The Bangladesh Bank is likely to announce its monetary policy statement (MPS) for the first half of fiscal year 2017-18 (FY1-18) on July 25, 2018.
Key programs such as broad money, net domestic asset and foreign asset, and inflation should be addressed within the July-December period.
During this period, the central bank should apply all its monetary instruments to achieve these goals.
Stable monetary policy management and fiscal discipline support macro-economic stability, allowing the economy to benefit from high remittance, high export growth, and low commodity prices.
The result may be strong output growth, less inflation, moderate public debt, and external resilience.
A strong and healthy growth propelled by increased private and public investment along with public spending can lead to higher investment-related imports, pushing the current into a modest but manageable deficit.
Keeping the public debt-GDP ratio at a moderate level, it should be increased to an optimal level in any given time.
The challengesMaintaining output growth would become more challenging and would require not only prudent macro-economic policies, but also upgrading those macro-economic policies to support the country’s ambition to reach middle income status by 2021.
The current MPS has been taken up by the central bank when the economy is facing major challenges such as increasing the savings-investment gap, unsatisfactory collection of revenue, infrastructural under-development, institutional weaknesses, slow investment, low rate of ADP implementation, and inadequate revenue, all of which hinder the desired “growth of GDP.”
A strong financial system is needed for the successful implementation of monetary policy.
Now, the ongoing crisis in the banking and financial sectors -- due to mainly rapid increase in non-performing loans -- reflects the institutional weakness in the financial system of our country. Huge capital flight becomes a concern for the economy.
A strong financial system is needed for the successful implementation of monetary policy
This unaccounted transfer of funds/money is a big blow to the economy as it means less investment and revenue income for the government, which, in effect, affects the monetary policy statement for the economy of Bangladesh.
Inflation has been on the rise since January, climbing to 5.94% by June. Certain economists predict far higher inflationary pressures in the nearer term as the country is facing supply-chain problems with rice, caused by floods, severe crop damage in haor regions, and so forth.
Looking into this matter carefully and embracing a flexible inflation target approach is a possible solution.
The interest rate is declining, which reflects favourable inflation performance, ample liquidity, and an increase in competition in banking systems.
The private sector credit growth is now slightly in decline, and to achieve GDP growth, it should be accelerated to attain a steady economy.
The solutionsThe current account and trade balance recorded a deficit due to higher import growth, lower export growth, and decreased remittance inflows during the last couple of months.
As a result of deterioration in the balance of current account and trade balance, there is unsatisfactory performance in the economy, which can be improved by adopting a cautionary and consistent monetary policy.
To promote financial stability with sustainable development of banking and financial institutions, a sound and effective monetary policy is needed to optimise the various indicators which help our economic growth.
There are vital indicators that should be considered as parameters to measure or evaluate the monetary policy statement, such as economic growth, inflation, interest rates, excess liquidity, clarity in deposits, and non-performing loans.
The central bank needs to consider the effect of the welfare-oriented government budget and private sector investment on the price and the external sector stability.
Likewise, it is necessary to appropriately manage the existing excess liquidity in the banking system in order to support the development activities and the investment promotion.
Excess liquidity, lower interest rates, and interest rate differential with neighbouring economies are some of the challenges facing our economy.
If the situation of this kind prevails for too long, there is a risk of informal capital flight.
Considering the likely impact of such situations on financial stability, the monetary policy should focus on managing liquidity, inflation rates, and interest rates at a moderate level, and channel financial resources towards more productive sectors.
Md Abdus Sobhan is a Deputy General Manager of Bangladesh Krishi Bank.