Current economic maladies and inappropriate prescriptions for their remedy****

I would like to present my propositions in a summarised form for constraint of time. The present economic maladies in a nutshell are: 1) Very high inflation rate: The government had projected in the budget for the financial year 2011-12 a growth rate of 7.0% and an inflation rate of 6.5%. We already hear of the inflation rate having touched the double digit figure, which may be anywhere above 10%. Fortunately for us the aman crop has reportedly been a bumper one and the crop is in the process of harvesting. With that prospect in view the level of food prices should come down, though at the cost of the farmers, giving some relief to pressure on the price level. We know that agriculture contributes a large share to our GDP and as such a fall in the food price inflation will have a salutory impact on the overall inflation rate. The trend may get reversed when the Boro crop production will start because of reduction of subsidies from oil and gas that are needed for running the irrigation pumps increasing the costs of production at farmers' level. We would only hope that the farmers do not lose heart and cut down their production. We may appreciate that our farmers are also good calculators. If they commit mistakes in their calculations, they will do that at their peril which often happens, as in the case of the last potato production in North Bengal. So we may anticipate that overall price level may not fall substantially to end up at 6.5% at the end of the current FY as had been anticipated by the government. So the Bangladesh Bank has to pursue its monetary expansion programme prudently within the bounds as planned in their July-December, 2011 Monetary Policy Statement, while the government should aim at keeping their promise of ending up with a budget deficit at 5.0% of the GDP for the current year. Any faltering on these ends will worsen the inflation scenario. 2) Fall in the share market: The diagnosis is the less availability of liquidity in the money market and withdrawal of institutional and big investors from making investments. In an open and free market situation it is their option. The investors' forums of all descriptions have been putting pressure on the government to somehow increase the availability of funds in the capital market. When there is a sharp fall in the index of share prices, the investors even demonstrate putting pressure upon the government to act. That eventually led to intervention by Honourable Prime Minister herself and after having consultations with all stake-holders and her own agencies such as the finance ministry, Bangladesh Bank and the Securities and Exchange Commission (SEC), she has reportedly given directions on how to go about handling the stock market impasse , and also to compensate the very small investors who have lost between taka 5.0 and 10 lakhs during the last January market crash. The question has not been highlighted who will compensate and how. The government? How will the government mop up the huge amount involved, amounting to hundreds and even thousands of crores of taka? In that case, the government will have borrow from the banks or even the central banks which will be an outrageous proposition. This will further squeeze the liquidity of the money market crowding out the private sector that is perhaps already feeling the pinch. We do not hear of substantive new investments in the economy and rather hear of some prospective investors knocking at the doors of the banks with good projects and substantial equity funding without any response. Alternatively, the government will have to raise more money from the people through taxation, which is an absurd proposition in the current year as the increase in the revenue earnings till date is not as satisfactory as in the previous year. Secondly, why will the people in general be called upon to foot the bill of losses in which they had no role to play? We would humbly submit to the government to be kind enough to look up at the Ibrahim Khaled's reports on the last stock market debacle wherein the manipulators have been identified and named instead of putting in the cold storage in the name further inquiry by another committee. This amounts to dragging feet and will indicate lack of courage to deal with the heavy weight operators in the stock market. Inappropriate and self-contradictory prescriptions to deal with the malaise: a) We hear of the government's intention of asking the Bangladesh Bank to reduce the Cash Reserve Ratio (CRR) as well as the Statutory Liquidity Ratio (SLR) to be maintained by the banks. This will increase the lending capability of the banking system which will mean an expansionary monetary policy by the Bangladesh Bank and only increase the money supply in the economy putting an inflationary pressure to the already a high inflation situation. This will be a self-contradictory policy prescription. We will hope the government will desist from such suicidal action. b) I am not fully aware of all the policy directions. But I have read in the newspapers that the banks' exposure to the capital market should be brought down to 30% if the present level is above that. During the last crash we heard of some banks did have exposures even up to 80% of the deposits kept with them by their innocent clients. If that level is still that, a call to bring that down to 10% appears to be reasonable; but let that not be an encouragement for those banks whose exposures are less than that. In fact, the banking system dealing in people's money should not engage in speculative investments which may spell disaster for the depositors. In the same vein, it is all the more desirable that the central bank puts a brake on investments in the stock market. Real answer to bring in sanity in the capital market is to educate the people in general, and the investors in the stock market in particular, of the nuances of sound investment decisions and not to be carried away by the lure of making quick and big money by borrowing money from whatever sources they can muster. It is a game by the expert manipulators and small investors fall prey to that. Price-earning (PE) ratio of the shares should be the guiding factor in making investments decisions in the capital market. If one has made wrong decision, one has to bear the brunt. Herein comes the role of the SEC who should act as the guardian of the capital market and its investors. How they do it is their business. We should not pass the onus of sane behaviour of the capital market to someone or other who is not charged with that responsibility. ............................................. Khorshed Alam is former governor of Bangladesh Bank and former principal secretary to the government of Bangladesh. He can be reached at e-mail: alamk1230@gmail.com