The central bank provided liquidity to troubled banks, mostly controlled by S Alam Group, in FY23 and FY2024 by printing new money without creating real assets.

As a result, the country’s reserve currency increased by Tk 66,000 crore in these two fiscals, according to Bangladesh Bank data; this was the highest increase in the country’s history, which had an immediate impact on inflation as the wearer lost value.

Reserve money is money issued by the central bank, backed by domestic and foreign assets, that serves as the monetary base of an economy.

Central bank data shows that total reserve money rose to Rs 4.13 lakh crore in June 2024 for the first time in history, registering an annual growth of 10.49% in FY23 and 7.84% in FY24.

The central bank issued government-guaranteed reserve money, which was treated as domestic assets when foreign assets decreased significantly; This meant that the newly circulated money added no value to the economy.

Domestic assets increased by Rs 1.67 lakh crore in FY23 and FY24, when the country’s economy was bleeding due to banking corruption.

However, net foreign assets decreased by Rs 1 lakh crore during the period due to faster meltdown of foreign exchange reserves.

The increase in domestic assets was due to Bangladesh Bank starting printing money in June 2022 to meet the liquidity shortfall of S Alam Group-controlled banks and close the budget deficit due to lower revenue earnings.

Explaining the impact of rising domestic assets, Sabeth Siddique, former deputy governor of the Federal Reserve Board in Washington DC, said that when domestic assets increase and foreign assets decrease, it means more swaps are in circulation against the dollar.

He explained that this led to a decrease in the demand for taka and an increase in the demand for dollars, causing the taka to lose value, which triggered inflation.

He said: “When the central bank increases the money supply to help the banks, it does not create real assets. For money creation to work, the economy has to grow. But when the Bangladesh Bank prints money and puts it in the banks, there is no real growth.” “This just fuels inflation.”

As an example, he added: “If this money is used to import raw materials that lead to exports, such as garments, it can create real assets. If you invest Tk 100 in imports to produce $2 in exports, you create a real asset worth $1. This contributes to GDP growth, It creates reserves and benefits everyone.”

However, Siddique said that despite the decrease in reserves due to the decrease in imports in the country, the balance of payments is improving. This meant that production was affected and exports also fell; This meant that real assets were not produced.

“So if you just print money but do not produce real assets, this will create inflation, and the excess money in people’s hands will increase. Such a situation creates a mismatch between supply and demand. You have money to buy, but the supply is limited. As a result of the inability to produce real assets, demand increases due to excess money, which causes inflation.” “It’s happening,” he added.

Post-Hasina government took measures to improve banking

Bangladesh Bank stopped printing money after the formation of the interim government that ended the Hasina regime on August 5.

He made the call money market operational by introducing a new mechanism that guaranteed weak banks from borrowing from other banks to meet their liquidity problems.

The regulator also imposed various restrictions on the trading activities of cash-strapped banks until their cash flows recovered, which helped stop further erosion of liquidity position.

Soon after joining Bangladesh Bank, the new Governor Ahsan H Mansur identified weak banks linked to political influence and exposed their true health.

He later dissolved the boards of nine banks looted by the S Alam Group, a former private sector advisor to then prime minister Salman F. Rahman and former land minister Saifuzzaman Chowdhury.

Bangladesh Bank introduced a new liquidity support policy for these banks after reconstituting their boards to prevent further erosion of financial health through corruption.

So far, troubled banks have been allowed to take loans of Tk 5,000 billion from other banks under the guarantee of the central bank.

How did Cenbank produce new money?

Bangladesh Bank produced new money, also known as printing money, through various means such as turnover, ways and means, overdrafts and temporary accounts.

Amid a severe liquidity crisis with point-to-point inflation at 7.56%, it started printing money through a turnover process from June 2022.

During the turnover process, the central bank produces new money in exchange for the government’s treasury bills and bonds. In this case, the central bank buys treasury bills and bonds instead of selling them to commercial banks.

The central bank generated a total of Tk 88,000 crore of new money through the turnover process in FY23, when inflation reached 9.76%.

The central bank stopped printing money through transfer in August 2023, under pressure from the IMF (International Monetary Fund); because this money creates domestic assets without creating foreign assets.

Later, as the cash crisis worsened as the bank stopped printing money through the turnover process due to huge criticism, it started printing money through two accounts, Ways and Means Advances and Overdraft.

An overdraft occurs when there is not enough money in the account to cover a transaction or withdrawal, but the bank still allows the transaction.

Ways and Means Advances are a mechanism used to provide temporary lending facilities against temporary mismatches in the cash flow of government revenues and payments.

Through these two accounts, the central bank produced high-powered money in exchange for government guarantees, which contributed to the increase in domestic assets.

The bank also provided money to S Alam Group-controlled banks by creating suspense accounts, which meant the creation of new money in exchange for a government guarantee.

According to central bank data, Bangladesh Bank generated money using all these instruments, providing a total amount of Rs 1.45 lakh crore to banks in just two years in FY 23 and FY 2024.

Q How did cenbank print money to support Alam banks?

Social Islami Bank, one of the banks controlled by S Alam Group, experienced a negative balance in its current account held with Bangladesh Bank for the first time in November 2022 due to aggressive lending.

A negative current account balance means banks are unable to honor depositors’ checks, reflecting an extreme liquidity crisis for the lender.

However, Bangladesh Bank allowed the bank to continue clearing checks by providing liquidity support by printing money rather than taking measures to stop further erosion.

Despite having a negative balance, the bank continued to lend to S Alam Group by printing money support from the central bank, which ultimately pushed the lender to the brink of collapse, leaving it unable to run regular operations.

“If Bangladesh Bank had initially stopped lending, as per rule, when current account turned negative, the bank would not be in the current situation,” said a senior executive of Social Islami Bank.

The bank official said that if the central bank stopped its operations during that period, the bank would have at least Tk 1,000 billion in its current account balance. “On the contrary, it was allowed to continue making loans, which expanded negative equity, causing a serious liquidity crisis.”

The official said that even though the bank’s Advance Deposit Rate (ADR) rose up to 102% in 2022 due to aggressive borrowing by S Alam Group, the central bank will not take any action against the bank for exceeding the authorized ADR limit of 92% set for 2022. He said he didn’t. Islamic banks.

ADR of 102% means the bank has given a loan of Tk 102 against a deposit of Tk 100, he explained.

“Lastly, Bangladesh Bank sent a letter imposing restrictions on business activities due to negative balance on August 19, 2024, after the change of political regime. Had this letter been issued in November 2022, the bank could have been saved,” he said.

He stated that there are many provisions that will penalize banks for current account deficits, such as punishing the bank’s general manager and the head of treasury, and the most extreme action is the cancellation of check clearing.

“But the central bank did not take any action,” he added.

Four other Islamic banks controlled by S Alam Group, including Islami Bank, First Security Islami Bank, Global Islami Bank and Union Bank, were experiencing similar negative balances in their current accounts with the central bank since November 2022.

Everyone was allowed to continue clearing checks with liquidity support from the central bank. Despite having negative current accounts, these banks continued to lend aggressively.

For example, according to media reports, Islami Bank gave loans of around Tk 2,500 billion in the first two weeks of November 2022, while First Security and Social Islami invested a total of Tk 2,300 billion.

Although the Central Bank sent a warning letter to five banks, including Social Islami, on November 28, 2022, stating that check clearing would be stopped if they did not correct the negative balance within 20 days, it backed down from its stance in the face of this situation. Pressure from S Alam Group.

Despite failing to correct the negative balance, Bangladesh Bank did not stop check collection but instead continued to provide liquidity by printing money.

The total cash reserve ratio (CRR) of most Sharia-based banks was in surplus of over Tk 6,000 billion in October, which turned into a deficit of around Tk 7,500 billion in December 2022, according to the central bank statement.

Cash Reserve Ratio (CRR) is the portion of deposits that a bank must keep in cash to reduce risk. Banks must maintain a 4% CRR with the central bank to ensure funds are available when customers need to withdraw their money in an emergency.

If any bank fails to maintain the required CRR, Bangladesh Bank levies an additional penalty of 4% on the lender along with 4% bank rate, taking the total daily shortfall amount to 9%.

Bangladesh Bank not only provided extreme liquidity support for day-to-day operations but also helped these banks show an artificially healthy balance sheet.

For example, on December 28, 2023, Bangladesh Bank provided liquidity support of Tk 22,000 billion to seven banks, including five Sharia-based banks, for balance sheet preparation.

If liquidity support were not provided, these banks would have to show liquidity deficit on their balance sheets and this would continue to be documented.

Bangladesh Bank provided liquidity support for only two days on December 30, 2023 to demonstrate excess liquidity.

Similarly, Bangladesh Bank provided liquidity support of Tk 35,000 billion in a single day to Islamic banks, majority owned by S Alam Group, on June 30, 2024, to prepare their six-month balance sheets.

All this liquidity support was provided by printing money, which ultimately increased inflation.