A review of the monetary policy
Wednesday, 5 August 2009
Muhammad Ali
THE latest monetary policy announced on July 19, the first policy statement of the Bangladesh Bank (BB) under its new Governor Dr. Atiur Rahman, puts stress on growth, investment and employment generation.
"The monetary policy seeks to anchor inflation expectations of market participants and the general public. It is designed to support sustainable output growth without triggering escalation of inflation," said the governor.
The monetary policy statement also puts greater emphasis on the credit flows to underserved sectors like agriculture and SME (small and medium enterprise).
The new monetary policy is supportive of the objectives set out in the budget for fiscal 2009-10. The growth rate of broad money (M2), set at 15.5 per cent, appears to be consistent with the objectives of achieving 6.0 per cent gross domestic product (GDP) growth rate and containing inflation within 6.5 per cent, after further monetisation of the economy.
Lowering the lending rates and service charges and fees would be mandatory rather than advisory under the new policy.
The policy statement recognises that output weakened as exports declined for most items other than apparels and textiles, which also faced some growth slowdown.
Decline in capital machinery imports in fiscal year (FY09) indicated sluggishness in investment activities. Despite incipient signs of recovery of global financial markets and institutions, the effects of the global slowdown are likely to linger until mid 2010, affecting the growth momentum in export-oriented, manufacturing and investment activities.
The decline in domestic annual average CPI (consumer price index) is likely to reduce in FY10, projected to be at 6.5 per cent by June 2010. In July last fiscal year, it was 10 per cent and in May it declined to 7.32 per cent, the statement said. As inflation is fuelled by food grains and oil prices, their down-trend due to recession could be utilised to cut down inflation further. But there will be risk of higher inflation if the markets of these items become volatile.
The BB policy pledges easy credit flows in FY 2009-10 to help maintain the growth momentum, despite global recession.
The policy seeks to encourage investment with emphasis on greater equity participation and the mobilisation of savings to avoid borrowing. It seeks to utilise the principle of aggregate demand and aggregate supply to achieve GDP growth rate and macro-economic equilibrium without pushing up prices. The policy does not disregard the risks of lower growth.
On the external front, although economists project a better outlook for the major economies, they are not yet sure that global markets and institutions are on a solid path of recovery.
If global recovery falters or slackens, the central bank does not rule out the possibility of export growth, remittance inflows and investment activities weakening in fiscal 2009-10, with negative implications for GDP growth.
But faster global recovery will also involve some risks of aggravating domestic inflation, fuelled by global commodity price speculation and re-emergence of price bubbles, it said.
On the domestic front, growth of farm output will depend, besides favourable weather and reasonable market prices, on adequate and timely availability of irrigation, fertilisers and other inputs to the growers, a challenge not always well addressed in the past.
The agriculture ministry and the central bank recently agreed to maintain an agricultural credit programme, supportive of the farm sector.
It said infrastructural inadequacies, particularly of power and gas, remain as severe as before, impeding rapid growth in all economic sectors.
The ongoing infrastructure projects and the public-private partnership (PPP) programme envisaged in the budget for fiscal 2009-10 will need implementation to achieve the projected growth.
Experts believe that by blending the monetary and fiscal policies, economic growth could be accelerated.
The emphasis on agriculture given by the monetary policy could be sustained by ensuring power supply.
The platform of Palli Bidyut Samity (Rural Electric Supply Cooperatives) can ensure the proper economic benefits for the farmers. Besides, introduction of crop insurance can address the risks of lending by the financial institutions in agricultural sector where crop output mainly depends on nature. The government move to introduce crop insurance for calamity prone areas would bring benefits.
The writer is managing director of Shahjalal Islami Bank Limited
THE latest monetary policy announced on July 19, the first policy statement of the Bangladesh Bank (BB) under its new Governor Dr. Atiur Rahman, puts stress on growth, investment and employment generation.
"The monetary policy seeks to anchor inflation expectations of market participants and the general public. It is designed to support sustainable output growth without triggering escalation of inflation," said the governor.
The monetary policy statement also puts greater emphasis on the credit flows to underserved sectors like agriculture and SME (small and medium enterprise).
The new monetary policy is supportive of the objectives set out in the budget for fiscal 2009-10. The growth rate of broad money (M2), set at 15.5 per cent, appears to be consistent with the objectives of achieving 6.0 per cent gross domestic product (GDP) growth rate and containing inflation within 6.5 per cent, after further monetisation of the economy.
Lowering the lending rates and service charges and fees would be mandatory rather than advisory under the new policy.
The policy statement recognises that output weakened as exports declined for most items other than apparels and textiles, which also faced some growth slowdown.
Decline in capital machinery imports in fiscal year (FY09) indicated sluggishness in investment activities. Despite incipient signs of recovery of global financial markets and institutions, the effects of the global slowdown are likely to linger until mid 2010, affecting the growth momentum in export-oriented, manufacturing and investment activities.
The decline in domestic annual average CPI (consumer price index) is likely to reduce in FY10, projected to be at 6.5 per cent by June 2010. In July last fiscal year, it was 10 per cent and in May it declined to 7.32 per cent, the statement said. As inflation is fuelled by food grains and oil prices, their down-trend due to recession could be utilised to cut down inflation further. But there will be risk of higher inflation if the markets of these items become volatile.
The BB policy pledges easy credit flows in FY 2009-10 to help maintain the growth momentum, despite global recession.
The policy seeks to encourage investment with emphasis on greater equity participation and the mobilisation of savings to avoid borrowing. It seeks to utilise the principle of aggregate demand and aggregate supply to achieve GDP growth rate and macro-economic equilibrium without pushing up prices. The policy does not disregard the risks of lower growth.
On the external front, although economists project a better outlook for the major economies, they are not yet sure that global markets and institutions are on a solid path of recovery.
If global recovery falters or slackens, the central bank does not rule out the possibility of export growth, remittance inflows and investment activities weakening in fiscal 2009-10, with negative implications for GDP growth.
But faster global recovery will also involve some risks of aggravating domestic inflation, fuelled by global commodity price speculation and re-emergence of price bubbles, it said.
On the domestic front, growth of farm output will depend, besides favourable weather and reasonable market prices, on adequate and timely availability of irrigation, fertilisers and other inputs to the growers, a challenge not always well addressed in the past.
The agriculture ministry and the central bank recently agreed to maintain an agricultural credit programme, supportive of the farm sector.
It said infrastructural inadequacies, particularly of power and gas, remain as severe as before, impeding rapid growth in all economic sectors.
The ongoing infrastructure projects and the public-private partnership (PPP) programme envisaged in the budget for fiscal 2009-10 will need implementation to achieve the projected growth.
Experts believe that by blending the monetary and fiscal policies, economic growth could be accelerated.
The emphasis on agriculture given by the monetary policy could be sustained by ensuring power supply.
The platform of Palli Bidyut Samity (Rural Electric Supply Cooperatives) can ensure the proper economic benefits for the farmers. Besides, introduction of crop insurance can address the risks of lending by the financial institutions in agricultural sector where crop output mainly depends on nature. The government move to introduce crop insurance for calamity prone areas would bring benefits.
The writer is managing director of Shahjalal Islami Bank Limited