MCCI for evolving strategy collectively to contain inflation

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FE Report
The Metropolitan Chamber of Commerce and Industry, Dhaka (MCCI) Wednesday urged the central bank to consult the leaders of private sector business and industry and collectively evolve a strategy for controlling inflation and achieving and maintaining the highest attainable output growth in the immediate and medium terms.
In a statement on the fourth mid-year Monetary Policy Statement (MPS) of the Bangladesh Bank announced on July 12 last, the leading chamber body of the country said the MPS which hinted at a tighter monetary policy in the near and the medium term should not aim at increasing interest rates and effecting hike of statutory liquidity ratio (SLR) and cash reserve requirement (CRR) of banks.
The MCCI also urged the BB to ensure that the administrative prices of fuels, utilities and fertilisers are not increased and ensure that the borrowings of the government are reduced by 11 percentage point to 21 per cent as mentioned in the MPS.
It said higher prices will aggravate the inflationary situation and the inflation rate was higher in the rural areas than in the urban areas because of price hike.
The MCCI, however, welcomed the central bank's initiative for disclosing in advance the MPS to help trade and industry adjust their plans and programmes accordingly.
The chamber mentioned that increased interest rates in the least developed countries "cause higher inflation instead of helping reduction of the same."
"Reduction in Government's borrowings for non-productive expenditures can have significant lasting beneficial impact on the over-all inflationary pressures," the MCCI said.
The MPS set a goal to curb domestic credit growth by 2.6 percentage points by June 2008 to ease the inflationary pressure in the economy.
The aim, the MCCI pointed out, is to bring down the private sector credit growth by 1.6 percentage points -- from 16.6 per cent recorded in March 2007 to 15 per cent in June 2008. "On the other hand, the net credit to the Government will be reduced by 11 percentage points to 21 per cent."
"The MPS states that the credit squeeze will not have any adverse effect on the private sector. The central bank believes that the 15 per cent growth of private sector credit programmed for FY08 would be sufficient to support a 7.0 per cent GDP growth", the chamber stated.
The Bangladesh Bank, according to the chamber, justifies the credit contraction by saying that it is intended not to slow down output but to curb excess demand arising from inflationary expectations.
"We record our resentment as the Bangladesh Bank did not consult the stakeholders in the private sector in formulating such an important policy, although it is the private sector industry and business, which will mostly bear the consequential credit contraction," the MCCI said.
It said the policy objective and the premise on which Bangladesh Bank's policy move is based, is not without their flaws.
"The prescription of the traditional quantity theory of money, on which the MPS is based to contain inflation by decreasing the money stock is hardly relevant for Bangladesh, as rising prices are linked to a plethora of non-economic factors, such as profiteering, which cannot be checked by decreasing the flow of credit", the chamber commented.
Empirical research conducted thus far has not found much statistical significance between changes in money supply and inflation rates in this country, it pointed out.
"It is now well-documented that the current rise in the inflation rate is induced by cost-push factors manifested through higher global prices of major imports (fuel, food and fertiliser, for example) and frequent increases in the government-administered prices of the utilities", it observed.
"A contractionary monetary policy cannot affect any of these factors. Instead, it will raise the cost of borrowing for the entrepreneurs, curb the enthusiasm of genuine businessmen to invest in the formal economy, and subdue economic growth, while the major source of inflation will remain beyond reach," the MCCI said.
"The BB's argument that its tight monetary policy stance is intended to prevent the excess demand in the economy has little empirical support. The policy document seems to regard the increased volume of investment in the real sectors and the associated production growth rates achieved in these sectors as symptoms of excess demand that has generated inflationary pressure", it noted.