Increase money supply | The government wants to increase the money supply by more than 15% even in the context of runaway inflation

June 08, 2022, 10:30 a.m.

Last modification: June 08, 2022, 11:21 a.m.

Infographic: TBS

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Infographic: TBS

The government will increase the money supply in the next fiscal year to 15.4% – the highest in seven years, which appears to be putting a damper on its own efforts to rein in rising inflation.

Economists say such an uncalculated target for broad money growth will further fuel inflation in Bangladesh.

They suggest reducing the money supply by controlling aggregate demand.

“Broad money” – or M2 – is a calculation of the money supply that includes all components of “narrow money”, such as cash deposits and checks, as well as “near money” such as savings deposits, money market securities and others. – related deposits.

M2 is a broader measure of money supply and is closely watched as an indicator of future money supply and inflation, and as a target for central bank monetary policy.

If broad money exceeds nominal GDP growth, commodity prices will surge again, leaving low-income consumers and the poor to bear the brunt of mounting pressure on the cost of living, fear- they.

At its coordination council meeting, the finance ministry said the country’s economic growth target was forecast at 7.5 percent and inflation at 5.6 percent. Nominal GDP will stand at 13.1%.

By that calculation, the estimated broad money growth target for FY23 is 2.3% higher than nominal GDP, the economists said.

An analysis of the Ministry of Finance’s proposal shows that the seven-year high money supply target was set to increase domestic credit flow to 16%.

In the revised FY22 budget, to meet the government’s additional demand for bank borrowing, domestic credit growth increased to 17.8 percent from the 14 percent originally set in the main budget.

Broad money grew by 13.6% year-on-year in FY21. Through February of the current fiscal year, the money supply increased to 9.46% against the annual target of 13.8%. In the revised budget, the target was raised to 15%.

Economist Ahsan H Mansur told the Business Standard that the money supply needs to be curbed to cope with inflationary pressure, as a free flow of money will drive up the prices of goods and services following an increase in the request. Moreover, if demand increases, imports will also increase, putting pressure on foreign exchange reserves.

There is no alternative to increasing the money supply to meet the demand for capital to stimulate economic growth. But keeping people’s purchasing power intact by keeping commodity price rises in check is now more important than growth, he noted.

Monzur Hossain, research director at the Bangladesh Institute of Development Studies (BIDS), said controlling inflation at all costs should be a top priority in the upcoming budget. The decision to increase money supply growth goes against this priority.

If the money supply drops globally, so does demand, he said, adding that to reduce the flow of credit to the private sector, the Bangladesh Bank has already raised the repo rate, which could further increase in the future.

In this situation, there is no reason to provide additional money to the economy, added Monzur Hossain.

In the FY23 budget, credit growth to the private sector was projected at 15 percent. The growth target has been set at 14% in recent years, but the gain remains at 8% on average.

However, in April this year, credit to the private sector reached 12.8%, the highest in three years, according to the Bangladesh Bank.

Dr. Salehuddin Ahmed, former Governor of Bangladesh Bank, said the new money supply will not pose much risk if the flow of private sector credit is kept in the right direction by identifying growth investment sectors.

Stating that there is both demand-driven inflation and cost-driven inflation in the country’s economy, the economist said, “If we can increase investment in potential private sectors, output will increase. and production costs will drop.

As a result, prices of goods will fall, leading to lower inflation and higher people’s incomes, he said.

However, money supply alone cannot have much impact on increasing investment in Bangladesh as there are various obstacles at every stage of running a business from the start.

If issues such as bribery, corruption and extortion are addressed, the flow of money will ensure increased investment. Otherwise, the new money supply will only increase inflation, he continued.

During the coordination council meeting, Finance Division Secretary Abdur Rouf Talukder said that the growth of broad money supply is very low in Bangladesh. Although it has been rising for several years, it remains below 70% of GDP.

In neighboring India, broad money accounts for almost 90% of its GDP. It is more in other countries, including Thailand and Vietnam, he noted, adding that increasing the money supply will help increase government funding for budget execution.

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