have been hampered due to the pandemic. Therefore, we have strengthened the off-site supervision,” he said.

The BB has already asked banks to beef up the monitoring of the loan disbursement from the stimulus fund.

WHAT ANALYSTS SAY

Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, said that the central bank had properly addressed the loan disbursement for the SME and agriculture sector.

“But the BB should have given a clear direction on how to mop up the excess liquidity.”

The central bank now provides at least 50 per cent of the stimulus packages from its own sources.

“The BB should rein in the injection of the fund as it usually supplies funds in the form of reserve money, which fuels the excess liquidity,” Mansur said.

Mustafizur Rahman, a distinguished fellow at the Centre for Policy Dialogue, said that there was no scope to achieve the private sector credit growth target if the ongoing Covid-19 situation persisted.

“There is no major risk for the inflation to hike now, but the government should give attention to contain the price pressure on food grains.”

Rizwan Rahman, president of the Dhaka Chamber of Commerce and Industries, said that the target of the monetary policy could not be realised if the economy did not recover.

Shahidul Islam, chief executive officer of VIPB Asset Management, said until the credit growth went up and inflation pressure rose, the central bank should not withdraw the excess liquidity.

“Though the key index of the stock market has risen to its historic high, the overall market is not overvalued. Some stocks are overpriced because of manipulation,” he said, adding that many blue-chip stocks were trading at lower prices.