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How printing money without creating real assets fuelled inflation?


The Bangladesh Bank’s decision to print money without backing it with real assets has contributed to significant inflation in Bangladesh. Starting in June 2022, the central bank injected funds into financially distressed banks, mainly linked to the S Alam Group, by creating new money without securing corresponding assets. Over the fiscal years FY23 and FY24, this approach increased reserve money by an unprecedented Tk66,000 crore, causing the taka to lose value, which contributed to inflation.

Reserve money, which forms the monetary base, reached a historic Tk4.13 lakh crore by June 2024. However, this increase was largely due to domestic asset creation, as net foreign assets fell by Tk1 lakh crore, further weakening the currency. When domestic assets rise and foreign assets fall, there’s an oversupply of taka relative to dollars, leading to depreciation of the taka and increased inflationary pressure, as explained by former Federal Reserve official Sabeth Siddique.

Bangladesh Bank's money-printing strategy, rather than fostering economic growth, worsened the situation by not generating real assets. If the printed money had been directed toward productive uses, such as importing materials for export industries, it might have stimulated growth. Instead, declining imports and exports reflected a lack of productive investment, worsening the supply-demand imbalance and driving inflation.

In August 2023, under pressure from the IMF, Bangladesh Bank stopped using its "devolvement" process to print money and began using other mechanisms, like overdrafts and Ways and Means Advances, continuing to support banks through newly created funds. Notably, S Alam-controlled banks, such as Social Islami Bank, maintained aggressive lending practices and continued operating despite severe liquidity shortages due to central bank support. These banks faced mounting financial instability, and the Bangladesh Bank had to issue over Tk1.45 lakh crore in support from FY23 to FY24.

A change in government in August 2024 marked a shift. The Bangladesh Bank halted money printing, restricted struggling banks' operations, and allowed them to borrow under guarantees from other banks. Additionally, the new leadership imposed limits on banks' business activities, dissolved boards at politically influenced banks, and introduced a new liquidity support framework aimed at stabilizing the banking sector.

In essence, Bangladesh Bank’s approach of printing money without real asset backing, primarily to support weak banks, fueled inflation, depreciated the taka, and put the economy under strain. Only recently has the central bank made moves to address these issues by imposing stricter oversight and reducing dependency on printed money.
#Bangladesh #Economy #TopNews #TBS #JebunNesaAlo

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