The Bangladesh Bank has injected Tk 70,000 crore into circulation during the current fiscal year to support the government’s budget expenditure.
However, this move has raised concerns about the risk of further inflation, which has already affected the living standards of the general population.
According to a senior executive, the central bank began creating new money, or printing money, at the start of the fiscal year due to a liquidity crunch in banks. While liquidity conditions have improved in recent months, the central bank has continued to inject new money into circulation to keep interest rates on treasury bills and bonds below 9%.
In July, the central bank plans to introduce a new lending rate formula based on the weighted average rate of a six-month treasury bill plus a 3% premium.
It aims to maintain lending rates at 9% even after lifting the single-digit rate cap by keeping treasury bill rates below 7%. To achieve this, the bank is devolving its role as a lender to the government by buying treasury bills and bonds instead of mobilizing money from commercial banks.
Critics argue that printing money is a counterproductive approach to controlling inflation. Zahid Hussain, the former lead economist at the World Bank’s Dhaka office, suggests that borrowing money from banks rather than printing money would increase interest rates, slow down private sector credit growth, and reduce demand, thereby helping to control inflation.
The increased circulation of new money has already reduced interest rates on treasury bills and bonds. For example, the interest rate of a six-month treasury bill decreased from 7.59% in January to 7% in May.
Furthermore, the government’s borrowing from banks is predicted to surpass the target set for the fiscal year, as analysts consider the remaining two months and the typical rise in borrowing during this period.
The creation of new money has led to an imbalance in the balance sheet of the Bangladesh Bank, with high growth in domestic assets and negative growth in foreign assets. Experts warn that this could fuel inflation and weaken the country’s capacity for foreign payment.
The Bangladesh Bank’s decision to inject money through printing taka comes when global central banks are tightening monetary policies to control inflation.
In India, for example, inflation decreased to an 18-month low in April after adopting a contractionary monetary policy.
Inflation in Bangladesh stood at 9.24% in April, the highest in the last eight months, according to data from the Bangladesh Bureau of Statistics. The high revenue shortfall and interest rate burden have also influenced the central bank’s decision to inject money through printing taka.
Experts warn that if the revenue shortfall continues, it could seriously challenge the government’s overall economic management.