Monetary policy in the perspective of global economic crisis
Friday, 22 January 2010
Mahmood Ahmed
THE Bangladesh Bank (BB) announced a supportive monetary policy for the second half of the current fiscal year (FY), aiming to increase investment in the productive sector and to help contain inflationary pressure. To achieve these goals, the central bank has taken a strategy to drastically cut credit to government while ensuring supports to the private sector for productive purposes. The rate of growth of credit to private sector in June 2010 will be increased to 16.70 per cent by pushing it up by 2.08 percentage points over that of June 2009. Private sector credit growth was 14.62 per cent in June 2009.
There is already a turnaround in the economy, the governor of the BB noted. Private sector credit has increased. Openings of letters of credits (LCs) for capital machinery and industrial goods have also gone up. These indicators prove that investment is growing. Surplus liquidity since the beginning of the fiscal year, as noted by the BB governor, has already been largely used for extending credits to the private sector and import growth, driven by a pick-up in output and investment activities from the second quarter of fiscal 2010 onwards.
As a result, concerns that liquidity surplus could largely end up in speculative uses, stoking inflation, could be allayed. With the increase in the demand for investment, the call money rate that was below 1.0 per cent in July last is now above 4.0 per cent. The BB deputy governor, Ziaul Hasan Siddiqui said in six months from July to December, 2009 the L/C opening for the imports of capital machinery increased by 28.04 per cent and 22.3 per cent for imports of industrial raw materials. According to the monetary policy just announced by the BB for the second half of the current fiscal, despite a decline in export growth rate in the beginning of fiscal 2009-10, the economy is expected to regain enough momentum and to reach export growth rate at double digit level in the coming months in fiscal 2009-10, as was the case in fiscal 2008-09.
All such goals and targets of the new monetary policy merit to be dispassionately reviewed from the perspective of the on-going global economic crisis. The abatement of the crisis is not yet in full sight. Under such given conditions, the Bangladesh economy may not grow, at the same rate as has been projected in the monetary policy. The global economic crisis, to recall, was caused by the crush of sub-prime mortgage market in the USA and related credit crunch. But what has so far been witnessed about some of the latest positive developments relating to the global economy may turn out to be not so much significant for the Bangladesh economy than what it might experience in the coming months. Thus, a massive "second wave" of mortgage defaults is getting ready to hit the US economy starting in 2010. Delinquent home loans at the government-controlled mortgage finance giants, Fannie Mae and Freddie Mac surged 20 per cent from July through September, 2009 according to a new report by the companies' regulator, the Federal Housing Finance Agency. Almost 1.6 million borrowers had not made their mortgage payments for at least two months. That is about 5.18 per cent of all borrowers.
Year over year, the number of delinquencies has more than doubled. The regulator said the rates were increasing in part because of "continued deterioration" in the companies' businesses "as home price and economic conditions remain challenging." But it also said that district-based Fannie and McLean-based Freddie are taking steps to delay foreclosures.
This may prolong payments as borrowers try to use government programmes meant to make it easier to adjust the terms of their loans.
The foundations of the US economy have been destroyed by an orgy of government, corporate and individual debts that have gone on for decades. In the 2001 recession cycle, the economy lost 2.0 per cent of its jobs and took four years to get them back. This time it has lost more than 5.0 per cent of its jobs. The recession, as is claimed by many quarters, is now history. Even after that, employers are likely to continue to offshore and automated jobs out of existence. If they don't, they'll lose out to competitors that do so.
In a November update of a previous research, Princeton University economist Alan S. Blinder estimated that 22% to 29% of all US jobs will be offshorable within two decades. Of course, even working in a job that will not be offshorable - say, landscaping - is no guarantee of job security or decent pay. That is because people in those jobs must compete with the millions of former factory workers and such others whose jobs have already been offshored, notes Josh Bivens, an economist at the Economic Policy Institute in Washington.
There was a cover story of 'News Week', published on December 7, 2009, with its title "How Great Powers Fall Steep Debt, Slow Growth, And High Spending Kill Empires -- And America Could be Next" by Niall Ferguson, Professor of history at Harvard. But the foreign exchange reserve of the Bangladesh Bank is still being kept in US dollar.
Under such circumstances, the announced monetary policy may not be much fruitful to brace for the developments, in yet unproedictable in nature, in the coming months.
Dr. Mahmood Ahmed is Senior Vice President, Islami Bank Bangladesh Limited. He may be reached at e-mail: mahmood_ibtra@yahoo.com
THE Bangladesh Bank (BB) announced a supportive monetary policy for the second half of the current fiscal year (FY), aiming to increase investment in the productive sector and to help contain inflationary pressure. To achieve these goals, the central bank has taken a strategy to drastically cut credit to government while ensuring supports to the private sector for productive purposes. The rate of growth of credit to private sector in June 2010 will be increased to 16.70 per cent by pushing it up by 2.08 percentage points over that of June 2009. Private sector credit growth was 14.62 per cent in June 2009.
There is already a turnaround in the economy, the governor of the BB noted. Private sector credit has increased. Openings of letters of credits (LCs) for capital machinery and industrial goods have also gone up. These indicators prove that investment is growing. Surplus liquidity since the beginning of the fiscal year, as noted by the BB governor, has already been largely used for extending credits to the private sector and import growth, driven by a pick-up in output and investment activities from the second quarter of fiscal 2010 onwards.
As a result, concerns that liquidity surplus could largely end up in speculative uses, stoking inflation, could be allayed. With the increase in the demand for investment, the call money rate that was below 1.0 per cent in July last is now above 4.0 per cent. The BB deputy governor, Ziaul Hasan Siddiqui said in six months from July to December, 2009 the L/C opening for the imports of capital machinery increased by 28.04 per cent and 22.3 per cent for imports of industrial raw materials. According to the monetary policy just announced by the BB for the second half of the current fiscal, despite a decline in export growth rate in the beginning of fiscal 2009-10, the economy is expected to regain enough momentum and to reach export growth rate at double digit level in the coming months in fiscal 2009-10, as was the case in fiscal 2008-09.
All such goals and targets of the new monetary policy merit to be dispassionately reviewed from the perspective of the on-going global economic crisis. The abatement of the crisis is not yet in full sight. Under such given conditions, the Bangladesh economy may not grow, at the same rate as has been projected in the monetary policy. The global economic crisis, to recall, was caused by the crush of sub-prime mortgage market in the USA and related credit crunch. But what has so far been witnessed about some of the latest positive developments relating to the global economy may turn out to be not so much significant for the Bangladesh economy than what it might experience in the coming months. Thus, a massive "second wave" of mortgage defaults is getting ready to hit the US economy starting in 2010. Delinquent home loans at the government-controlled mortgage finance giants, Fannie Mae and Freddie Mac surged 20 per cent from July through September, 2009 according to a new report by the companies' regulator, the Federal Housing Finance Agency. Almost 1.6 million borrowers had not made their mortgage payments for at least two months. That is about 5.18 per cent of all borrowers.
Year over year, the number of delinquencies has more than doubled. The regulator said the rates were increasing in part because of "continued deterioration" in the companies' businesses "as home price and economic conditions remain challenging." But it also said that district-based Fannie and McLean-based Freddie are taking steps to delay foreclosures.
This may prolong payments as borrowers try to use government programmes meant to make it easier to adjust the terms of their loans.
The foundations of the US economy have been destroyed by an orgy of government, corporate and individual debts that have gone on for decades. In the 2001 recession cycle, the economy lost 2.0 per cent of its jobs and took four years to get them back. This time it has lost more than 5.0 per cent of its jobs. The recession, as is claimed by many quarters, is now history. Even after that, employers are likely to continue to offshore and automated jobs out of existence. If they don't, they'll lose out to competitors that do so.
In a November update of a previous research, Princeton University economist Alan S. Blinder estimated that 22% to 29% of all US jobs will be offshorable within two decades. Of course, even working in a job that will not be offshorable - say, landscaping - is no guarantee of job security or decent pay. That is because people in those jobs must compete with the millions of former factory workers and such others whose jobs have already been offshored, notes Josh Bivens, an economist at the Economic Policy Institute in Washington.
There was a cover story of 'News Week', published on December 7, 2009, with its title "How Great Powers Fall Steep Debt, Slow Growth, And High Spending Kill Empires -- And America Could be Next" by Niall Ferguson, Professor of history at Harvard. But the foreign exchange reserve of the Bangladesh Bank is still being kept in US dollar.
Under such circumstances, the announced monetary policy may not be much fruitful to brace for the developments, in yet unproedictable in nature, in the coming months.
Dr. Mahmood Ahmed is Senior Vice President, Islami Bank Bangladesh Limited. He may be reached at e-mail: mahmood_ibtra@yahoo.com