Monetary policy for sustainable economic growth

The central bank has come up with the new Monetary Policy Statement (MPS) for the second half of the fiscal year 2016 (MPS H2, FY2016) recently. It is a policy instrument of the Bangladesh Bank (BB) for achieving price stability by controlling money supply and fostering economic growth.
The BB has brought about a change in its regulatory approach, compared to that of the previous one in setting the current monetary policy, offering a cautious but supportive monetary stance, taking balance between output and price under consideration. The current MPS focused on two important issues: lower inflation and reduced lending rate. Emphasising these issues would help speed up investment and industrialisation that eventually support the country in achieving projected economic growth. The BB forecast an economic growth of 6.8 per cent - 6.9 per cent while rate of inflation is expected to be kept at 6.07 per cent within June 2016 from 6.20 per cent in December 2015.
It issued an accommodative monetary policy that recommended reducing the  existing  policy rates (Repo and reverse Repo rates)  of  interest  by  50  basis points  and re-fixed at  6.75 per cent and  4.75 per cent from 7.25 per cent and 5.25 per cent respectively, which remained unchanged since 2013. This reduced rate is believed to be pro-business since it would slash the cost of fund of banks and allow bankers to offer loans and advances at a cheaper rate that can help the business communities plan their investment. This move has an implied positive gesture to commercial banks that inspires the banking industry and energises bankers' confidence to cut their interest rates in order to best use the excessive liquidity of banks in supporting entrepreneurs and businesses. This will ultimately lead to economic growth. The BB encouraged banks to utilise idle liquidity in productive lending to farm and non-farm activities, small and medium-sized enterprises (SMEs), which are efficient shock absorber of economic crisis.
It is expected that rate cut would reduce cost of business and investors would act positively by investing more and more. As a result, domestic demand would be increased, which would boost domestic production in the economy; the GDP (gross domestic product) growth would tend to achieve its target.
The MPS H2 FY16 projected a 15.5 per cent growth in domestic credit while public credit is expected to grow by 18.7 per cent. Private credit is expected to grow 14.8 per cent, according to the current policy. These targets are slightly lower than those of the previous MPS. Though few economists allege that compressing credit growth may challenge economic expansion, the BB illustrated it as a calculated target considering the momentum of the economy.
For an economy to be successful, both monetary policy and fiscal policy should act in a positive direction.  Economics literature suggests that if money supply increases, interest rate will decrease; thus investment demand will increase and aggregate output will increase. This will also enhance employment opportunities in the economy. Economic activities will get momentum in every corner of the country, which, in other words, is a must for Bangladesh that just experienced an economic transition from lower income bracket to lower middle income status and most importantly. This will finally lead to transition to the next income bracket.
The central bank did its job with a supportive policy pursuing an economic and development vision though arguments and counter arguments are going on among economists. There are important issues (e.g.,political environment, good governance, infrastructure, supply of energy etc).  These are external to the monetary policy but influential enough to challenge its efficiency and plausibility.
Political environment is one of the crucial factors that determine investors' confidence. Investors may not be willing to invest their precious funds if they are not convinced enough to take a leap and go for profit. Production activities may be hampered if they fail to sell their produced goods and services to the buyers at prices higher than production costs. As political analysts perceive, political stability may remain calm this year and local business environment may get the impulse.  
Other than economic and political environment, there are a few more issues that are to be addressed for pursuing economic growth. For example, supply of gas and electricity are very important pre-requisites for industrial development. Do we have enough resources to meet the investors' demand? Have we developed any plan for alternative resources and infrastructure? If, for example, there is a shortage of energy, what will they do with the money? They may install capital machinery, but due to lack of energy, those will not run. Hence, if we expect industrialisation, credit expansion and economic growth, we must have the infrastructure for supporting these.
Oil price is another important factor that facilitates creation of investment opportunities and economic growth. If the Bangladesh economy gets the benefit of consuming oil at lower prices, commensurate with international market, it would reduce producers' costs as well as consumers' prices. As a result, real income would increase, which would boost national savings and level of investment. Reduction in oil prices would not only boost investment, but also reduce dependency on gas which would ensure future energy security. Thus for short-and long-term economic sustainability, measures considering all these factors need to be reckoned with.
Moreover, in macro-view, bureaucratic difficulties and corruption also need to be addressed as these play a vital role when it comes to new investments. Ease of doing business must be improved with institutional and infrastructural support.
Furthermore, the BB has motivated and supported the banks to extend loans to vibrant sectors at lower interest rates. It also facilitates green projects with loans at a lower rate and so it is with export promotion activities. A US$ 500 million fund will be created to support medium and long-term projects, especially environmentally responsible investments at lower interest rates. The BB extends low-cost funds for promoting women entrepreneurship, skill building projects, and energy expansion initiatives. These initiatives of the central bank are praiseworthy. It shows its drive towards economic and environmental sustainability, in one hand and gives promise for inclusive growth on the other.
In fact, reduced policy rates of the central bank are not the only thing that may improve investment climate and economic pulse. Along with an investment-friendly monetary policy, pro-investment climate, good governance and infrastructure facilities are necessary to ensure economic growth.
 [email protected]