Is tight monetary policy the solution?
Mohammad Ali Sattar | Monday, 21 July 2008
Thomas R Rumbaugh, adviser to the Asia and Pacific Department of the International Monetary Fund (IMF), had some positives about the Bangladesh economy. While wrapping up his team's visit to Dhaka last week, he spoke at length with the press. The IMF team, under his leadership, visited Bangladesh on a two-week-long trip to conduct annual Article IV consultations for reviewing the performance of the Bangladesh's economy.
He informed the press that the IMF thought the present Bangladesh monetary policy "is too expansionary and the monetary expansion has to be curtailed". He thought the IMF would like to see a tight monetary policy for Bangladesh, saying the existing policy is 'too expansionary' to deal with the problem of soaring inflation.
Observers feel the economy is not too bleak as some would like to think about. But somewhere down the line the realistic growth is hampered by the irregular market adjustment problems. The uncomfortable international 'bazaar', especially the oil market, has been creating too much of pressure on the global economic cart. The wheels are getting jammed.
Thomas Rumbaugh further observed that since the high inflation pressure 'is already prevailing in Bangladesh', all concerned should act with more understanding and take immediate steps to change the monetary policy and make it less expansionary.
But his suggestions have taken some by surprise. The monetary policy, which is expansionary according to the IMF team, would, if it is made less expansionary, affect the market and there could be greater problems in the circulation process, eventually having negative effect on the purchasing power of the people. The common people are anyway in a tight position in so far as the purchasing capacity is concerned. Less money circulation could bear bad results for them.
Some observers have are expressed the view that our monetary policy has been more or less on the right bank, and if any attempt is made to tamper with it at this stage, this might bring about unfriendly outcome. According to Rambuagh, the escalating food and fuel prices in international market caused inflation in the country to go up, which averaged 10 per cent in fiscal 2007-08. He expressed fear that it will be more difficult to check inflation if oil and food prices rise further in the international market.
This has been rightly pointed out by Rambaugh. The continuing rise in the oil price, coupled with price hike of the essentials, has already taken a turn for the worse. People are wary of the situation and do simply wait for a miracle to happen for better days.
But things look only gloomy. The crises in the Middle East (ME) -- Iran and US conflict -- could well make things further worse. If oil shoots up to $200 plus mark per barrel, we are in for post-modern recession.
Our economists have been telling us about six per cent growth rate over the 2007-08 fiscal. A similar observation has been made by the IMF team. Rambaugh said Bangladesh's economy rebounded quite well in the second half of the last fiscal 2007-08. A strong revival in domestic economic activity and rapid growth in garment manufacturing and remittances enabled the country to grow in fiscal 2007-08 in excess of six per cent. It is indeed heartening to note that our domestic economic activities have revived and are going well. The readymade garment (RMG) sector, with its many hurdles, is still the mother sector of all industries. But the RMG leaders should do still better, for, there is ample scope to improve on its present performance. The sector still lacks proper direction and planning.
Rumbaugh has been mildly critical of the present budget, which he feels is also expansionary. He said Bangladesh's monetary policy has been very expansionary in the last six months, adding that the budget for the current fiscal is also expansionary with the government making recently a significant upward adjustment in fuel prices.
"Credit growth is a bit high and has reached 23-24 per cent in recent times," the IMF senior official said, adding that the broad money circulation also hovering around 20 per cent. The government needs to make an adjustment in the monetary policy to curb credit growth and inflationary pressure, Rumbaugh said.
Here the businessmen differ with him. They claim that the credit growth has been shrinking. The business community has been clamouring for further growth in credit. According to the IMF, the statistics show there is no shortage of credit, defying the business sector's claim that credit growth is shrinking. The IMF adviser said monetary policy should be reactive to inflation as further increases in international oil and food prices would place stress on the balance of payments and fiscal position. He, however, noted that Bangladesh's balance of payment was in a comfortable position.
The above observations about the state of the economy by the IMF team carry a positive message amidst the clouds overhead. There have been bleak pictures painted by our own experts. Even the Finance adviser was not sure of any remarkable achievement anytime soon. We always have tied up grants and loans. The rate of interest is sometimes so high that we find it really tough to make proper adjustments. Most of the time we are dictated by the world finance bodies asking us to adjust our sectors in their way. That is sometimes telling on the economy.
We have been working on short term strategies for a long time. Rather, we should shortly go for a long term planning to avoid the regular (or chronic) sectoral ailments in our national economy.
The challenges ahead are manifold, and if are to capitalise on the present upward trend, we should be serious about moving things forward for an accelerated growth performance of the economy.
He informed the press that the IMF thought the present Bangladesh monetary policy "is too expansionary and the monetary expansion has to be curtailed". He thought the IMF would like to see a tight monetary policy for Bangladesh, saying the existing policy is 'too expansionary' to deal with the problem of soaring inflation.
Observers feel the economy is not too bleak as some would like to think about. But somewhere down the line the realistic growth is hampered by the irregular market adjustment problems. The uncomfortable international 'bazaar', especially the oil market, has been creating too much of pressure on the global economic cart. The wheels are getting jammed.
Thomas Rumbaugh further observed that since the high inflation pressure 'is already prevailing in Bangladesh', all concerned should act with more understanding and take immediate steps to change the monetary policy and make it less expansionary.
But his suggestions have taken some by surprise. The monetary policy, which is expansionary according to the IMF team, would, if it is made less expansionary, affect the market and there could be greater problems in the circulation process, eventually having negative effect on the purchasing power of the people. The common people are anyway in a tight position in so far as the purchasing capacity is concerned. Less money circulation could bear bad results for them.
Some observers have are expressed the view that our monetary policy has been more or less on the right bank, and if any attempt is made to tamper with it at this stage, this might bring about unfriendly outcome. According to Rambuagh, the escalating food and fuel prices in international market caused inflation in the country to go up, which averaged 10 per cent in fiscal 2007-08. He expressed fear that it will be more difficult to check inflation if oil and food prices rise further in the international market.
This has been rightly pointed out by Rambaugh. The continuing rise in the oil price, coupled with price hike of the essentials, has already taken a turn for the worse. People are wary of the situation and do simply wait for a miracle to happen for better days.
But things look only gloomy. The crises in the Middle East (ME) -- Iran and US conflict -- could well make things further worse. If oil shoots up to $200 plus mark per barrel, we are in for post-modern recession.
Our economists have been telling us about six per cent growth rate over the 2007-08 fiscal. A similar observation has been made by the IMF team. Rambaugh said Bangladesh's economy rebounded quite well in the second half of the last fiscal 2007-08. A strong revival in domestic economic activity and rapid growth in garment manufacturing and remittances enabled the country to grow in fiscal 2007-08 in excess of six per cent. It is indeed heartening to note that our domestic economic activities have revived and are going well. The readymade garment (RMG) sector, with its many hurdles, is still the mother sector of all industries. But the RMG leaders should do still better, for, there is ample scope to improve on its present performance. The sector still lacks proper direction and planning.
Rumbaugh has been mildly critical of the present budget, which he feels is also expansionary. He said Bangladesh's monetary policy has been very expansionary in the last six months, adding that the budget for the current fiscal is also expansionary with the government making recently a significant upward adjustment in fuel prices.
"Credit growth is a bit high and has reached 23-24 per cent in recent times," the IMF senior official said, adding that the broad money circulation also hovering around 20 per cent. The government needs to make an adjustment in the monetary policy to curb credit growth and inflationary pressure, Rumbaugh said.
Here the businessmen differ with him. They claim that the credit growth has been shrinking. The business community has been clamouring for further growth in credit. According to the IMF, the statistics show there is no shortage of credit, defying the business sector's claim that credit growth is shrinking. The IMF adviser said monetary policy should be reactive to inflation as further increases in international oil and food prices would place stress on the balance of payments and fiscal position. He, however, noted that Bangladesh's balance of payment was in a comfortable position.
The above observations about the state of the economy by the IMF team carry a positive message amidst the clouds overhead. There have been bleak pictures painted by our own experts. Even the Finance adviser was not sure of any remarkable achievement anytime soon. We always have tied up grants and loans. The rate of interest is sometimes so high that we find it really tough to make proper adjustments. Most of the time we are dictated by the world finance bodies asking us to adjust our sectors in their way. That is sometimes telling on the economy.
We have been working on short term strategies for a long time. Rather, we should shortly go for a long term planning to avoid the regular (or chronic) sectoral ailments in our national economy.
The challenges ahead are manifold, and if are to capitalise on the present upward trend, we should be serious about moving things forward for an accelerated growth performance of the economy.