Taming inflation, exchange rate top priority, says outgoing BB chief

Bangladesh Bank (BB) has announced a cautious monetary policy stance for fiscal 2022-23 in a bid to contain inflation and exchange rate pressure.

As part of the move, the BB has decided to hike the repo rate, at which banks borrow from the central bank, by 50 basis points to 5.50 percent to deal with the demand side pressure.

Fazle Kabir, outgoing governor of BB, unveiled the monetary policy stance (MPS) in a press conference at the central bank headquarters in Dhaka on Thursday.

In the new MPS, the central bank also reduced the private sector credit growth target to 14.1 percent for FY23 from 14.8 percent for FY22. Still, BB believes the money supply will be stable to productive and employment-generating activities.

However, the ongoing Russia-Ukraine war, pandemic and recent floods in North and Northeastern parts of the country could have some headwinds on the price stability of essentials and economic growth as well.

Growth outlook

Bangladesh’s economy grew at 7.25 percent in FY22 as confirmed by the BBS in its estimate. The exuberance of economic activities was concentrated mainly in the industry sector, with 10.44 percent growth supported by the improved Covid-19 situation and pent-up demand. In addition to expansionary and accommodative monetary and fiscal policies during the pandemic, the manufacturing sector benefited from the recent surge in domestic and foreign demand.

A pick-up in activities in the services sector also helped maintain the robust growth momentum. The healthy growth performance of the local industries and higher external demand benefited the buoyant activities in the services sector. A robust external demand, reflected in over 34 percent growth in exports in the first 11 months of FY22 and buoyant domestic demand manifested in over 39 percent growth in imports.

Notwithstanding the substantially diminished intensities of the Covid-19 pandemic, the Bangladesh economy’s recovery process is likely to face some direct and indirect adversities due to the Russia-Ukraine war. The war has heightened the potential losses of export demand on the one hand, and the war-induced surge in the commodity prices has led to higher import costs and trade deficit, putting pressure on inflation and exchange rates on the other hand.

So far, the Bangladesh economy has shown strong resilience against Covid-19 shocks and recovered the growth rate quickly. Considering the economic impact of the Padma Bridge, the 7.50 percent real GDP growth target seems consistent with BB’s model-based GDP growth forecasts for FY23.

Inflation outlook

The inflation outlook might confront some uncertainties in FY23 because of increasing price pressures from supply-demand imbalances in the pace of rising demand, the unfavourable prognosis of the Russia-Ukraine war, and elevated global commodity prices. In addition, a sharp rise in inflation in India, which is the second-largest trading partner, might pose upward risks to the inflation outlook of Bangladesh. Frequent lockdowns in China’s manufacturing hubs could cause supply bottlenecks, worsening the inflation forecast as the country is the largest trading partner of Bangladesh. Amid this situation, BB said a higher inflation trajectory will continue in FY23.

Current account

Based on the latest trend of available data, BB anticipated that the current account deficit might remain in the negative territory by around $16.5 billion at the end of FY23.

Remittances

The increased outflow of wage earner remitters amid improved economic and working conditions in the source countries is expected to help the inward remittances grow by 15 percent in FY23.

Export-import

The export and import growth will also be moderated by the higher base effect, reaching 13 percent and 12 percent growth in FY23, respectively.

Balance of payments

Supported by a boost in inward remittances and export and import growth, the BB forecasted that the overall balance in FY23 will be at a moderate deficit level.