Debate over outcome of monetary policy and . . .
Wednesday, 18 July 2007
THE latest half-yearly monetary policy announced by the central bank and the government's reported move to increase prices of fuel oil, gas and power simultaneously have raised a debate over their impact on the price situation in particular and economy in general. The Bangladesh Bank and the government has come under criticism from the Centre for Policy Dialogue (CPD), a private think tank, for pursuing measures that, according to it, would hurt the economy and fuel inflation without having positive impact thereof. The CPD tried to highlight a point about the monetary policy being designed in line with the 'prescription' of the International Monetary Fund (IMF), that was, however, dismissed outright by both governor of the central bank and the resident representative of the IMF in Bangladesh last Sunday. The advisers for finance and energy also have taken exception to CPD's criticism, citing the logic behind the government move to increase prices of fuel oil, gas and power for meeting the resource gap and defending the same.
The central bank governor while announcing the monetary policy on July 12 assured all concerned that the productive sector would continue to receive higher credit flow in spite of a restrictive monetary policy that had been primarily designed to contain inflation. At the same time, he made it clear that bank credit would no longer be 'cheaper' and advised the private sector entrepreneurs to increase their productivity and efficiency level to remain competitive. In this context, the point raised by the CPD about the nature of the current inflation in Bangladesh being a cost-push one, thus providing little room for any restrictive monetary policy to be effective against soaring inflation, merits a dispassionate consideration. A contractionary monetary policy enforced about two years back by the central bank has proved, as the CPD has noted, to be largely unsuccessful in containing inflation. The Federation of the Bangladesh Chambers of Commerce & Industry (FBCCI), the apex trade promotion body of the country's businesses, has also feared that the respective monetary policy would hurt the interests of the private sector under the present circumstances. Meanwhile, the IMF resident representative has strongly backed the central bank's latest monetary policy saying that a developing country like Bangladesh does not have any other choice but to take recourse to a restrictive monetary policy when prices of food items have recorded an abnormal rise in the international market.
One may like it or not, the central bank will have to do its part of the job to tame inflation. If excess liquidity or demand-pull factors are held mainly responsible by the monetary watchdog for igniting the price pressures on an unabated scale, then restrictions on money supply are, no doubt, to be considered a logical response to the situation. Even then, one must underline here the fact that this tool -- contractionary monetary policy -- can become effective if the government on its part takes other policy measures to contain inflation. In this context, serious doubts persists over the rationale of the reported government move to increase prices of fuel oils, gas and power in one-go and if this move does take place in the immediate future, that may run afoul of the central bank's monetary policy objective. While restrictive monetary policy will put a rein on demand-pull factors leading to price pressures, the hike in all kinds of energy prices will in all likelihood push up costs, defeating the very purpose of containing inflation. As such, the whole scenario about the current inflationary situation and its causes from both demand and supply sides deserves a critical scrutiny.
On its part, the government must not invite risk by taking any step in a hurry, before considering its pros and cons as far as the consequences thereof are considered. Against this backdrop, enlightened debates among the government leaders, the CPD economists and the multilateral capital donors over inter-related economic issues can be useful for shedding light on the multi-faceted costs of policy actions or inactions. But such debates have to be purposeful for delineating clearly the areas where the corrective public policy actions are necessary to help maintain macro-economic stability, on one hand, and to relieve the people of hardship, on the other.
The central bank governor while announcing the monetary policy on July 12 assured all concerned that the productive sector would continue to receive higher credit flow in spite of a restrictive monetary policy that had been primarily designed to contain inflation. At the same time, he made it clear that bank credit would no longer be 'cheaper' and advised the private sector entrepreneurs to increase their productivity and efficiency level to remain competitive. In this context, the point raised by the CPD about the nature of the current inflation in Bangladesh being a cost-push one, thus providing little room for any restrictive monetary policy to be effective against soaring inflation, merits a dispassionate consideration. A contractionary monetary policy enforced about two years back by the central bank has proved, as the CPD has noted, to be largely unsuccessful in containing inflation. The Federation of the Bangladesh Chambers of Commerce & Industry (FBCCI), the apex trade promotion body of the country's businesses, has also feared that the respective monetary policy would hurt the interests of the private sector under the present circumstances. Meanwhile, the IMF resident representative has strongly backed the central bank's latest monetary policy saying that a developing country like Bangladesh does not have any other choice but to take recourse to a restrictive monetary policy when prices of food items have recorded an abnormal rise in the international market.
One may like it or not, the central bank will have to do its part of the job to tame inflation. If excess liquidity or demand-pull factors are held mainly responsible by the monetary watchdog for igniting the price pressures on an unabated scale, then restrictions on money supply are, no doubt, to be considered a logical response to the situation. Even then, one must underline here the fact that this tool -- contractionary monetary policy -- can become effective if the government on its part takes other policy measures to contain inflation. In this context, serious doubts persists over the rationale of the reported government move to increase prices of fuel oils, gas and power in one-go and if this move does take place in the immediate future, that may run afoul of the central bank's monetary policy objective. While restrictive monetary policy will put a rein on demand-pull factors leading to price pressures, the hike in all kinds of energy prices will in all likelihood push up costs, defeating the very purpose of containing inflation. As such, the whole scenario about the current inflationary situation and its causes from both demand and supply sides deserves a critical scrutiny.
On its part, the government must not invite risk by taking any step in a hurry, before considering its pros and cons as far as the consequences thereof are considered. Against this backdrop, enlightened debates among the government leaders, the CPD economists and the multilateral capital donors over inter-related economic issues can be useful for shedding light on the multi-faceted costs of policy actions or inactions. But such debates have to be purposeful for delineating clearly the areas where the corrective public policy actions are necessary to help maintain macro-economic stability, on one hand, and to relieve the people of hardship, on the other.