The Bangladesh Bank has started printing money against the ‘special bonds’ to provide loans to the banks within a month it announced a contractionary monetary policy in a bid to check the rising inflation in the country and stop lending to the government.
The central bank set an interest cap equal to the policy interest rate or 8 per cent on the loans to the banks from ‘special bonds’. People concerned said Bangladesh Bank has deviated from the objective of its monetary policy.
The government is issuing bonds to address the debts incurred by the fertiliser and power sectors, with five banks already receiving bonds worth about Tk 50 billion. Now, the central bank has printed money and started lending to the banks.
Private IFIC Bank received Tk 4.59 billion and City Bank 19.85 billion with a 180-day deadline.
Bangladesh Bank, however, argues this move does not contradict the objectives of the monetary policy.
Mezbaul Haque, executive director and spokesperson of Bangladesh Bank, told Prothom Alo that banks can get the money by depositing these special bonds.
He termed the process a part of regular treasury management.
The central bank spokesperson also said it takes a long time to provide money in an alternative way, and that affects more on inflation. But, this liquidity facility will not affect the inflation that much, he claimed.
Who receives how much?
The government opted to issue special bonds amid the currency crisis triggered by a fall in revenue collection, and private banks are the recipients of these bonds. The government reports outstanding dues of approximately Tk 260 billion from both the private sector and government agencies in the fertiliser and power sectors. Among these, the electricity subsidy constitutes Tk 140 billion, while outstanding amounts to Tk 120 billion in fertiliser.
In response to the financial crisis, Bangladesh Bank initially provided government funding by printing currencies. However, the central bank has since shifted away from this approach due to the escalating inflation. Consequently, the government has chosen to address its financial needs by issuing bonds.
Already, Islami Bank Bangladesh Ltd. received Tk 24 billion in bonds, Sonali Bank Tk 2.44 billion, IFIC Bank received Tk 4.59 billion in bonds to settle dues in the fertiliser sector while City Bank got Tk 19.85 billion and Pubali Bank 770 million in bonds to clear up debt in the power sector.
Banks receive cash against bonds
Bangladesh Bank moved to provide liquidity facilities to banks against the bonds after the government started providing the banks with special bonds.
The central bank’s Motijheel office supervises liquidity management. In a letter on 21 January, Bangladesh Bank’s Debt Management Department told the Motijheel office that, to settle the debts incurred by the fertiliser and power sectors, banks will receive a definite repo of 1, 3, 14, 28 or 180-day terms from Bangladesh Bank at the existing policy rate, taking the Bangladesh Government Special Purpose Treasury Bond, issued by the government, as collaterals.
In this case, money equal to the Bangladesh Government Special Purpose Treasury Bond will be used for repurchase agreements known as repo, which will continue until the government withdraws this bond.
For this reason, the Debt Management Department made several recommendations. These include making necessary arrangements in the electronic system of Bangladesh Bank to keep bonds as collaterals; adjusting money from banks’ current accounts by exempting the lien of the collateral bonds when its maturity is over, and depositing that money to the respective accounts of Bangladesh Bank.
It has also been advised to provide repo once again following the appeal from the banks after depositing the money coming from bond maturity to the respective accounts of the central bank. As a result, banks have borrowed money from the central bank over the past two days.
Bangladesh Bank issued guidelines to inject money into Islami Bank against bonds. However, banks can borrow at an interest rate of 8 per cent and lend to their clients at an interest rate of 11-12 per cent.
Both banks and the government benefit from this move as the banks’ liquidity crisis and the government’s debt eases. However, people concerned expressed doubt whether introducing loans against bonds by printing money would ease inflation.
Bangladesh Bank moved to further reduce the currency supply to the markets in the monetary policy of the second half of the current fiscal in a bid to rein in the rising inflation.
The central bank also increased the policy interest rate. As a result, the government and private banks are borrowing currency from the central bank at a higher interest rate than before. Besides, private sector credits are reined in too.
Zahid Hussain, former lead economist of the World Bank’s Dhaka office, told Prothom Alo, “This way or that the government has been taking money from the Bangladesh Bank. Maybe it would not have been a decent way for now to print the money directly, so this is being done in a slightly different way. These liabilities will increase slowly, and maybe they will print money directly to settle the debts in the coming days. As a result, there will be no initiative to reduce subsidies on power and fertiliser, which would result in creating inflation pressure. And all these contradict the objective of the monetary policy.”