Post-pandemic, Bangladesh recovered reasonably quickly and was seeing encouraging signs that the economy was well poised to return to the pre-Covid growth path. However, a combination of global inflationary pressure and supply disruptions owing to the Russia-Ukraine War, a rising US dollar, increasing international inflation rates, and the emergence of recessionary fears in advanced economies coupled with a few not-so-thoughtful domestic policy measures created a hostile economic environment for us.

Bangladesh has been facing some serious macroeconomic challenges, reflected in high inflation, balance of payments pressure causing the loss of foreign exchange reserves, and fiscal pressures indicated by a severe revenue constraint and rising fiscal deficits.

History has shown us when it comes to influencing macroeconomic outcomes, governments have typically relied on one of two primary courses of action: monetary policy or fiscal policy. Central banks use monetary policy tools to keep economic dents in check and stimulate economies out of distress.

While central banks can be effective, there could be negative long-term consequences that stem from the short-term fixes enacted in recent times. If monetary policy is not coordinated with a fiscal policy enacted by governments, it can undermine efforts as well.

We, therefore, felt that addressing the current macroeconomic issues in Bangladesh requires the use of different policy instruments that best relate to each of these areas: monetary policy instruments to ease the inflationary pressure; the exchange rate policy to ease the balance of payments pressure; and tax or expenditure policy measures to ease the budgetary pressure. Their combined use can help avoid the bluntness of any single instrument and reinforce the effectiveness of each of the policy reforms.

Our central bank formulated the monetary policy for the second half of 2023 promising emphasis on liquidity supply to the manufacturing and agricultural sectors and reducing the gap in dollar rates for export proceeds and remittance. The policymakers also introduced a new financial instrument for Shariah-compliant banks to aid their liquidity management and strengthen their governance standards.

However, the policy came in the wake of reports of some big cash-outs through shady lending. This raised questions on the credibility and effectiveness of the decision and even the independent decision-making ability of the central bank.

On the cap on interest rates, speculations were ripe regarding who is benefitting the most? Such a cap was supposed to help small businesses, small and medium entrepreneurs (SMEs), and the rural economy, but the beneficiaries are the already wealthy big business owners and those who were taking undeserved and unfair advantage of low-cost funds from commercial banks.

Our authorities needed to be very wary of falling into the trap of policy myopia where to address the short-term issues, they often lost sight of the longer-term solutions.

The central bank has recently released the monetary policy statement for the next six months in 2024, trying to put a brake on the spiraling inflation and help market liquidity improve up to a respite level. This time, whether there is any IMF pressure or not, they have decided to support the interest and exchange rates to go up and the market to play a historically accepted role.

Though the central bank governor, in response to media queries, brought many irrelevant issues onto to table, the apprehension about the efficacy of the monetary policy remains with its failure in taming errant banks and financial institutions, ending indiscipline in the banking sector, and taking visible reforms to strengthen the watchdog.

Whether we like it or not, we must let the market play its role.

The writer is an economic analyst