BB's half-yearly monetary policy
Sunday, 20 July 2008
TRUE to its recent promise, the Bangladesh Bank (BB) has announced its half-yearly monetary policy brushing aside the suggestion from the International Monetary Fund -- IMF -- to pursue a tight monetary policy. Several weeks back, the central bank governor had promised to prepare an 'independent' monetary policy. An IMF mission headed by its Asia-Pacific adviser Thomas Rumbaugh, while concluding its annual consultation in Dhaka late last week, made veiled yet strong suggestions to follow a tight monetary policy because the credit growth in recent months had been 'too expansionary to contain inflation'.
In its new monetary policy, the central bank has apparently opted for going along with the expansionary credit growth with the objective of "ensuring reasonable price stability and providing support to sustainable and high growth". This, on the face of it, does not go in line with what the IMF considers 'important' for the Bangladesh economy to help avert any worsening of the inflationary situation, under the given circumstances. As expected, the new monetary policy has been welcomed by a number of chamber bodies and economists. However, the central bank governor has listed some downside risks, including, among others, socio-political instability, power shortages, infrastructural bottlenecks, unfavourable near-term outlook and high prices of oil and other commodities in the global market, for implementation of the monetary policy. The suggestion for a restrictive monetary policy should, under no circumstances, be considered to be ill-motivated. This is more so in view of the present situation in which the rate of inflation remains at a high level amid risks of its fuelling further in the event of the central bank's failure to direct credit to the productive sectors of the economy.
There are debates, on valid and logical grounds, over how far the current inflationary situation that the Bangladesh economy faces, in tandem with other low-income developing economies, is related to demand-driven conditions or supply-related constraints, or a combination of both. But there is a strong feeling particularly among the businesses in this country that the current rate of inflation is not a demand-driven one and external factors, more than domestic ones, have been contributing to it. Soaring prices of oil and other commodities, including food, have been largely responsible for high inflation in this country, as in many others. What is particularly more worrying here is that there has been a slowdown in economic activities in the country for the past one year, leading to the creation of a fewer number of jobs. For instance, the industrial sector that achieved an impressive growth of nearly 10 per cent, the highest ever in the country's history, in the fiscal 2006-07, registered a lower growth rate of 6.87 per cent. The services sector which was making impressive gains in recent years also recorded a lower growth in the last fiscal than that of the previous year.
In this context, the move by the central bank to maintain credit growth rate at a reasonable level would be considered by many as prudent since any restrictive monetary policy, actually, will, under the given circumstances, not have any impact on global prices of food and oil. The Reserve Bank of India-RBI- has recently tried in vain to be restrictive in its monetary policy. The rate of inflation has been going up in that country, much to the frustration of the ruling Congress party. Credit squeeze is certain to impact further adversely private investment, blurring the prospects for additional job creation. Such a development would be most unwelcome particularly when many private companies and business establishments, reportedly, have been downsizing their manpower because of the lower demand for their goods and services in recent months. The central bank has announced that it would seek to maintain a balanced credit flow with a view to reverse that situation. However, it would have to ensure that the credit goes to those prospective areas of the economy that would help more production, more exports and more jobs. But this will not be an easy job for the central bank when the banks are more prone to channeling their funds to high profit-earning trading and other activities. The central bank will have to monitor intensively the developments in the monetary sector and take appropriate remedial measures.
In its new monetary policy, the central bank has apparently opted for going along with the expansionary credit growth with the objective of "ensuring reasonable price stability and providing support to sustainable and high growth". This, on the face of it, does not go in line with what the IMF considers 'important' for the Bangladesh economy to help avert any worsening of the inflationary situation, under the given circumstances. As expected, the new monetary policy has been welcomed by a number of chamber bodies and economists. However, the central bank governor has listed some downside risks, including, among others, socio-political instability, power shortages, infrastructural bottlenecks, unfavourable near-term outlook and high prices of oil and other commodities in the global market, for implementation of the monetary policy. The suggestion for a restrictive monetary policy should, under no circumstances, be considered to be ill-motivated. This is more so in view of the present situation in which the rate of inflation remains at a high level amid risks of its fuelling further in the event of the central bank's failure to direct credit to the productive sectors of the economy.
There are debates, on valid and logical grounds, over how far the current inflationary situation that the Bangladesh economy faces, in tandem with other low-income developing economies, is related to demand-driven conditions or supply-related constraints, or a combination of both. But there is a strong feeling particularly among the businesses in this country that the current rate of inflation is not a demand-driven one and external factors, more than domestic ones, have been contributing to it. Soaring prices of oil and other commodities, including food, have been largely responsible for high inflation in this country, as in many others. What is particularly more worrying here is that there has been a slowdown in economic activities in the country for the past one year, leading to the creation of a fewer number of jobs. For instance, the industrial sector that achieved an impressive growth of nearly 10 per cent, the highest ever in the country's history, in the fiscal 2006-07, registered a lower growth rate of 6.87 per cent. The services sector which was making impressive gains in recent years also recorded a lower growth in the last fiscal than that of the previous year.
In this context, the move by the central bank to maintain credit growth rate at a reasonable level would be considered by many as prudent since any restrictive monetary policy, actually, will, under the given circumstances, not have any impact on global prices of food and oil. The Reserve Bank of India-RBI- has recently tried in vain to be restrictive in its monetary policy. The rate of inflation has been going up in that country, much to the frustration of the ruling Congress party. Credit squeeze is certain to impact further adversely private investment, blurring the prospects for additional job creation. Such a development would be most unwelcome particularly when many private companies and business establishments, reportedly, have been downsizing their manpower because of the lower demand for their goods and services in recent months. The central bank has announced that it would seek to maintain a balanced credit flow with a view to reverse that situation. However, it would have to ensure that the credit goes to those prospective areas of the economy that would help more production, more exports and more jobs. But this will not be an easy job for the central bank when the banks are more prone to channeling their funds to high profit-earning trading and other activities. The central bank will have to monitor intensively the developments in the monetary sector and take appropriate remedial measures.