Generous devolvement of Bangla-desh Bank on risk-free government securities like treasury bills and treasury bonds has gone up remarkably, helping ease banks' liquidity stress, but with downside risks.
As BB officials sing success of the monetary intervention in the money market in the crunch time, economists strike a bit different note as they anticipate further strokes to inflation-meaning price rises on the already-overheated market.
The economists say it could give some sorts of respite to the banks in the current context for a while, but it could further enhance the risk of inflation as the central bank buys these securities with the funds equivalent to newly circulated money.
According to the statistics of BB, the grand total of devolvement on treasury bills and bonds by BB had stood at Tk 1.07 trillion up to May 2023 of this fiscal year while primary dealers who participate in the auction made devolvement on only treasury bills amounting to Tk 21.07 billion.
On maturity, the net volume of devolvement stood at Tk 699 billion as of May, according to the data.
Seeking anonymity, a BB official said in the process they calculated many factors like liquidity situation of the participating dealers, interest rate, cost of fund, call-money rate and so on.
The official said they had sold US$12 billion so far in this ongoing fiscal to the banks to help them settle their overseas transactions. It means the banks spent over Tk 1.0 trillion to buy the greenback and it creates a pressure on their liquidity.
"If we did not go for devolvement, the money would come from the market and it would mount the liquidity stress further that we don't want," the BB official said to explain how overheating of the money market was averted.
Another BB official, who also preferred to keep anonymous, said the investors (PDs) asked for higher yields amidst the BB move for relaxing interest rates.
"If we allow higher rate for the security instruments in the auction, it would have a negative impact on the benchmark reference rate through which the lending rate by banks will be fixed," the central banker said.
The official said the central bank is set to introduce the reference rate from the coming fiscal year (FY'24) and it will be based on six-month moving average of government securities.
"So, this devolvement mechanism is helping ease liquidity stress and avoid possible distortion in the lending rate. That's why over 90 per cent of the funds the government now collects go from the BB account," the official added.
As part of the domestic borrowing from the banking system for budgetary expenses, the government issues treasury bills and bonds of various terms and the Bangladesh Bank (BB) calls the auction for banks to invest in these government securities, through which money is collected for the budget.
Primary dealers (PDs) can place bids in auction. Other commercial banks and non-bank financial institutions, insurance companies, corporates, individuals, provident fund etc can also participate in auction through the PDs.
The primary dealers later trade such securities in the central bank-controlled MI module. And it should be ultimately traded on the DSE secondary market.
Talking to the FE, Managing Director and Chief Executive Officer of Mutual Trust Bank (MTB) Limited Syed Mahbubur Rahman said there is some pressure on liquidity, so devolvement of BB helps in present liquidity situation.
Contacted for his view of the macroeconomic maneuvering, former lead economist at the World Bank's Dhaka office Dr Zahid Hussain told the FE that the BB purchased the government securities with the fund from their account which is equivalent to the print money.
"It would further enhance risk of inflation in the country where the rate of inflation is as high as over 9.0 per cent," he says about the downside of exigent monetary mechanism.
The central bank could say that it is helping ease pressure on the overall liquidity situation. But private sector cannot import industrial raw materials under the current situation while power supply has been disrupted for lack of primary energy, he points out.
"Private sector urgently needs foreign currency, not the local currency," he says.
The economist mentions that most countries are now following monetary-tightening measures to contain inflation, which is benefiting them. "But, we're following expansionary policy. That's why Bangladesh is among the few countries where inflation is still higher."
Echoing Dr Hussain's view regarding inflation, Chairman of Policy Exchange of Bangladesh Dr M. Masrur Reaz said the traditional investment avenues of the banks continued shrinking under the current macroeconomic situation.
"Investment in risk-free instruments by the banks is an additional option for banks, and it has also shrunk," he added.
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