Thursday, 16 September, 2021

CPD suggests mopping up excess liquidity

  • Staff Correspondent
  • 4 August, 2021 12:00 AM
  • Print news

The Centre for Policy Dialogue (CPD) has urged the central bank to mop up excess liquidity from the money market to make it stable and avoid asset bubble in the country. 

For this, it suggested raising cash reserve ratio (CRR) for the banking sector and stopping proving 2 percent cash incentives on foreign remittances for the time being.

“The excess liquidity has already created a bubble to some extent in the capital market due to a lack of room to invest the fund in the productive sector,” said Dr Fahmida Khatun, CPD’s executive director, on Tuesday.

In her presentation, she showed that excess liquidity doubled in last one year bringing down call money rate and both the lending and deposit rates.

CPD held a press conference styled: "MPS FY2021-22: To what extent does the monetary policy meet the needs of the economy?" to give immediate reaction of Bangladesh Bank’s monetary policy announced last week.

It called upon the central bank to reconsider its expansionary monetary policy as low private sector credit demand has led to piling up liquidity in the banking sector.

Instead, the central bank should beef up its monitoring of the credit flow so that the excess liquidity can barred from being invested in the capital market to avoid asset bubble, CPD says.

“Banking sector is now in vicious cycle of excess liquidity. In this situation, the central bank can create foreign exchange bond for investment of remittances instead of injecting liquidity to the market through purchasing dollar,” Professor Mustafizur Rahman, Distinguished Fellow of CPD, recommended.

Given the current slugging private credit growth trend, it will be an uphill task for the central bank to achieve a 14.8 percent private sector credit growth trend. Rather, the target should be more realistic at 12 percent, according to CPD.

It alleged that all the targets, including credit growth, GDP growth and Inflation target have been set in the monetary policy in line with government’s budgetary targets.   Besides, the central bank should also gear up its supervision on the loans disbursed from stimulus packages to avoid misuse of the funds, CPD suggested, citing that banks are now worried about whether their stimulus loans will be repaid or not.

Dr Fahmida Khatun observed that small entrepreneurs are mostly deprived of the stimulus loans as the large entrepreneurs are the main beneficiaries of the stimulus packages.

As a result, small entrepreneurs are not being able to make a turnaround from the Covid crisis, which can eventually widen inequality amid the pandemic, she warned. 

The think tank thinks that the government should change its Consumer Price Index (CPI) to better reflect the present living cost and inflationary situation in the country, saying that the 16-year old CPI can’t reflect the real inflation pressures now.

The central bank eyes to keep inflation rate within 5.3 percent this fiscal in line with budgetary target, but CPD thinks that it might not be possible, given the current spike in living cost amid corona pandemic. 

“The next few months are very crucial for the country. The economy may start recovering by this time, if a large section of population is vaccinated,” Towfiqul Islam Khan, a CPD researcher, observed, also putting emphasis on establishing good governance in different aspects of economy.