Economists are skeptical about attainment of targets set in the latest Monetary Policy Statement (MPS) in view of adverse impact of the ongoing political impasse on the country's trade and economic activities.
They said most of the targets in the six-month MPS ending in June next are quite alright, but the economists contacted by the FE said the economy is now progressing through stagflation following the political troubles.
Stagflation is a state of economic situation in which some parts are caught in a 'stag' (falling income and employment) mode and some in 'flation' (rising prices) mode.
The economists said the targets for growth and inflation in the MPS announced on January 29 will be challenging under the present state of political unrest that began since January 05.
Lead economist at the Dhaka office of the World Bank (WB) Dr Zahid Hussain said the MPS for the second half of fiscal year 2015 promises to maintain policy continuity which indeed is the need of the hour.
"The 6.5 per cent inflation target is realistic while the 6.5-6.8 per cent GDP growth assumption is somewhat ambitious considering the observed trends in growth correlates in the first half of FY15 and the ongoing political instability."
Dr Hussain said the economy is currently passing through an adverse supply shock induced by disruption in the transportation system as a result of the ongoing political unrest.
"Consequently, using the standard macro-economic demand management for controlling inflation and supporting growth has become especially challenging," Dr Hussain said.
The WB lead economist said the economy must come out of the current state of stagflation to attain its desired goals.
He said the parts in 'stag' mode of the term 'stagflation' can get out of it only when the supply chain disruptions end.
The parts that are in 'flation' mode fuelling it even more in the monetary policy stance are expansionary, he pointed out.
Greater public faith that inflation will be low also adds stability to the currency which is central to business interests.
Many central banks in the world today keep policy rates low to foster growth because they have fought the battle against inflation and convinced their citizens that, if need be, they will hold in check inflationary trend again if it raises its ugly head.
About the low policy rate in the country, he questioned, "Will the low policy rate give businesses more incentives to invest?"
He replied: "Probably not. First, the primary factor holding back investment in Bangladesh today is not high interest rates. These are rather political instability and structural factors that are fundamental impediments to investment."
He also said even if the Bangladesh Bank (BB) cuts rates of banks, which are paying higher rates on deposits, the banks are unlikely to cut their lending rates to single digit.
"The reason is that the banks are facing high cost of funds due to high loan default rates, inflation and uncertainty," he argued.
The WB economist said lending rate ceiling on agricultural credit has been lowered from 13 per cent to 11 per cent. "But farm incomes have been adversely hit by the recent supply chain disruptions," he noted.
He said cheaper credit may help farmers cope with this situation provided they do indeed get access to agricultural credit at this lower cap. However, former central bank governor Dr. Salehuddin said the Bangladesh Bank should lower the policy rate in the latest MPS to broaden the economic activities.
"In my view, the MPS should announce the lowering of the policy rate, especially the repo, as it may help broaden lending by the commercial banks," the former BB governor said. The BB stance remained unchanged about the policy rates in its January-June monetary policy.
The former chief of the central bank said the economy is now facing tremendous shocks following low rate of employment and growth.
"The MPS remained non-descriptive about the how the economy will grow at a pace of at least 6.5 per cent and how the inflation will be contained at 6.5 per cent," he said.
"These needed better explanation with strategies in the MPS," he said.
"This is not criticism of the MPS but such a stance is needed for the bankers and the potential investors to spur the economic activities," said the former BB governor, also an economist.
He stressed the need for credit facility for new, small and medium investors to spur investment.
Dr Ahsan H Mansur, executive director at the Policy Research Institute of Bangladesh (PRI) said low inflation is required for luring investment and inflation might be low in the next six months mainly because of the low prices of commodities in the international market.
"But this is not to be so low as the BB expects in its MPS," he noted. He said the target for private sector credit will remain un-met due to slow economic activities.
"This (15.5 per cent target up to June) will ensure availability of resources but the ongoing political unrest and overall investment climate are not supportive of investment and expansion of existing plants," Dr. Mansur forecast.
However, the monetary policy has been a source of strength for the economy in recent years.
It contributed to containing inflation, limiting exchange rate volatility and building up reserves.
jasimharoon@yahoo.com
Stagflation grips economy, say economists
Jasim Uddin Haroon | Published: January 31, 2015 00:00:00 | Updated: November 30, 2026 06:01:00
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