Monetary Policy in the context of Vision 2021

Monetary policy is one of the important issues of the economy of a country. Monetary policy means a process by which the monetary authority i.e., the central bank of a country controls the supply of money often targeting a rate of interest for the purpose of promoting economic growth and stability. The objective of monetary policy is to ensure economic growth through exchange stability, price stability, full employment, credit control, reduction of inequality and wealth etc.
Normally, monetary policy is referred to as either being expansionary or contractionary, where an expansionary policy increases the total supply of money in the economy more rapidly than usual, and contractionary policy expends the money supply more slowly than usual or even shrinks it. Every financial year Bangladesh Bank publishes monetary policy for the period July to December and January to June. Recently, for the first half of the financial year 2015 Bangladesh Bank has published monetary policy. Main features of that monetary policy are to bring down the inflation rate to 6.5 per cent from 7.35 per cent and to have credit growth at the rate of 16.5 per cent.
Inflation is one of the critical elements in the economic development of the country. Due to high rate of inflation, people of lower income level suffer heavily. So, one of the important objectives of monetary policy is to keep inflation within a tolerable limit. But there remains a question how far it is possible to keep inflation within tolerable limit. Inflation depends on various issues such as supply of broad money, supply of commodity, fluctuation of price in international market, indirect tax, government expenditure, growth of credit etc. In our country, Bangladesh bank as the monetary authority can only control the supply of broad money and growth of credit. Other elements which are the causes of inflation are beyond control of Bangladesh Bank. Other issues depend on fiscal policy of the country and utilisation of government fund. For example, higher indirect taxes can cause cost-push inflation which can lead to a rise in inflation. Though the dependency on indirect tax is reducing gradually in our country, still the ratio of indirect tax is higher compared with that of the neighbouring countries. So, to control the inflation of the country there must be a consistency and coordination among the monetary policy, fiscal policy and government expenditure policy.
From the monetary policy as published by the Bangladesh Bank it appears that there is no such consistency. The vision of the present government is to achieve the status of a middle income country by 2021, for which industrialisation is essential. For this, different plans have been drawn up by the government including expanding infrastructure facilities, improving and renovating tourism facilities of different areas of the country for developing tourism industry. Without sufficient amount of credit, industrialisation in the country is not possible at all. Although in the monetary policy 14 per cent credit growth for private sector has been projected as against actual 11.4 peer cent credit growth for the period from July to May 13, it is not clear how this growth rate is in line with the vision 2021. Moreover, according to the review of the World Bank, if the country wants to achieve the status of middle income country by 2021, investment will have to be increased by 5 per cent of GDP. If we look at the increasing tread of income and expenditure of the recent past i.e., for the period 2005 to 2010, it may be observed that income has increased by 59 per cent but at the same time expenditure has increased by 82 per cent, because of increasing the prices of consumable goods. So, if inflation cannot be controlled, national savings will not increase and it will ultimately fail to increase investment as required. It is also pertinent to mention that mere increasing investment will not be enough to achieve the expected level of industrialisation, as credit growth is essential. But again credit growth will be the cause of demand pull inflation.
It is needless to mention that ultimate objective of increasing investment and industrialisation is to combat the unemployment problem through creating job opportunities. Expansionary policy is traditionally used in trying to combat unemployment by lowering interest rates in the hope that easy credit will be helpful to promote business and industry. Contractionary policy is intended to slow inflation in order to avoid the abnormal prices of commodities resulting in distortion and deterioration of asset values. From the above discussion, it is clear that endeavour to combat unemployment problem through creating job opportunity by way of easing credit facility is completely contrary to controlling inflation, but both are important for the economic development of the country. So, considering the present economic situation, especially the adverse impact of inflation, number of unemployed people and fiscal policy, the policy makers of the country should determine the equilibrium in the rate of credit growth and rate of interest. But nothing in this regard has been mentioned in the monetary policy. It is expected that the issues as mentioned above will be taken care of by concerned authorities in future.
The writer, a chartered accountant, is council member and               former vice-president, Institute        of Chartered Accountants                   of Bangladesh. sha.hossain@gmail.com