The dollar soars, inflation roars and central banks squeeze hard on the money flow. The result is the global economy decelerating fast into a slowdown. It all started with the US Federal Reserve raising rates. Other large savings had to follow suit to stay afloat. Hard braking sometimes may be unavoidable in an emergency, but it is dangerous too – be it on the road or in the economy. Rising inflation, highest in decades even in leading economies, has made it necessary to go for harsh monetary tightening.
The US Fed was the first to slam the brake. It used its policy rate tool to curb consumption and bring down inflation. But the exercise pushed the global economy into a deeper crisis, ringing alarm bells on a financial meltdown.
In its latest forecast, the International Monetary Fund anticipates 2023 will feel like a recession for millions as a third of the global economy may see a negative growth in the next three quarters.
The three largest economies — the United States, the European Union and China — will continue to slow down, it says, forecasting the worst is yet to come as rate hike bites.
Similar warnings are issued from the UN, World Bank, global CEOs and chief economists of different organisations.
When the forecast for the largest economies is so frightening, can economies like our hope any better?
Poor and emerging economies, already rattled by food and energy price volatility, will be on the ropes even longer. They are the helpless victims of rate hikes that have made funds and trade costlier for them; their currencies are losing ground to the dollar and other major currencies they trade in.
Some middle-income countries, like Brazil, Mexico, India and Indonesia could manage their monetary situations better and somewhat weathered the storm, preventing free fall of their currencies against the greenback.
An article in The Economist gave credit to the central banks of those middle-income countries – Brazil in particular – for “nicely elevating” bank charges, which helped them contain inflation, protect the value of local currencies and prevent quick fall of its foreign currencies holdings.
It is the credibility and independence of its central financial institution that mattered most, it says, referring to Brazil and India that could keep their reserves strong.
Bangladesh Bank, while responding to the needs of the local economy, has taken a series of initiatives to ease the pressure on foreign exchange reserves, reduce luxury imports and facilitate essential imports to keep inflation in check. Of late it also ended the fixed exchange rate regime and allowed banks to decide dollar rates on their own. But it has been too late as the central bank had long ignored the suggestions from businesses and economists to devalue taka in line with the neighboring countries. Still, there are different rates for dollars for importers, exporters and remitters.
Taka has lost value by more than 23% in one year. The weaker taka will benefit exporters and remittance receivers, but it makes imports costlier, adding to inflationary pressure.
Forex stood at $34.47 billion on 7 November as the central bank has to sell dollars to banks to help them meet international payment obligations.
Despite some hike in policy rates, interest rate caps still remain in place, raising questions about the central bank’s independence as well as ability to take right decisions at the right time.
Its financial intelligence unit is clueless about currency flights, prompting the higher court to ask it to form a cell to prevent money laundering and submit a progress report.
Apart from the inflationary concern, acute shortage of power and energy, and worries over future food supply, the crisis in the external sector has also accentuated in Bangladesh, calling for more prudent monetary policy actions.
Still, import payments remained high mainly due to high fuel and food prices in the global market. That is why the trade deficit increased despite some growth in exports.
As remittance growth slowed, the current account balance also decreased further, with financial accounts experiencing a deep decline.
The Center for Policy Dialogue (CPD) thinks that the central bank should refrain from further depleting its forex reserves, particularly in view of the recent debate regarding the estimation methodology and pursue a floating exchange rate policy.
How good is central bank’s independence?
It has long been a popular debate for central bankers worldwide. Central banks can do their routine work the best – keeping inflation in check and supporting the growth target – if they are independent of the governments.
Central banks that were more independent, such as those of Germany, Austria and Switzerland, achieved lower inflation in 70s and 90s than those with closer ties with governments, for example in Norway, New Zealand and Spain.
But the relationship changed in the new millennium as new forces, like greater globalization and the euro, came into force.
Once a sacred cow in the Western World, this has been questioned for some recent independence steps of central banks including the Bank of England, whose move irked the immediate past British prime minister Liz Truss. Central bankers across the world are under fire from politicians for failing to predict and prevent the current bout of high inflation, says a Reuters report.
Even in the US and Europe, the central bankers’ independence is questioned for their massive purchase of government debt – a quantitative easing program that requires the central banks work shoulder to shoulder, rather than at arm’s length, with their governments, it suggests.
Most central banks in the developed world and many emerging economies are formally independent to varying degrees. But in practice, absolute independence is rare.
Does independence alone help?
Reuters puts the idea in a different way. A central bank is independent if it can make policy, such as setting interest rates or printing money, without interference from elected officials or the private sector. To prevent the economy from overheating or slowing, and inflation running high, central bankers require innovation and ability to think beyond the rulebook in times of unprecedented crisis like the present one.
Did they always do the right things?
A section of economic historians now hold central bankers responsible for many costly failures and suggest that the notions of their “credibility and independence” need to be reconsidered.
The US Fed has been blamed for deepening the Great Depression in 1930, stagflation in 1970, contraction in the early 1980s as well as contributing to the 2008-09 global financial crisis.
Back in 1962, economist Milton Friedman had dismissed the idea of having a fully independent central bank.
He had argued that a modern central banker’s “responsibilities overlap with other government functions”. So central bankers must be subject to political authority while maintaining operational independence, the revered economist felt.
Raising interest rates, central banks now race to reverse earlier monetary expansion. Credit contractions are squeezing economies, hitting poorer countries especially hard, says Australia-based Bangladeshi economist Anis Chowdhury in his article titled “Stop worshiping central banks.”
“Clearly, central bank’s independence is no harmless ‘elixir’ ensuring low inflation,” Anis Chowdhury concludes in the article he co-authored with Jomo Kwame Sundaram.
Cutting its global growth forecast earlier this month, the IMF also shared its concern about the impact of the central banks’ race for monetary tightening.
The IMF said central bankers need to fight inflation without over-tightening, which could push the global economy into an “unnecessarily severe recession” and heap economic pain on emerging markets that are seeing their currencies fall sharply against the dollar.
“What we are recommending is that central banks stay the course. Now that doesn’t mean that they should accelerate compared to what they’ve been doing,” said Pierre-Olivier Gourinchas, the IMF’s chief economist.
This tip has been reflected for Bangladesh Bank too during the latest visit of an IMF team to see if Bangladesh qualifies for the $4.5 billion support it asked for. The team rounded up its two-week tour in a final meeting at the central bank, which has finally agreed to market-based dollar rate – a suggestion it has unheeded so far.
It will now announce its monetary policy twice a year. These are all routine works of the central bank and it is its own efficiency which matters in deciding if it should stay in its course or accelerate, as advised by IMF chief economist. And if listening to any of the IMF team’s suggestions helps the central bank strengthen its oversight role, restore discipline financial sector, reduce non-performing loans, check currency flights and tame inflation, and finally paves the way for the government to access $4.5b loan in this hard time, it justifies what Friedman told six decades back – central banks should be subject to political authority.