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The Bangladesh Bank has injected Tk70,000 crore in new money into circulation in the first 11 months of the current fiscal year 2022-23 to support the government's budget expenditure, creating further risk of inflation which already eroded the living standard of general people.
The Bangladesh Bank started to create new money, also known as printing money, at the beginning of the current fiscal year amid a liquidity crunch in banks, said a senior executive of the central bank.
Although the liquidity situation has improved over the past few months after pumping money into banks, the central bank continued to inject new money into circulation to keep interest rates of treasury bills and bonds below 9%, the executive added.
The central bank plans to introduce a new lending rate formula in July this year that will be based on the weighted average rate of a six-month treasury bill plus a 3% premium. It wants to keep treasury bill rates below 7% to maintain the lending rate at 9% even after lifting the single-digit rate cap.
To achieve this goal, the Bangladesh Bank is devolving – a process where it plays the role of a lender for the government by buying treasury bills and bonds instead of mobilizing money from commercial banks through selling treasury bills and bonds.
Printing money is a counterproductive approach to controlling inflation, said Zahid Hussain, former lead economist at the World Bank's Dhaka office.
He said if the government would borrow money from banks instead of printing money, it would increase interest rates and slow down the private sector credit growth. And, a slowdown in private sector credit growth would depress demand even with low-interest rates helping to control inflation.
Moreover, tight liquidity also would make the government cautious in unnecessary expenditure which would also reduce price pressure, he added.
Now, both the government and the private sector are getting available money which will fuel inflation, observed the noted economist.
The increased circulation of new money has reduced the interest rates of treasury bills and bond rates. For example, the interest rate of a six-month treasury bill decreased from 7.59% in January to 7% in May, according to Bangladesh Bank data.
The reduction in treasury bill rates is due to the Bangladesh Bank buying government instruments instead of selling to banks, the central bank executive observed.
The rate of treasury bills and bonds declined even after huge jump in government borrowing at the last time of the fiscal year.
The Bangladesh Bank's data show that the government borrowed Tk29,697 crore from banks in April, the highest amount borrowed in a single month during FY23.
According to the central bank, in the first 10 months (July-April) of the current fiscal year, the government borrowed a total of Tk82,057 crore from the banking system, and around 80% of this fund was provided by the central bank.
Analysts predict that the government's borrowing from banks may surpass the target of Tk1,06,334 crore set for FY23, considering the remaining two months and the typical rise in borrowing during this period, coinciding with increased expenditure.
The bank is creating new money through development instead of taking money from banks for the government, according to Syed Mahbubur Rahman, managing director of Mutual Trust Bank.
However, he cautioned that this development may create price pressure after one or two years.
The huge circulation of new money caused the reserve money growth to surge to 8.71% this February, up from 7.25% in the same period last year. But, the reserve money growth was still far below compared to the monetary target of 14% set for June in the monetary policy of the current fiscal year.
The low reserve money growth is due to the central bank mopping up Tk1.14 lakh crore from the market by selling $12 billion, according to Bangladesh Bank data.
The circulation of new money increased domestic asset growth by 315% year-on-year in February this year when foreign asset growth was negative 18.53% due to dollar selling.
The high growth in domestic assets is because the Bangladesh Bank is creating new money against government treasury bills and bonds, while the negative growth of foreign assets is due to the massive dollar selling pressure, said the central bank official.
The official warned that high domestic asset growth will fuel inflation when the foreign exchange market normalises, and negative foreign asset growth means the country is losing its capacity for foreign payment.
The faster erosion of foreign assets and high growth in domestic assets created an imbalance in the balance sheet of the Bangladesh Bank, said Ahsan H Mansur, executive director of the Policy Research Institute.
He said the rise in domestic assets will ultimately increase pressure on the US dollar as people will have more money to buy it.
The Bangladesh Bank is supplying money through printing taka at a time when global central banks have moved for tightening monetary policy to cool down their inflation.
India has already started to get the result of contractionary monetary policy as its inflation came down to an 18-month low in April.
US inflation also has started to ease after a hike in interest rates by its central bank.
On the other hand, inflation in Bangladesh stood at 9.24% in April 2023, which was 9.33% the previous month – the highest in the last eight months, according to the latest data from the Bangladesh Bureau of Statistics (BBS) released on Wednesday.
Earlier in August last year, inflation in the country hit a record 9.52%.
According to BBS data, food inflation stood at 8.84% in April, down from 9.09% in March, while non-food inflation remained the same as the previous month at 9.72%.
High revenue shortfall and interest rate burden also prompted the central bank to go for supplying money through printing taka, said central bankers.
According to sources within the National Board of Revenue, the shortfall in revenue collection against the target is about Tk28,000 crore in the first nine months of the current fiscal year.
If the shortfall continues to stretch, experts said, it could pose a serious challenge for the government regarding overall economic management.
