To combat inflationary pressure, volatility in the foreign exchange market, and growing non-performing loans (NPLs) and boost the forex reserve, the Bangladesh Bank will take a number of policy measures. The banking regulator is preparing a policy stance on how to address these four issues as part of the move.
According to three senior central bank officials, who requested anonymity, the BB has already drafted a draft policy and is in the process of soliciting feedback from economists. Wahiduddin Mahmud, noted economist, and Governor Abdur Rouf Talukder met with four deputy governors on Thursday.
Later this week, the central bankers are scheduled to meet with the vice-chairman of the Policy Research Institute of Bangladesh, Sadiq Ahmed, and the executive director of the Economic Reporters Forum, Ahsan H Mansur.
“The policy stance will be finalized after taking opinions from stakeholders. It will be implemented through the next monetary policy, but some measures will be implemented soon,” a central bank official explained.
According to another official, it would be a sustainable policy aimed at improving the financial sector.
A transparent and credible policy stance will be prepared by the central bank, Prof Mahmud told The Daily Star on Thursday.
Despite skyrocketing inflation, volatile forex markets, depleting forex reserves, and growing NPLs, the banking regulator’s move comes at a time when the economy faces multiple challenges.
A 12-year high of 9.92 percent was achieved in August, compared with the government’s target of 6 percent for the full fiscal year. It stood at 9.2 percent in July. Inflation appears to be on the rise.
Due to a higher demand for the US dollar than inflows, the forex reserves decreased to $21.45 billion on September 21.
In the last two years, the local currency has lost nearly 29 percent of its value against the American dollar. Yesterday, the dollar traded at Tk 110, up from Tk 85.8 in January last year. Experts have attributed the current economic situation to the central bank’s control over interest rates and exchange rates.
To comply with the conditions attached to the International Monetary Fund’s $4.5 billion loan, the BB finally removed the lending cap in June. While the rules governing the forex market have been eased, a fixed exchange rate still prevails, according to market observers.
It is good that the BB is consulting with stakeholders, including economists, according to Zahid Hussain, a former World Bank economist in Dhaka. However, if the recommendations are not implemented, there is no point in taking them.”
Despite the administration of the interest rate and the exchange rate, Hussain says the rates have not produced any positive results. The two rates must be fully market-based. The mounting NPLs are another economic concern.
In March, NPLs totaled Tk 1,31,620 crore, up 16.02 percent year-on-year. As a percentage of the total loans disbursed, this accounted for 8.80 percent.
According to BB’s Financial Stability Report 2022, distressed assets in the banking industry amounted to Tk 3,77,922 crore. Prof Mahmud emphasized accelerating loan recovery when he met with central bankers.
As Selim Raihan, executive director of the South Asian Network on Economic Modeling, points out, credit expansion is impossible without realizing bad loans.
“Monetary policy needs to be implemented independently and dynamically, not just formulated.”
According to the professor, the BB should have the sole authority to reduce NPLs and bring governance to the banking sector, especially public banks.
As public sector banks are regulated by both the BB and the finance ministry, the central bank cannot properly monitor them.