Govt report fears rise in inflation due to increased money supply

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Nazmul Ahsan
The increase in money supply due to the record rise in foreign currency reserve coupled with the presence of substantial amount of idle money in the banking sector is likely to create inflationary pressure on the economy, feared a report of the Ministry of Finance (MoF).
The report, styled 'Macro-Economic Situation: July-September, 2009', said the Bangladesh Bank has been sterilising the excess money through reverse repo in a bid to address the problem.
However, experts said reverse repo alone is not enough to combat the problem of excess liquidity in the market. They have underscored the need for ensuring investment-friendly environment to create demand for funds.
'Monetary and fiscal sectors are being affected due to record rise in foreign currency reserve. Supply of money will increase following the rise in the reserve, which will generate excess liquidity in the banking sector and, consequently, increase the pressure of inflation,' reads the report of the MoF.
The report highlighted almost all the major sectors in the macro economy. It underscored the need for implementation of the Annual Development Programme, enhanced investment in power and infrastructure and vigorous efforts to enhance the revenue income to achieve the six per cent GDP in the current fiscal year.
According to the data of Bangladesh Bank, the foreign currency reserve crossed $10 billion mark for the first time in the country in November last. The reserve in September this year was $ 9.36 billion and October $9.54 billion.
The foreign currency reserve on December 8, 2008 was at $5.47 billion and in June 30, 2009 at $ 7.47 billion, according to the BB data.
The inflation in July and August of the current fiscal was 3.46 per cent and 4.69 per cent on a point-to-point basis, according to the Bureau of Statistics.
The amount of excess liquidity in the banking sector was estimated at about Tk 340 billion as of September 2009, according to the latest figure released by the BB.
The MoF report attributed lower amount of import and higher remittance during the first quarter of the current fiscal year to the growth of the record foreign currency reserve.
According to the BB statistics, import spending during the first quarter of the current fiscal was $ 5.12 billion, which is 19.02 per cent less than that of the corresponding period of the previous fiscal year.
Import of capital machinery and industrial raw materials during July-September witnessed a noticeable decline, according to the BB data.
On the other hand, remittance amount during the first quarter was $ 2.70 billion, up by 15.9 per cent from the same period of the previous fiscal year.
Zaid Bakht, Research Director of the Bangladesh Institute of Development Studies (BIDS) said the government has to create an investment-friendly environment to offset the bad impact of excess liquidity and robust foreign currency reserve on the economy.
"If import goes up, the pressure on inflation would ease," Zaid told the FE on Thursday.
" If investors find the investment situation favorable, multiple problems relating to excess liquidity and healthy reserve would no longer exist in the country", he said.
He advised the government to ensure supply of adequate power and gas across the country to meet the demand for the same from the existing investors as well as encourage the new entrepreneurs.