Central bank's novel approach to resolving issues

In the face of the runaway food price inflation that reached 12-year high in August, 2023at 9.92 per cent, the fixed-income and the socially less privileged section of the population are in a tight corner. And this has been the case despite the government's target of keeping the inflation at 6.0 per cent during the current fiscal year. The government has adopted various measures including strong market monitoring and fixing the prices of certain essential commodities to tame inflation. But such measures did not work, as expected, in arresting the price inflation. So, it is necessary to consider other issues that might also contribute to inflation. For instance, the depreciation of taka against US dollar. Though the goods produced locally should not be affected by the volatility in the foreign exchange market, it still happens due to the overall erosion of taka's purchasing power. There is also the impact of the soaring prices of other imported essential commodities being sold in the market at the same time.
The price expectation of customers in a market of fluctuating prices strongly influences the demand of a commodity and hence its price. Unless addressed duly, such price expectation becomes accepted as normal which can work for further raising the prices in the market. In this situation, the government is required to instil in the public mind the belief that the situation is not as bad as they think. But that has to be done in a credible way, because the consumers are a very critical lot and cannot be expected to be fooled. And seeing that there is domination of oligarchs over the commodities market, strict monitoring and control of the market by the government cannot be overemphasised. And the central bank's lending money to the government in the form of high-powered money can also drive up inflation. In this way the central bank can monetise government debt through creation of new money thereby permanently increasing the monetary base to finance the government. To be fair, any country with a history of its government intervening in the central bank's decision-making, the practice of such debt-monetisation hardly ever helps to resolve the issue that led to adopting the measure in the first place. Conditions of such monetary finance or financing the government through money creation usually arises in crisis times such as during 2008's global financial crisis or during the pandemic.
And such monetisation of debt usually takes place through the central bank's buying interest-bearing debts through non-interest-bearing money, which is but a permanent exchange of debt for cash. But such practice if continued for long can lead to dangerous consequences like hyperinflation. And in that case, a country may have to abandon its currency altogether to get out of the crisis. However, the good news is such printing of currency by the central bank, i.e., Bangladesh Bank (BB), to fund the government stopped last fiscal year (FY 2022-23) after the government borrowing from the BB alone reached as high as TK 988.26 billion (which is close to Tk 1 trillion). Thankfully, the government paid back Tk 70.44 billion of the loan it had borrowed from the central bank in July last. Obviously, that points to the government's reduced dependence on the central bank to fund its expenditures.
However, the amount the government owes to the BB is in addition to what it borrowed from the country's commercial banks. Though the government repaid some of its debt to the commercial banks, its total debt from the sector still stands at Tk 3.96 trillion. Against this backdrop, in a bid to ride out the crisis the economy has been going through, especially the situation of uncontrolled inflation, the government's financial high-ups and the BB authorities have decided to exchange views with the former colleagues, the country's leading economists, experts and think tanks.
Of the economists and experts so invited to come up with their valued opinions on the subject, in the first phase, the senior economist and former adviser to the caretaker government, Professor Wahiduddin Mahmud, for instance, was invited for talk. He first advised the government not to further print money through the BB, which, as noted earlier, has already stopped. And the monetary policy the government adopted to address different issues including inflation cannot be expected to produce results unless it (the policy) is transparent and credible, professor Mahmud viewed. Needless to say, to improve its abilities, the central bank needs to be fully independent in playing its critical role in the economy. Even so, it undoubtedly testifies to its or the government's seriousness about dealing with the crisis at hand.
First thing first. The excess money circulating in the economy for reasons including this being an election year has no doubt a role in fuelling the inflation. So, BB would do well to remove it from the market. Also, to address the liquidity crisis in the banks, the default loans which crossed Tk 4.1 trillion in March this year and was equal to over half the national budget for the current financial year, has to be recovered. Otherwise, neither the liquidity crunch that the banks have been experiencing, nor the issue of credit expansion to the private sector can be effectively addressed. But the big bank defaulters being politically powerful, to prove its worth and deliver, the BB will have to overcome their influence. Can BB do that? So, many such practices as the one that includes extending loans to businesses from the country's foreign exchange reserve should be avoided at all costs. Admittedly, the falling forex reserve is one of the biggest economic crises the government is facing at the moment.
Finally, the government should continue with such opinion sharing exercises with experts in the field before going for formulating the next monetary policy.

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