Expansionary monetary policy: A bold step by the BB
Muhammad Ali | Monday, 4 August 2008
DEFYING the prescription of the International Monetary Fund (IMF) for adopting a contractionary monetary policy, Bangladesh Bank Governor, Dr. Salehuddin Ahmed declared half-yearly Monetary Policy pursuing existing Expansionary Monetary Policy on July 17 last. The declared Monetary Policy, among others, mainly focused on following issues:
1. To ensure reasonable price stability.
2. To provide support to sustainable and high output growth directing investment towards productive sectors viz agriculture, small & medium enterprise (SME), rural- based industry and women entrepreneurs.
3. To protect the Bangladesh economy from the unprecedented ups- and- downs-cycle of the global economy.
4. To ensure macro-economic development, taking advantages of new and innovative emerging opportunities.
5. To ensure gross domestic product (GDP) growth at 6.5 per cent and restraining inflation to the maximum level of 9.0 per cent.
While justifying the policy, the Governor highlighted that the growth of private sector should be accelerated to boost up employment opportunities so that the teeming millions can acquire purchasing power. At the same time, he disclosed that the central bank had no immediate plan to appreciate value of Bangladesh Taka which might defuse inflation to some extent, but the exporters and expatriate Bangladeshis will then be discouraged who are the main sources of earning of foreign currency. The stance of the Governor is praiseworthy and it is a patriotic and bold decision to uphold the interest of the country against all pressure.
Inflation by no means is a threat to an economy provided monetary expansions are addressed to, in the right directions. It is said: "Inflation is an intoxicating tonic for tapping unutilized / underutilized resources for adding value to the GDP". As J. M. Keynes rightly pointed out that inflation was unjust, but deflation was inexpedient and of the two, the deflation was the worst. We know the history of economy of the Japanese in respect of inflation where it required one to carry a bag of money to buy one cup of tea or coffee. But what is the position of Japan economy at present? It is the purchasing power infused among the masses that has defused inflationary pressure. The economists are not at all worried about inflation, but they point their finger to the purchasing power of the individual. If one does not have purchasing power i.e. no income, then whatever less the price of any commodity, it is of no use to him. So, it is suggested that the economy should adopt a policy where GDP should have its upward growth, employment generation should be in place to enable the individual to have purchasing power and a safety net for the people of the country where agriculture and industry both-can grow in tandem.
While looking back, it is revealed from the sources of Bangladesh Bureau of Statistics (BBS) that the growth in industrial sector declined to 6.87 per cent in FY 07 - 08 from 9.74 per cent of FY 06 - 07, growth of agriculture declined to 3.61 per cent in FY 07-08 from 4.94 per cent of FY 06 - 07 and growth of service sector fell to 6.69 per cent in FY 07 - 08 which was 6.69 per cent in FY 06 - 07. Combined effect of the above, GDP growth has been pulled down to 6.2 per cent in 2008 although the achievement during the period 2007 was 6.4 per cent. Taking all factors into account, projection of GDP growth for the FY 08 - 09 has been made at 6.5 per cent, which we feel, is an ideal and achievable target.
Now turning to the global position, it shows that global GDP growth in 2007 was 4.9 per cent, which declined to 3.7 per cent in 2008, and now the forecast is 3.8 per cent for the year 2009. Compared to this global growth, the GDP growth @ 6.5 per cent pronounced in the monetary policy of the Bangladesh Bank is very much justifiable. Inflation and GDP growths are cross-current issues i.e. inflation has got inverse relationship with GDP growth and consequently that has been reflected in the economy of Bangladesh. The rate of inflation during 2007 was 7.2 per cent, which rose to 10 per cent in March 2008, but again it declined to 9.8 per cent in May '08. The resultant price effect of five mostly imported items has pushed up the inflationary pressure to such a high level pressing GDP to the lower side. Fuel oil, edible oil, rice, wheat, fertiliser etc., are in the hot list where it was observed that the price of rice escalated by 215 per cent and that of wheat by 200 per cent globally during the year 2008 vis-
1. To ensure reasonable price stability.
2. To provide support to sustainable and high output growth directing investment towards productive sectors viz agriculture, small & medium enterprise (SME), rural- based industry and women entrepreneurs.
3. To protect the Bangladesh economy from the unprecedented ups- and- downs-cycle of the global economy.
4. To ensure macro-economic development, taking advantages of new and innovative emerging opportunities.
5. To ensure gross domestic product (GDP) growth at 6.5 per cent and restraining inflation to the maximum level of 9.0 per cent.
While justifying the policy, the Governor highlighted that the growth of private sector should be accelerated to boost up employment opportunities so that the teeming millions can acquire purchasing power. At the same time, he disclosed that the central bank had no immediate plan to appreciate value of Bangladesh Taka which might defuse inflation to some extent, but the exporters and expatriate Bangladeshis will then be discouraged who are the main sources of earning of foreign currency. The stance of the Governor is praiseworthy and it is a patriotic and bold decision to uphold the interest of the country against all pressure.
Inflation by no means is a threat to an economy provided monetary expansions are addressed to, in the right directions. It is said: "Inflation is an intoxicating tonic for tapping unutilized / underutilized resources for adding value to the GDP". As J. M. Keynes rightly pointed out that inflation was unjust, but deflation was inexpedient and of the two, the deflation was the worst. We know the history of economy of the Japanese in respect of inflation where it required one to carry a bag of money to buy one cup of tea or coffee. But what is the position of Japan economy at present? It is the purchasing power infused among the masses that has defused inflationary pressure. The economists are not at all worried about inflation, but they point their finger to the purchasing power of the individual. If one does not have purchasing power i.e. no income, then whatever less the price of any commodity, it is of no use to him. So, it is suggested that the economy should adopt a policy where GDP should have its upward growth, employment generation should be in place to enable the individual to have purchasing power and a safety net for the people of the country where agriculture and industry both-can grow in tandem.
While looking back, it is revealed from the sources of Bangladesh Bureau of Statistics (BBS) that the growth in industrial sector declined to 6.87 per cent in FY 07 - 08 from 9.74 per cent of FY 06 - 07, growth of agriculture declined to 3.61 per cent in FY 07-08 from 4.94 per cent of FY 06 - 07 and growth of service sector fell to 6.69 per cent in FY 07 - 08 which was 6.69 per cent in FY 06 - 07. Combined effect of the above, GDP growth has been pulled down to 6.2 per cent in 2008 although the achievement during the period 2007 was 6.4 per cent. Taking all factors into account, projection of GDP growth for the FY 08 - 09 has been made at 6.5 per cent, which we feel, is an ideal and achievable target.
Now turning to the global position, it shows that global GDP growth in 2007 was 4.9 per cent, which declined to 3.7 per cent in 2008, and now the forecast is 3.8 per cent for the year 2009. Compared to this global growth, the GDP growth @ 6.5 per cent pronounced in the monetary policy of the Bangladesh Bank is very much justifiable. Inflation and GDP growths are cross-current issues i.e. inflation has got inverse relationship with GDP growth and consequently that has been reflected in the economy of Bangladesh. The rate of inflation during 2007 was 7.2 per cent, which rose to 10 per cent in March 2008, but again it declined to 9.8 per cent in May '08. The resultant price effect of five mostly imported items has pushed up the inflationary pressure to such a high level pressing GDP to the lower side. Fuel oil, edible oil, rice, wheat, fertiliser etc., are in the hot list where it was observed that the price of rice escalated by 215 per cent and that of wheat by 200 per cent globally during the year 2008 vis-