Broad money growth is stalled

| Updated:
November 12, 2022 12:51:12

The growth of broad money, which includes physical currency, certain types of bank deposits and highly liquid securities, is significantly hampered as Bangladesh tightens its belt to weather a feared global recession.

Official data shows M2 growth fell to 8.64%, year-on-year, at the end of September 2022, from 11.19% this time a year earlier, signifying a contraction in the money supply in the EU. economy to contain inflationary pressure.

M2 stood at 17.228 trillion taka at the end of September 2022, according to Bangladesh Bank (BB) statistics, released on Thursday.

Central bankers say this is due to a decline in the net foreign assets (NFA) of the banking system as the central bank sold dollars to stabilize the foreign exchange market. NEA fell 11.2 percent during the review period, according to BB data.

In contrast, another component of broad money, namely net domestic assets or AIN, surged over the period.

Private sector credit growth involving the NDA jumped nearly 14% during the period. Private credit growth was 8.77% over the same period a year earlier.

The central bank continues to engage in a wide variety of unprecedented efforts to stabilize the foreign exchange market, including tightening imports.

Money supply growth can often be useful in measuring economic activity. During periods of economic boom, the money supply tends to grow rapidly as commercial banks extend more loans. Recessions, on the other hand, tend to be preceded by periods of slower growth rates of money supply.

However, certain factors contribute to increase the monetary creation on the domestic side or NDA which increased by 14.84% at the end of last September due to the increase in credits of the public and private sectors.

Economists believe that the NDA is quite acceptable and that investors are getting loans. But they feel the need for stabilization in the FX market, failing which this could lead to a further decline in the NFA.

Dr. Ahsan H. Mansur, executive director of the Bangladesh Policy Research Institute (PRI), told the EF that the initial IMF loan of $1.5 billion was nothing to do with the NFA.

“If we get $1.5 billion initially, it will create the same amount of liability again on the other end,” he says, adding: when the amount starts to be spent, the NFA will start to decrease again.

Dr Zahid Hussain, former chief economist at the World Bank office in Dhaka, told the EF that the central bank should now carry out an assessment to determine whether the measures it has taken over the past few months are adequate. or not to stabilize the foreign exchange market.

“I still see instability in the forex market.”

Dr Hussain, however, suggests that the dollar buy and sell caps set by BAFEDA (Bangladesh Foreign Exchange Dealers’ Association) should be lifted for smooth foreign trade.

He notes that the government has so far sold $5.2 billion to stabilize the foreign exchange market over the past four months, which has led to the “reserve currency” plummeting. And when the reserve currency goes down, you feel a shortage of liquidity in the money market.

“In my view, caps on loans and deposits should also be removed to increase liquidity.”

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