Increased money supply in the last six months following a substantial growth in high-powered money has helped Bangladesh avert possible recession, but economists say inflationary pressure is building up.
High-powered money comprises currency and bank deposits at the central bank.
Expansionary monetary policy of the Bangladesh Bank (BB) along with the implementation of the government's stimulus packages aiming to speed up recovery of the pandemic-hit economy have also helped higher inflow of liquidity in the banking system.
Besides, the central bank's downward revision of repo rate and cash reserve ratio (CRR) since April 2020 has boosted the flow.
The country's aggregate money supply, measured by broad money (M2), increased by 1.41 percentage points to 13.57 per cent in August year-on-year from 12.16 per cent in March 2020, according to the central bank's latest statistics.
M2 is a measure of the amount of money in an economy with the combination of highly-liquid and the less-liquid money.
Meanwhile, outstanding of the M2 rose to Tk 14,154.12 billion in August from Tk 12,463.05 billion a year ago. It was Tk 13,737.35 billion in June 2020.
Reserve money (RM) also saw a 21.25 per cent growth in March, propelled by a sharp rise in precautionary cash holdings ahead of the nationwide general holidays in response to the pandemic.
The RM growth, however, came down to 10 per cent in May from 21.25 per cent in two months before. It exceeded the target in the last fiscal. The growth in the monetary base rose to 15.56 per cent in June against its target, which was fixed at 12 per cent for FY '20.
The growth in central bank money jumped again in July, the first month of the current fiscal (FY), after reopening the economy, the BB's data showed.
The RM growth reached 19.86 per cent in July from 15.56 per cent a month before. It came down to 12.19 per cent in August.
The RM is nothing but the 'currency in circulation plus banks' deposits with the central bank of Bangladesh.
Money multiplier, however, rose to 5.05 in August from 4.81 a month before. It was 4.83 at the end of June 2020.
Money multiplier considered an indicator of the money market refers to how actual money can lead to a bigger increase in the total money supply.
Outstanding of the base money rose to Tk 2,820.22 billion in August last from Tk 2,513.88 billion a year ago. It was Tk 2,844.83 billion in June 2020.
Economists feared that higher money supply may fuel inflationary pressure on the economy in the near future if the regulators failed to adopt proper policies for balancing between the money supply and price stability.
They also recommended the central bank strengthen its monitoring, saying the proper use of money should be ensured.
Talking to the FE, former BB governor Salehuddin Ahmed said the government and the business community should work together to keep the price of essentials in the market stable.
"The central bank should watch the movement of major monetary aggregates closely to avert unnecessary inflationary pressure on the economy," Mustafa K Mujeri, former director general of Bangladesh Institute of Development Studies (BIDS), told the FE.
Dr. Mujeri, a former chief economist of the BB, said supply side bottlenecks should be removed immediately to keep the price level stable.
A BB senior official told the FE though the money supply has increased recently, two major indicators -M2 and RM -are still within the monetary programme of the central bank.
Net foreign assets (NFA) has risen recently following lower import payments, record inflow of remittances as well as increased foreign assistance and loans. "These have enhanced money supply in the banking system," the central banker said.
He also said the growth in net domestic assets (NDA) maintained a decreasing trend in recent months because of the government's lower borrowing from the banking system, particularly from the central bank.
"Purchasing of the US dollar by the central bank from the banks directly has also contributed to the higher money supply in the banking system in recent months," explained the BB official, also an economist.
The central bank injected Tk 222.77 billion into the market through buying $2.63 billion from the banks in the July-September period of FY'21.
The BB's refinancing schemes have also strengthened the inflow of liquidity in the market, he added.
Prime Minister Sheikh Hasina has so far announced 19 stimulus packages worth Tk 1.03 trillion to offset the impact of the pandemic on various sectors.