Former Bangladesh Bank Governor, Professor Salehuddin Ahmed, has said that contractionary monetary policies and interest rate hikes won't benefit the economy, and more money should be supplied to entrepreneurs instead.
"Instead of reducing the money supply to control inflation, we need to provide ample capital to entrepreneurs to strengthen the country's industrial base," he said speaking at a Centre for Policy Dialogue (CPD) event today (23 May).
He believes that boosting investment and ensuring good market governance through coordinated efforts from various government agencies will naturally bring down inflation.
"If investments are increased and good governance is ensured, inflation will decrease on its own," he said.
The event, titled "What Lies Ahead for the Banking Sector in Bangladesh?" was held at a hotel in Dhaka.
CPD's Executive Director Fahmida Khatun presented the keynote paper, highlighting problems in the banking sector and suggesting the formation of a banking commission and strong political commitment to build a robust financial sector.
Prof Salehuddin expressed concerns about the increasing weaknesses in the economy. "The vulnerabilities in the country's economy are increasing, and unless the condition of the banking sector improves, this instability will not decrease," he said.
"Without specific plans, sudden decisions from Bangladesh Bank are deteriorating the financial sector," he said.
The former cenbank governor pointed out recent policy changes, saying, "While previously only two directors from one family could be nominated for a maximum of six years, now three directors can serve for nine years."
He added, "Earlier if a company from an industrial group defaulted on a loan, no other company from that group could take loans from the bank. Now, defaulting companies' parent groups are allowed to take loans for other companies."
Discussing foreign exchange reserves, Prof Salehuddin said, "Despite reserve pressures for several years, $12 billion was spent to maintain the exchange rate at 82 takas. Now, the currency value is being devalued by 27% all at once."
He criticised Bangladesh Bank's current approach, saying, "Bangladesh Bank is nurturing wrongdoers while suppressing the compliant, leading to further issues."
The former Bangladesh Bank governor also pointed out changes in loan rescheduling policies. "In the past, loans could be rescheduled by depositing 10% of the total loan amount, with higher rates for subsequent rescheduling. Now, loans can be rescheduled by depositing just 2%. Additionally, loans over 500 crore takas can be restructured," he said.
He argued that taking loans from banks without repayment has become a new business model, depriving genuine entrepreneurs. "Taking loans from banks without repayment has become a new business model, depriving genuine entrepreneurs," he said.
Prof Salehuddin blamed these issues on weak regulatory agencies, noting that business compromises and political pressures were present in the past, but the situation wasn’t as bad due to the central bank's autonomy.
"Business compromises and political pressures existed in the past, but the situation was not as bad due to the central bank's autonomy," he said.
He urged the creation of a separate agency for policy and control in the banking system, describing the current management of Bangladesh Bank as similar to a cooperative society.
"Bangladesh Bank is being managed like a cooperative society, with businessmen, Bangladesh Bank, and bank directors making joint decisions," he said.
Prof Salehuddin called for Bangladesh Bank to become a strict regulatory body.
"Bangladesh Bank must become a strict regulatory body," he stressed.
