Inflation-fuelling high-powered money makes a comeback as a special liquidity-feeding instrument called AR or assured repo is now in operation, sources said.
In the third phase that started on October 29, 2024, Bangladesh Bank, the country's central bank, is disbursing Tk 55.62 billion to the special bondholders. With the amount, the cash supports to banks under special bonds cross Tk 400-billion mark.
But money-market analysts think such fresh cash feeding might run counter to the central bank's contractionary monetary stance for controlling inflation as it would cause injection of high-powered money into the market that could deliver disservice to government's inflation-combat move.
The immediate-past government of deposed Prime Minister Sheikh Hasina started issuing special bonds meant for settling accumulated arrears to independent power producers and fertiliser suppliers in January last mainly because of revenue shortfalls.
Against the special bondholding, the government introduced the AR facility, which is completely different in nature from other liquidity instruments as the maximum tenure of the special credit support is 180 days unlike 28 days for other existing repo-backed liquidity supports.
Like in other sovereign securities, the government allows the special bondholders to get liquidity support from the central bank with more lucrative features.
To put more sweeteners on the special-bond platters, the regulator also excluded the yearly mark-to-market evaluation risk so that the banks do not shy away from subscribing to such a special bond.
Seeking anonymity, a BB official says the central bank resumed liquidity injection under the AR facility after a break of two months from October 29 last. "In three days, the BB will have to give Tk 55.62 billion to 22 commercial banks and two institutions."
Responding to a question, the central banker says the AR-backed liquidity injection is not ideal in the context of BB's ongoing contractionary monetary stance. "But it is the decision of the government."
The BB official observes that the special bonds have become a blessing for the bondholders, especially for the banks facing liquidity crisis following continuation of BB's highly contractionary monetary measures to contain inflation.
As the maximum tenure of the liquidity instrument spans 182 days, the official notes, the bondholders have started taking credit support from the central bank with the bond receipts kept as collateral at the repo rate, which now is 10 per cent. And the banks will get the opportunity to invest the funds in short-term government securities for higher gains.
For example, the cut-off yield on the 90-day treasury bills auctioned last Sunday was 11.75 per cent. "So, if the banks get the money at 10.0 per cent from the BB and invest in the short-term government securities, it is giving them lucrative financial returns," the central banker says about the bets on the bonds and treasuries.
On the other hand, the banks can use the receivables against the investment in the government securities as SLR component. "That's why the flow of liquidity supports against the special bondholding continues growing."
Managing director of Dhaka Bank Sheikh Mohammad Maroof mentions that the government is settling accumulated arrears owed to independent power producers and fertiliser suppliers through issuing these special bonds.
And the lending banks received the bond receipts from the government and adjusted their clients' liabilities. Banks get liquidity support from the central bank against these special bonds through repo window, according to him.
Chairman of the Policy Exchange of Bangladesh Dr M Masrur Reaz says injecting high-powered money in the form of AR is contracting the central bank's current stance of squeezing fund flow to contain inflation.
"It can be accepted as a short-gap measure but continuation of such money injection for a longer period of time is not a good thing for the economy amid higher inflation regime."
The economist suggests that the ministry of finance should renegotiate terms and conditions of the payment and clear the arrears from their own resources sparing the BB's high-powered money.
"If issuance of bonds is necessary, the government can issue bonds on the global capital market and encourage overseas investors to this effect," he says.
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