‘Out-of-box’ solution will bring economy back on course

In a time of elevated inflation, the interest rate is the handiest tool in the box to restore order. And yet, the new Bangladesh Bank Governor Abdur Rouf Talukder, in his maiden press conference yesterday, remained defiant that it would not be used.

"There is no need to follow the US on a mandatory basis -- we did the best among the south Asian countries to tackle the pandemic-induced crisis by following our own methods," Talukder said to a packed audience at the Jahangir Alam Conference Hall of the Bangladesh Bank headquarters in the capital.

Last month, the Federal Reserve enacted its second consecutive 0.75 percentage point interest rate increase as it seeks to tamp down runaway inflation without creating a recession.

Yesterday, the Bank of England raised interest rates by 0.5 percentage points to 1.75 percent, the biggest increase in 25 years, as it predicts inflation to hit 13 percent soon.

Similarly, the European Central Bank in July raised interest rates for the first time in more than 11 years as it tries to control soaring eurozone inflation, with more hikes planned.

Closer to home, the Reserve Bank of India will hike its key interest rate today.

While the central bank raised the key interest rates twice in a span of 30 days, its effect was barely reflected at the end users' end due to the interest rate caps.

Since April 2020, the interest rate on loans has been fixed at 9 percent.

Withdrawing the interest rate cap to control inflation is the "textbook solution", Talukder said.

In so doing, the cost of funds will go up and the common people would be discouraged to take loans.

"This will take the economy backwards."

His fear is that private sector credit growth, the barometer for the level of investment activities in the economy, will drop.

In June, private sector credit growth stood at 13.66 percent, which is a four-year high. This fiscal year, the central bank has targeted to hit 14.1 percent in private sector credit growth.

At the same time, Talukder acknowledged that banks are going through a liquidity crisis.

In fiscal 2021-22, Tk 78,000 crore was taken out of supply and replaced with about $7.5 billion to support the exchange rate. And last month, more than $1 billion was injected, according to Talukder.

"If that money goes back to the market, the liquidity crisis will be solved," he said.

Talukder, however, did not elaborate on how the money would go back to the market at a time when the central bank has brought down its private sector credit growth target for this fiscal year from fiscal 2021-22's.

Besides, inflation remains well above the government's target of 5.6 percent for this fiscal year. In July, inflation stood at 7.48 percent.

"We are now working on tackling inflation. Our core challenge is to ease the price pressure derived from the global market. Once that is controlled, the other associated sectors of the economy will become good automatically."

He is expecting a "positive outcome" in two-three months thanks to a set of initiatives taken by both the government and the BB.

"The economy is under pressure and that pressure has come from import-induced inflation -- we have nothing to do here as we have to import many items, including petroleum, gas, wheat and so on."

At present, importers have to count Tk 111 for a dollar while settling their import bills whereas the banks are buying dollars from the central bank at Tk 94.70.

When prodded on the large gap, he said: "The outflow of the dollar is now higher than the inflow. Hopefully, there will not be much of a gap in 2-3 months. This will help us let the exchange rate fully float."

BB has already taken several initiatives to bring down imports, he said, adding that the economy is now reaping the benefits from the decision.

Both the opening and settling of letters of credit decreased substantially in July.

In July, LCs worth about $6 billion were opened, down from $8 billion the previous month.

Talukder also acknowledged another glaring problem in Bangladesh's financial sector: the lack of depositors' confidence in the non-bank financial institutions.

The central bank will turn to invigorate the NBFI sector once it has finished working on the 10 banks it has identified with weak financial conditions.

Asked whether he would take any measures to prevent a single party from having ownership stakes in multiple banks and NBFIs, he said: "This is not my job to see who are the owners of banks. My responsibility is to bring all banks under compliance."

Md Habibur Rahman, the chief economist of BB, presented a paper at the event about the central bank's recent measures to contain inflation and stabilise the exchange rate fluctuation.