Remittance and the challenge of monetary management

COMMODITY prices globally are on the rise again as the global economic recovery takes hold. In response, domestic inflation is showing signs of upward movement and has caught the attention of monetary authorities. Lately, monetary management faces a bigger challenge from an unusual source -- remittance. Despite the global economic slowdown and contrary to what analysts were predicting about the collapse of remittance inflows to recipient countries, that situation did not materialise in Bangladesh, as its migrant workers increasingly chose the formal route for sending money home, and reverse migration, though notable, did not assume alarming proportions. As a consequence, by end June, the country received a total of $9.7 billion of remittances, a growth of 24% over the previous year. There is as yet no sign of this flow abating as inflows since June have hovered around $900 million.

With the economy still recovering from the aftershocks of the global downturn, import growth has remained sluggish while exports pulled in nearly $16 billion last fiscal. The consequence of this state of remittance, imports and exports has been that gross official reserves crossed the $10 billion mark this month. But burgeoning remittance has been causing some headache to the country's monetary authorities. As remittance flows increase, commercial banks surrender the dollars to the Bangladesh Bank in exchange of local currency. This is because their holding of foreign currency is subject to limits set by the Bangladesh Bank known as their open position. Even though the Bangladesh Bank recently raised their open positions, that still left enough remittance with commercial banks to exchange takas for. The upshot of this process has been the expansion of bank reserves, which are high-powered money -- that which leads to more money creation in the economy. In the last fiscal year, reserve money grew some 30 per cent with broad money (M2) growing 20 per cent. During the same time, credit to private sector grew only by 14 per cent. The economy faces two consequences from this phenomenon. Pressure is building on the price level which could lead to higher inflation as money supply growth tends to significantly overshoot the nominal growth of gross domestic product (GDP) or output. The second problem is that of excess liquidity as commercial banks remain on a holding pattern, as lending - particularly to large projects - stagnates, partly due to economic uncertainties, but mostly due to the energy constraint, because all big projects exert heavy demands on gas and power that is not readily available at the investment location.

Under the circumstances, one option the central bank could use is to sterilise the growing money supply by mopping up the excess liquidity through treasury auctions. Unfortunately, the last few auctions showed little interest from financial institutions to buy these bills at the low returns they had to offer. Moral persuation might not be enough to sway them into holding these low yielding bonds. At a time when the central bank is trying to push interest rates into lower territory, it would be hard-pressed to offer higher rates on auctions. Thus it seems for now monetary policy is stuck between the rock and a hard place. What is still surprising is that with so much excess liquidity in the market why interest rates would not be falling on their own without the central bank having to literally cajole commercial banks into lowering interest rates. That remains the great mystery of Bangladesh's financial market and a failure of financial intermediation.