Adopt accommodative monetary policy: Task force on economy

Staff Reporter :

Instead of adopting an ultra-tight monetary policy, the task force on re-strategizing the economy and mobilising resources for equitable and sustainable development suggested that Bangladesh Bank adopt an accommodative monetary policy.

The 12-member taskforce also recommended supply-side policies as recommended by task force to fight inflation including easing imports of food and essential items by reducing LC margins and tariffs; increasing competition among the importers of edible oil, sugar, LNG, etc; and cautious attempts for energy price adjustments.

The report submitted to Chief Adviser Muhammad Yunus on Thursday night suggested adopting the monetary policy with a moderate tightening of the money supply that may keep lending interest rates below 15 percent to encourage more investments
and productivity growth, gradually dampening inflationary pressure.

This ultra-tightening of the money supply might not have produced better results due to the weak monetary transmission process in a weak financial system for overall aggregate demand management. As a result, higher interest rates made domestic products costlier and contributed further to inflation, it observes.

Bangladesh Bank (BB) is scheduled to announce a new monetary policy on February 10 for the remaining period of fiscal year 2024-25, focusing on addressing inflation as a top priority.

Addressing government budget and debt management, the task force report highlighted that fiscal policy must be aligned with monetary policy to manage inflation expectations.

“If the government runs large fiscal deficits and borrows excessively, it can lead to higher inflation expectations, as people fear that excessive money supply growth will drive up prices,” it says, mentioning that maintaining fiscal discipline through controlling budget deficits and public debt can help avoid excessive government spending that could stoke inflationary pressures.

“Public spending policies must prioritize productive investments like infrastructure, education] over consumption-based expenditures that could inflate demand unnecessarily,” it warns.

The task force report said the RMG sector, the major exporting industry, faces a dire state in repaying the loans as it is difficult for them to adjust the prices of their products in the international market due to high-interest costs.

“Moreover, monetary tightening alone is often insufficient when inflation is driven by supply-side factors like food shortages or global commodity price increases,” it says.

In its report, the task force recommended forming a Monetary Policy Committee with voting rights to pursue a credible policy and bringing discipline in the financial sector with cautious liquidity support to the crisis-prone banks.

Earlier on 10 September last year, the task force was formed on to reframe the development strategies, find out leakages in the financial system and restore discipline in project implementation.