Fighting inflation in Bangladesh
Wednesday, 25 July 2007
M. Shamsul Haque
After the Bangladesh Bank announced a contractionery monetary policy, there have been some arguments against it from local national chambers and one research centre. Meanwhile, Sadiq Ahmad of the World Bank's South Asia Sector Directorate wrote an article in a Dhaka daily in its issue on July 16, 2007 on the above heading. There he tried to show inflation as a monetary phenomenon based on the Chicago University Nobel Laureate Economist late Milton Friedman's famous works on the issue.
Chicago Nobel Prize winning economist showed conclusively long ago that "inflation is a monetary phenomenon": Over the long term the rate of inflation is simply the difference between the rate of growth of money supply and the rate of growth of real out put (GDP)
The facts presented by Sadiq Ahmad are repeated here to inform those who argue against that to come up with their facts if they disagree. As the IMF representative in Dhaka has called it as "a healthy debate", we must participate in it with countering facts and figures.
Some statistics on Bangladesh
This writer while doing his Ph.D. research at Manchester Business School, UK, on a related subject -- inflation accounting -- read a paper by his supervisor renowned economist Prof. DC Hague in 1976. He argued as follows: "Money is like water. When created it first flows out in the domestic economy and if over supplied it over flows across the border."
The data presented by Sadiq Ahmad seems to prove that contention once again for Bangladesh. The chambers in the country should try estimating the impact of rising interest rates on the major sectors of the industrial and service economy. Mere assertions based on unfounded propositions should not be allowed to mislead policy makers. As far as the agri- and rural economy is concerned it is the supply of credit that is important for growth rather than its price -- interest rates -- as has been proved from the relatively higher charges levied by the informal and micro credit sources.
The table above shows that money supply has been increasing at much higher rates since 2005( 16.8-21%) and compared with GDP growth rates of 6.0 -6.5% excess demand was created in the economy that resulted in building inflationary pressure in the economy. It has become explosive in recent times when exchange rate depreciation has been halted.
(The writer is Vice-Chancellor, Northern University Bangladesh)
Yearly Averate of growth CPI Food Prices Exchange Depreciation Moneysupply GDP growth rate
FY 2002-2004 5.5 9.7 1 11 5.8
FY 2005 6.5 -0.3 4.4 16.8 6
FY 2006 7.2 9.8 9.3 21.3 6.6
FY 2007 April 8.3 9.3 -0.7 21.3 6.5 est.
After the Bangladesh Bank announced a contractionery monetary policy, there have been some arguments against it from local national chambers and one research centre. Meanwhile, Sadiq Ahmad of the World Bank's South Asia Sector Directorate wrote an article in a Dhaka daily in its issue on July 16, 2007 on the above heading. There he tried to show inflation as a monetary phenomenon based on the Chicago University Nobel Laureate Economist late Milton Friedman's famous works on the issue.
Chicago Nobel Prize winning economist showed conclusively long ago that "inflation is a monetary phenomenon": Over the long term the rate of inflation is simply the difference between the rate of growth of money supply and the rate of growth of real out put (GDP)
The facts presented by Sadiq Ahmad are repeated here to inform those who argue against that to come up with their facts if they disagree. As the IMF representative in Dhaka has called it as "a healthy debate", we must participate in it with countering facts and figures.
Some statistics on Bangladesh
This writer while doing his Ph.D. research at Manchester Business School, UK, on a related subject -- inflation accounting -- read a paper by his supervisor renowned economist Prof. DC Hague in 1976. He argued as follows: "Money is like water. When created it first flows out in the domestic economy and if over supplied it over flows across the border."
The data presented by Sadiq Ahmad seems to prove that contention once again for Bangladesh. The chambers in the country should try estimating the impact of rising interest rates on the major sectors of the industrial and service economy. Mere assertions based on unfounded propositions should not be allowed to mislead policy makers. As far as the agri- and rural economy is concerned it is the supply of credit that is important for growth rather than its price -- interest rates -- as has been proved from the relatively higher charges levied by the informal and micro credit sources.
The table above shows that money supply has been increasing at much higher rates since 2005( 16.8-21%) and compared with GDP growth rates of 6.0 -6.5% excess demand was created in the economy that resulted in building inflationary pressure in the economy. It has become explosive in recent times when exchange rate depreciation has been halted.
(The writer is Vice-Chancellor, Northern University Bangladesh)
Yearly Averate of growth CPI Food Prices Exchange Depreciation Moneysupply GDP growth rate
FY 2002-2004 5.5 9.7 1 11 5.8
FY 2005 6.5 -0.3 4.4 16.8 6
FY 2006 7.2 9.8 9.3 21.3 6.6
FY 2007 April 8.3 9.3 -0.7 21.3 6.5 est.