As usual, the Bangladesh Bank (BB) has announced the Monetary Policy Statement (MPS) for the next six months of the FY 2015-16. This time it has created two special funds totalling $ 500 million and kept other components and targets of the policy more or less the same. Though the BB governor has time and again said the MPS this time would be pro-growth, the announced policy has turned out be a puzzle as to how the policy will be so or different from the previous ones in terms of supporting a higher growth rate.
In fact, the monetary policies announced by the BB over the past few years were geared to get tied to the needs of a growth rate not higher than 6.5 per cent per annum. The main focus of the successive monetary policies had always been targeting inflation rate less than 7.0 per cent. It very scantily highlighted the need for achieving a higher growth rate. The investment needs had always been a secondary issue to the BB's policy-makers. Otherwise, how could the monetary policy be used to push up interest rates instead of lowering it? Whatever decline is being noticed in the interest rates in recent times is more of an outcome of the huge idle money piled up in the banking system because of fall in demand for investment funds, though the fall in investment demand can also be attributed to factors other than only interest rates. But it is to be recognised that the high interest rates played a role in dampening investment demand.
When the economy is experiencing a bearish condition in investment demand, the BB's monetary policy should have been used as a supportive tool to help grow this demand. But the central bank pursued monetary policies, one after another, which were contractionary in nature and only acted as a damper on the demand for investment. An anti-inflationary monetary policy is pursued in the context of economies having full employment or in the economies where supply side economy will not respond to a higher investment demand. But the Bangladesh case is not that type. Rather, it is an economy which would have responded with additional output from additional investment.
The BB has forgotten to see that the economy has been remaining under-invested since long and one main reason is the high cost of borrowing or the lending rates. It is a recognised postulate in economic science that the central bank which issues currency can also influence the price of borrowing in the market place by increasing, and if need be, by doing the opposite, money supply. Even in case of a bearish condition of the economy, the central bank goes all the way to supply more money at a lower cost. Unfortunately, in Bangladesh, the BB just does the opposite as if its main task is to stifle credit flow to the private sector.
The BB should have asked itself what the credit flow to the private sector was before July, 2010 and what it was during the periods when it started formulating contractionary monetary policies in the name of containing inflation. What was evident from the subsequent monetary policies was the BB's target to reduce credit flow to the private sector, lest an increased credit flow leads to an inflationary pressure. The just-announced monetary policy is no exception in this respect. It is difficult to understand how the announced monetary policy would be pro-growth when the same policy has targeted a reduction in credit growth for the private sector from 15 per cent to 14.3 per cent. What is the BB's logic? Is it a good logic that as previous year's credit growth was less than the contemplated rate in the immediate past monetary policy, so there is a scope for programming a reduced credit flow to the private sector?
Whether a monetary policy is investment-friendly or not makes a lot of difference for growth rate. Any economy that wants to embark on a higher growth rate has to tolerate some kind of inflationary pressure. Some kind of trade-off between a higher growth rate and an inflationary pressure is accepted in almost all emerging economies of the world. The BB seems to be too much concerned with inflation, even ready to sacrifice the cause of higher growth in the economy if that helps contain it. But this is not a good policy for an economy of Bangladesh kind which has a huge supply potential. If the monetary policy stifles investment demand in the private sector, then setting up of a US$ 500 million special fund will in no way compensate for that deficit. It is clear that the economy will not grow beyond 6.5 per cent largely because of the monetary policy being pursued by the Bangladesh Bank.
The writer is Professor of Economics University of Dhaka,
abuahmedecon@yahoo.com
