Reserve money with Bangladesh Bank squeezes with a negative growth by 2.0 per cent to Tk 3.7 trillion last December for inflation-control monetary measures that, seemingly, worked little so far.
In a two-pronged inflation battle, launched at government's bidding amid price rises, the central bank also raised interest rates to curtail money supply in the economy.
But inflation seems to be stubbornly high, hovering near two-digit level, with prices of many consumer supplies making fresh leaps. On the contrary, rate rises seem leading businesses to make a pause in borrowing for fresh investment, bankers and businesspeople say.
The money squeezes are mainly because of stopping "devolvement" operation by the Bangladesh Bank coupled with continuous pursuit of tight monetary policy to contain the higher inflationary pressure on the economy, people familiar with the developments told the FE.
Under the belt-tightening, the reserve money marked a 2.0-percent negative growth to Tk 3.7 trillion at the end of December 2023. The amount was Tk 3.8 trillion at the end of December 2022, according to the BB statistics.
Reserve money or base money represents the base level for money supply, or it is the 'high-powered' component of money supply in an economy. Reserve money equals currency in circulation plus bankers' deposits with Bangladesh Bank and other deposits with the BB.
Bangladesh Bank Governor Abdur Rouf Talukder said the BB had stopped devolvement or printing money since August 2023. "We've stopped devolvement since August last," the governor said at a programme recently about the contractionary stances on the monetary front.
Devolvement means the central bank supplies money to the government that it had kept unauctioned during treasury bill-bond auctions with the primary dealers.
A senior official at the BB told the FE writer that the central bank "has been pursuing tight monetary policy in a bid to contain the higher inflation in the economy since the middle of 2022".
The rate of inflation in December was recorded at 9.4 per cent (on point-to-point basis) or surpassing by 1.91 percentage points from the revised target for the current fiscal year (2023-24).
He also says Bangladesh Bank's net foreign assets have decreased as it sold dollars to commercial banks during the forex-market volatility.
"Actually there is a relationship between the circulation of new money and the net foreign assets of the BB, and it is believed to be another key reason behind the decrease in the volume of reserve money."
The official adds: the first thing that happens with a decrease in the money supply is it pushes the interest rate up.
"The interest rates are now upwards and businesses are less willing to invest or to borrow for investment spending," he says about the merits of the measures.
And the consumers are now also less interested in borrowing to buy luxury goods. Thus spending decreases and inflation starts to decrease, the official explains.
The BB official further notes that the government borrowing also remained much lower than expected during this fiscal year (2023-24).
Government net borrowing from the banking system stood at Tk 31.88 billion during July-November of FY24, down by 90 per cent from Tk 320 billion during the July-November of last fiscal.
Government domestic borrowing was initially targeted at Tk 1.55 trillion in the national budget for FY24 : from the banking system Tk 1.32 trillion and non-banking sources Tk 230 billion (including Tk 180 billion through net sales of National Savings Schemes).
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