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Economists seem pitted against each other

Some call MPS contractionary, others expansionary

Jasim Uddin Haroon | August 01, 2018 00:00:00

Leading economists are divergent over the monetary policy stance of the central bank, with some seeing it as 'expansionary' while others call it 'contractionary'.

Bangladesh Bank governor Fazle Kabir unveiled monetary policy statement for July-December-2018 at its headquarters in Dhaka on Tuesday.

Some economists argued the latest Monetary Policy Statement (MPS) is contractionary as its money supply growth falls short of the projected target of the nominal economic growth.

The projected nominal gross domestic product is around 14 per cent while the latest MPS has set the target of broad money at 12 per cent upto June 30 next.

"This is a little bit contractionary considering the gross domestic product (GDP) perspectives," said Dr Ahsan H Mansur, executive director at the Dhaka think-tank Policy Research Institute of Bangladesh (PRI).

But other economists argued that this was expansionary as the government had reduced the cash-reserve requirement (CRR) and the advance-deposit ratio (ADR) earlier, which the central bank cannot violate.

"With a reduction in CRR and repurchase agreement (REPO) announced by the finance minister in collaboration with the Bangladesh Association of Banks in April, which the central bank cannot possibly change now," Dr MA Taslim, a professor of economics at Dhaka University, told the FE.

"I do not see how one could term the latest monetary policy contractionary."

Dr Taslim said the real question is how a reduction in the market interest rates, which were flagged as the main reason for the change, could be effectuated with a declining M2 (broad money).

The BB has avoided saying if the lending rates have declined after the assurance of BAB, he said.

However, the economists agreed that the recent development in foreign exchange rates may push the inflationary pressures in the economy.

Taka has been falling for the last two years.

"With the massive current account deficit last year and possible deficit also this year it may depreciate more unless offset by large scale borrowing and FDI (foreign direct investment)," Dr Taslim said.

He said depreciation puts pressure on import prices directly, which may pass on to the economy.

"BB needs to be careful with sterilisation operations with the reserves falling toward the six-month import mark," he added.

This is against upside inflation risk emanating from increasing international commodity prices, exchange rate depreciation and high inflationary expectations, Dr Zahid Hussain, lead economist at the Dhaka office of the World Bank (WB) told the FE.

The central bank in the meantime projected slightly higher target of inflation in the MPS.

It said the average inflation to be around 5.4-5.8 per cent in December.

The government targeted average annual inflation rate at 5.6 per cent.

Dr Hussain said the latest policy blueprint provides sufficient accommodation to the private sector credit with a growth target of 16.8 per cent, which can be adjusted if the economic conditions warrant so.

"The emphasis on market-based reduction of nominal interest rate, rather than through directives, is very timely and ought to be followed," Dr. Hussain said.

He, however, said that there can be no sustainable decrease in interest rate without a durable decrease in inflationary expectation, increased intermediation efficiency through decrease in non-performing loans and excessive operating expenditures and decreased risk-free rates.

In the meantime, Dr Ahsan H Mansur said that the contractionary nature of the MPS is justified in a sense as the net foreign assets are falling and for this reason the net domestic asset (NDA) should rise.

Such an asset reflects net claims on the government by the central bank and commercial banks plus loans to public entities and the private sector.

Dr Mansur, however, said the central bank's calling for rationalisation of the yields of the national savings certificates with the treasury bonds' yields.

"To my mind, Bangladesh Bank's call for rationalisation of the NSCs' yields with the government bonds' yields is a right move," he added.

The latest yield of the long term bonds is around 9.0 per cent, according to the central bank statistics.


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