Inflation management
Saturday, 7 July 2007
Samiul Haque
AFTER dipping considerably in recent months, the rate of inflation has increased a little though it is officially counted to be below 8.0 per cent. The Finance Adviser has, once again, assured all concerned in this connection that inflation would be kept below the double-digit. There is no reason not to consider this to be a realistic statement in view of the government's awareness of the inflation issue and the intention which is apparent to address it through various policies.
The rate of inflation is considered to be an important macro-economic indicator. It influences not only local investment decisions but also significantly affects the decisions of foreign investors. Investors in businesses want to be happy about the rate of returns. The rate of inflation that remains low and steady over the long haul serves as an incentive for investors. If the investors feel assured that costs of production will remain stable in the long run from non-volatility of the costs of the factors of production, then they can expect to remain competitive and earn good profits. Investors feel inspired when they are convinced that the value of the profits they are making will continue to hold steady and not erode drastically over the medium and long terms.
Considering all of these factors and more, it has become imperative for the interim government to start giving high priority to inflation management. But the policies to be operated in this respect should leave ample room for meeting the genuine needs of finance for entrepreneurial activities. The squeeze should come in the areas of unproductive activities. The same will then prevent huge sums of money from coming into circulation that would otherwise not aid productive activities.
Limiting money supply in a bid to contain inflation can turn out to be as undesirable as inflation itself. With credit squeeze as the most used weapon to reduce money supply, the credit needs of businesses may suffer and lead to economic stagnation. Therefore, the Bangladesh Bank will have to weigh and apply policies exceptionally carefully. The central bank will be expected to play the role of a balancer between the needs of the economy, particularly those of the private sector and the unproductive spending for meeting both ends without allowing inflation to take wings.
The challenge for the interim government is to put on a leash government's spending. The relevant ministries will have to plan promptly how government's spending can be pruned without hurting spending on essentials. The plan should be prepared and adopted swiftly and then its implementation should start immediately. This would be an important step towards controlling money supply for creating a damper on inflation. But while doing this, every effort should be made to meet well the genuine credit needs of the private sector. Even policies can be tried to encourage borrowing by the private sector for investments in production-oriented activities through lowering the lending rate and other measures.
AFTER dipping considerably in recent months, the rate of inflation has increased a little though it is officially counted to be below 8.0 per cent. The Finance Adviser has, once again, assured all concerned in this connection that inflation would be kept below the double-digit. There is no reason not to consider this to be a realistic statement in view of the government's awareness of the inflation issue and the intention which is apparent to address it through various policies.
The rate of inflation is considered to be an important macro-economic indicator. It influences not only local investment decisions but also significantly affects the decisions of foreign investors. Investors in businesses want to be happy about the rate of returns. The rate of inflation that remains low and steady over the long haul serves as an incentive for investors. If the investors feel assured that costs of production will remain stable in the long run from non-volatility of the costs of the factors of production, then they can expect to remain competitive and earn good profits. Investors feel inspired when they are convinced that the value of the profits they are making will continue to hold steady and not erode drastically over the medium and long terms.
Considering all of these factors and more, it has become imperative for the interim government to start giving high priority to inflation management. But the policies to be operated in this respect should leave ample room for meeting the genuine needs of finance for entrepreneurial activities. The squeeze should come in the areas of unproductive activities. The same will then prevent huge sums of money from coming into circulation that would otherwise not aid productive activities.
Limiting money supply in a bid to contain inflation can turn out to be as undesirable as inflation itself. With credit squeeze as the most used weapon to reduce money supply, the credit needs of businesses may suffer and lead to economic stagnation. Therefore, the Bangladesh Bank will have to weigh and apply policies exceptionally carefully. The central bank will be expected to play the role of a balancer between the needs of the economy, particularly those of the private sector and the unproductive spending for meeting both ends without allowing inflation to take wings.
The challenge for the interim government is to put on a leash government's spending. The relevant ministries will have to plan promptly how government's spending can be pruned without hurting spending on essentials. The plan should be prepared and adopted swiftly and then its implementation should start immediately. This would be an important step towards controlling money supply for creating a damper on inflation. But while doing this, every effort should be made to meet well the genuine credit needs of the private sector. Even policies can be tried to encourage borrowing by the private sector for investments in production-oriented activities through lowering the lending rate and other measures.