Monetary Policy Statement H2FY14: An evaluation

The last two sentences of the monetary policy statement (MPS H2FY14) announced on January 27 for the second half of the fiscal year 2013-14 are probably the most important points to note. The sentences are: "The outcomes of the monetary programme and policies pursued in H2 FY14 will be reviewed in July 2014 in light of the prevailing global and domestic economic conditions. In the meantime, monthly Monetary Policy Committee meetings will continue in order to make necessary policy adjustments."
The Bangladesh Bank, in its monetary policy statement, identifies a number of likely developments in the economy. These developments are factored in, rightly so, in the formulation of the monetary programme and policies. There has been a merciless torture on our economy in the recent months. Some damages are already visible; some are yet to be unfolded. In this context, the Bangladesh Bank's openness to adjust its policy stance as new challenges emerge is a welcome step.
The problem of low investment demand and consequently low growth of private credit has been rightly highlighted in the monetary policy statement. Although a 15 per cent growth was programmed for the first half of the current fiscal year, actual growth until November 2013 has been only 11.1 per cent. Growth of private credit has failed to show any notable increase since January 2013. While tighter lending practices by banks is mentioned as one of the reasons for low growth of private credit, no specific measure has been mentioned in the monetary policy statement to ease the delivery of bank loan. On the contrary, as mentioned in the monetary policy statement, "banks continue to be advised to lend to lend only to creditworthy clients for productive use".
The problem of adverse selection of clients - disbursement of loan to someone who actually does not qualify for it - is not unique to Bangladesh. Banks even in developed countries face this problem, although not to the same extent as ours. Therefore, there is nothing wrong in advising the banks to lend only to creditworthy clients. But at the same time, measures need to be taken so that creditworthy clients can get the loan on an easy term and condition. No such measure seems to be even in the offing.  
Yet, a 16.5 per cent growth of private credit has been programmed for the second half of the current fiscal year. It will require a significant improvement in the investment climate of the country, otherwise, actual growth of private credit will fall short of the programmed level. The Bangladesh Bank is also aware of it. This is the reason why the monetary policy statement mentions whether the programmed growth of private sector credit "is reached or not depends ultimately on investor appetite". The problem is the monetary policy alone cannot create that appetite; it can at best satisfy that appetite by making loanable funds available in the credit market. It is mostly the government who can create the appetite for investment.
As mentioned above, the current monetary policy stance has been announced at a time when the economy has been continuously shattered for months. It requires an out-of-box approach to help the economy to revive fast. Probably the current monetary policy will not score high on this.
The monetary policy statement acknowledges the fact that there has been a sluggish aggregate demand in the economy which, in turn, slowed down the economic growth. According to the monetary policy statement, "bank advances to transport and communication sector registered a negative growth of -43.54 per cent (at the end of Q1FY14 compared to Q1FY13). Moreover, there is also evidence that retail and wholesale trade, hotel and restaurant business, transport services and tourism faced sluggish demand due to frequent national shutdowns in H1FY14. Low growth of cement production (3.16 per cent) and negative growth of iron and steel (-8.54 per cent) in the first two months of FY14 indicate slowing growth of construction subsector with bank credit to this sector also experiencing a low growth of 8.87 per cent in Q1FY14. A sample of iron, steel and cement manufacturers reported a 50 per cent-60 per cent drop in sales in Q2FY14."
The above information provided in the monetary policy statement indicates a sluggish demand for non-food items, especially for construction and other services. This is consistent with the fall in non-food price inflation in December as estimated by Bangladesh Bureau of Statistics (BBS).
At the same time, overall inflation is increasing. The food price inflation is mainly fuelling the overall inflation, which is also recognised in the monetary policy statement: "the rise in food inflation is pushing up average inflation which bottomed out at 6.06 in January 2013, rose to 6.78 per cent in June 2013 and is 7.53 per cent in December 2013."
In a country like Bangladesh, monetary policy can have very little impact on food price inflation. Recognising this fact, the monetary policy statement also acknowledges "reducing average inflation from its current 7.5 per cent level may prove challenging".
All these mean that two parts of the economy are facing two different problems. In case of non-food consumption, the sluggish demand is the main problem, while in case of food consumption, high inflation is the main problem. The continuance of conservative stance on private sector credit, including the consumer credit, will neither curb the food inflation nor revive the demand for non-food consumption. Alternatively, accepting the fact that inflation is an evil which has to be endured unless food production is enhanced and disruption in supply chain is prevented, the Bangladesh Bank could ease the delivery of private sector credit, especially the consumer credit, to avoid further sluggishness of the demand for non-food consumption. In case of the currently taken monetary position of the Bangladesh Bank, the danger of high inflation with low growth cannot be ruled out, whereas in case of the alternative monetary stance, high inflation with reasonably high growth could be expected.
There were a number of media reports that the stock market bubble of 2010 was created by consumer credits which were eventually used in share business. Probably, this is the reason why the Bangladesh Bank still maintains a stringent stance in case of consumer credit. However, the claim that consumer credits eventually found their way to the stock market in 2010 is not based on any scientific research. Rather, available research showed that bubble was created by significant direct trading of the commercial banks in the stock market, wholesale transactions of institutional and large players.
However, a research needs to be conducted to evaluate the myth about the consumer credit in regard to stock market, so that Bangladesh Bank can take an informative view. Such a study can provide useful input to the formulation of monetary policy of the country. Hopefully, this study will be conducted as soon as possible and the next monetary policy will be formulated on the basis of the finding of it. In the meantime, the Bangladesh Bank, as promised in the monetary policy statement, should remain vigilant and revisit its current stance on the delivery of consumer credit if the sluggish demand for non-food consumption tends to continue.
Abul Basher, PhD is Researcher             at Bangladesh Institute of Development Studies (BIDS),              former economist, World Bank,    and former faculty, Willamette University, USA. [email protected]