On 29 July 2021, the Monetary Policy Statement (MPS) for fiscal year (FY) 2022 was announced by Bangladesh Bank. This is the second MPS during the ongoing COVID-19 pandemic. Monetary policy has a crucial role in addressing the challenges created due to the pandemic. On the one hand, economic crisis as a result of disruption in production and supply chains has led to economic contraction, loss of employment, and increased poverty. On the other hand, inflation is creeping up which will have impact on purchasing power and demand, particularly of the poor and low-income families. Besides, the banking sector has been responsible for disbursing loans under the stimulus packages announced by the government. The banking sector also has a number of pre-existing challenges which need to be resolved in order to have a disciplined financial sector in the country.
The Centre for Policy Dialogue (CPD) presented its reflections on the recently announced monetary policy to the media, focusing on various macroeconomic targets, and the adequacy of monetary instruments to achieve those targets at the virtual Media Briefing titled “CPD’s Reaction on MPS FY2021-22: To what extent monetary policy meets the needs of the economy”, held on 3 August 2021. The media briefing also discussed how far the monetary policy will be able to address the challenges during the ongoing pandemic and meet the demands of the Bangladesh economy.
Overall, the monetary policy of FY22 appears to be a cautious policy during the chaotic times of the pandemic, CPD’s Executive Director, Dr Fahmida Khatun stated while making the keynote presentation. The central bank has refrained from taking any active steps in reducing the prevailing excess liquidity in the banking system, but has assured that it will not hesitate to act if the need arises. The overall stance of the policy is expansionary, and in the words of the central bank, “accommodative”. It appears that the targets set for private sector credit growth and economic growth may not be met, considering the rapidly worsening COVID-19 situation at present. Inflation targets should be practical, based on updated consumption basket, Dr Fahmida Khatun added. Finally, the governance of the banking sector will be an important determinant for better recovery of the economy. Unfortunately, reforms in the banking sector remain outside the radar of the central bank at present.
The presentation recommended that loan defaulters should not be allowed to access any of the COVID-19 related liquidity support packages. Weak and poorly governed banks should be barred from participating in the COVID-19 related liquidity support packages. Banks which are not fully compliant with BASEL III or the Banking Company Act should be not be allowed to participate in the COVID-19 related liquidity support packages. Clear, objective, and quantitative criteria should be declared to properly identify “affected” businesses and individuals. Transparency and accountability mechanisms should be built into all COVID-19 related liquidity support packages, and more disaggregated data on the implementation status of all liquidity support packages should be published on a monthly basis. Disbursement of the government’s COVID-19 liquidity support for small businesses, farmers, and low-income professionals should be expedited immediately.
The policymakers should acknowledge the actual scale of the COVID-19 crisis and then formulate a specific and target-oriented post-COVID recovery plan that aims to build back better. A thorough assessment should be conducted to understand the extent of damage done by COVID-19, the amount of support required, and the people who need the support the most. Public awareness about the liquidity support and fiscal stimulus packages should be raised through nation-wide campaigns so that the general population can clearly understand what kinds of support are being provided by the government, who are eligible for such support, and how to obtain the support. Liquidity support is inappropriate for small borrowers and new borrowers, as well as those who are the poorest and most vulnerable. Therefore, direct cash support should be provided by the government so that these groups can adjust to the shocks of COVID-19.
A multi-stakeholder taskforce with representatives from the various ministries, central bank, commercial banks, trade bodies, civil society, non-government organisations and academia should be formed for monitoring the delivery of the COVID-19 liquidity support and fiscal stimulus packages and assessing their effectiveness. Banks with excess liquidity should be discouraged by the central bank from taking unnecessary risks. A goal-specific, time-bound, inclusive, transparent, unbiased and independent Citizen’s Commission on Banking should be set up in order to bring transparency in the prevailing situation, identify the root causes of the manifest problems, and suggest credible measures for improving the situation sustainably. A new consumption basket should be formulated for calculating CPI inflation, based on rigorous research as regards consumer behaviour and expenditure patterns. All targets, projections, and plans in the monetary policy and the 8th Five Year Plan should be revised in accordance with this new consumption basket for CPI and new base year for inflation.
Professor Mustafizur Rahman, Distinguished Fellow; Dr Khondaker Golam Moazzem, Research Director, CPD and Mr Towfiqul Islam Khan, Senior Research Fellow, CPD were also present at the briefing and responded to questions from the journalists.