Addressing the key challenges to the economy
Wednesday, 5 May 2010
Abu Taher
THERE are some worries mainly over rising commodity prices and surplus liquidity that are likely to create inflationary pressures and weaker balance of payments in Bangladesh. The International Monetary Fund (IMF) and some other multilateral capital donors in their assessment reports have alerted all concerned about such risks.
Such reports have appreciated the financial sectors reforms that have been carried out since 2003 but have also observed that the reforms have not been enough to eliminate all risks. It has been noted that the supervision of the financial system is still trailing international standards, requiring further improvements. In the banking sector, the caution is, thus, about considerable long-standing risks and vulnerabilities that remain to be adequately addressed, notwithstanding some good work done since 2003.
Loan classification, provisioning and even capital remain uneven in the country's banking sector; some of the banks are reported to be not fulfilling requirements in these respects. The banking sector in the country, out of necessity and not finding investors in the traditional sectors, have branched out into newer or unconventional fields. But the rapid growth of non-traditional banking entails the risks of exposure to new forms of hazards. This should underline the importance of early application of a carefully initiated regulatory framework. The banks are also increasingly delving into engagement with the capital market. Thus, risks to their resources from a fall of share prices in the capital market, might grow for some banks. All such developments in the financial spheres merit a careful attention, leading to better supervision. Counter measures should be taken in time, in case of necessity, so that the problems do not turn worse threatening the stability of the financial system as a whole.
The rising prices of imported commodities and inflationary pressures are the latest disconcerting features of the economy, once again. The government should be in a constant vigil to limit their occurrence and impact. It may take some credible steps to buy some commodities such as fuel oils under long-term contracts or through advanced procurement. The suppliers would then be obliged to supply at stable or the contracted price throughout the contract period no matter whether prices of these commodities go up in the international market. The scope for forward lining up of imports of a wide range of commodities should be explored in order to hedge against price rises of these essential consumer commodities. The government and the private sector should both take greater initiatives to this end.
Meanwhile, the financial institutions and the central bank should take up appropriate policies and gear up their efforts to operationalise those policies for easing the excess liquidity that they hold at the moment. But doing of it should essentially involve the maximum extending of funds into productive enterprises for facilitating sustained growth of the national economy within a framework of relative price stability. There is no denying that credits going mainly for production activities would be a big safeguard that inflation can be contained from supply side improvements and a balance created between money supply and available goods and services. But one of the main challenges to investment facilitation in the economy lies in areas of poor infrastructural facilities, particularly in areas of energy. That is, indeed, a binding constraint. If this problem is not properly addressed on a priority basis, the downside risks to the economy will be severe.
THERE are some worries mainly over rising commodity prices and surplus liquidity that are likely to create inflationary pressures and weaker balance of payments in Bangladesh. The International Monetary Fund (IMF) and some other multilateral capital donors in their assessment reports have alerted all concerned about such risks.
Such reports have appreciated the financial sectors reforms that have been carried out since 2003 but have also observed that the reforms have not been enough to eliminate all risks. It has been noted that the supervision of the financial system is still trailing international standards, requiring further improvements. In the banking sector, the caution is, thus, about considerable long-standing risks and vulnerabilities that remain to be adequately addressed, notwithstanding some good work done since 2003.
Loan classification, provisioning and even capital remain uneven in the country's banking sector; some of the banks are reported to be not fulfilling requirements in these respects. The banking sector in the country, out of necessity and not finding investors in the traditional sectors, have branched out into newer or unconventional fields. But the rapid growth of non-traditional banking entails the risks of exposure to new forms of hazards. This should underline the importance of early application of a carefully initiated regulatory framework. The banks are also increasingly delving into engagement with the capital market. Thus, risks to their resources from a fall of share prices in the capital market, might grow for some banks. All such developments in the financial spheres merit a careful attention, leading to better supervision. Counter measures should be taken in time, in case of necessity, so that the problems do not turn worse threatening the stability of the financial system as a whole.
The rising prices of imported commodities and inflationary pressures are the latest disconcerting features of the economy, once again. The government should be in a constant vigil to limit their occurrence and impact. It may take some credible steps to buy some commodities such as fuel oils under long-term contracts or through advanced procurement. The suppliers would then be obliged to supply at stable or the contracted price throughout the contract period no matter whether prices of these commodities go up in the international market. The scope for forward lining up of imports of a wide range of commodities should be explored in order to hedge against price rises of these essential consumer commodities. The government and the private sector should both take greater initiatives to this end.
Meanwhile, the financial institutions and the central bank should take up appropriate policies and gear up their efforts to operationalise those policies for easing the excess liquidity that they hold at the moment. But doing of it should essentially involve the maximum extending of funds into productive enterprises for facilitating sustained growth of the national economy within a framework of relative price stability. There is no denying that credits going mainly for production activities would be a big safeguard that inflation can be contained from supply side improvements and a balance created between money supply and available goods and services. But one of the main challenges to investment facilitation in the economy lies in areas of poor infrastructural facilities, particularly in areas of energy. That is, indeed, a binding constraint. If this problem is not properly addressed on a priority basis, the downside risks to the economy will be severe.