MPS set to further discourage investment

Unfortunately, the monetary policy statement (MPS) that was framed and propagated in the context of western advanced economies now-a-days is being adopted and applied in developing countries like Bangladesh at the behest of the IMF which stands for targeting inflation.  The 'contractionary', or what our Bangladesh Bank (BB) Governor calls 'cautious' monetary policy in the face of criticism, has its theoretical roots in the neoclassical economics, which was very strongly advocated by late Nobel laureate economist Milton Friedman of the University of Chicago.
To Friedman and his followers, who are known as monetarists, inflation everywhere and anywhere is a monetary phenomenon. To further explain the issue - if money supply increases, it will lead to corresponding increase in the price level. All these neoclassical stuffs about the monetary economics are there in the text books that are taught in the graduate schools of the universities of the USA and elsewhere in the world. Students write about whether the monetary policy matters or does not and pass their exams. Of course, it is more logical to say that increased money supply has a corresponding impact on the price level if the economy is fully employed. The monetarists presume that the economy will remain fully employed always with small ups and downs here and there occasionally. But, though this presumption is correct to a large extent in case of advanced economies, it is neither correct nor almost correct in case of economies like that of Bangladesh.
The monetarists presume that there is no scope for additional supply of output in the economy. So an increase in money supply will raise the price level only. To them, inflation is a harmful phenomenon unlike those who believe inflation is also necessary to stimulate growth and maintain full employment. These controversies attracted more attention as the monetarists got an edge over other economists since the beginning of 1980s. International organisations like the IMF followed the theories of monetarist economists and tried to apply the same in the context of developing countries like Bangladesh too in the name of containing inflation.
Paradoxically, the IMF does not advocate a tight monetary policy for countries like the US, other western and European countries. By advocating a tight or contractionary monetary policy, the IMF wants to see inflation tamed in economies like that of Bangladesh. The IMF sees inflation as a major problem in these countries and tries to short-circuit it by raising interest rate.
To the IMF, the shadow of inflation is bigger than its size. According to it, a monetary policy which does not target inflation is not a monetary policy at all. It is reluctant to give any credence to the opposite logic of supply side economics. To the IMF, economies like that of Bangladesh should aim at low inflation, even if it leads to a low growth. It sees the devil of inflation in high growth. It does not admit that there is a relation between high growth and an inflationary pressure. The IMF wants to shun this type of argument by labelling it as Keynesian rubbish.
But the IMF is not correct always. The economy which has supply potentials needs much more investment, especially through the private sector. How will more private sector investment come along with a tight monetary policy? The Bangladesh Bank in the last few years has been following a contractionary monetary policy emphasising containment of inflation as its main target. What is the result of such a monetary policy? The private sector investment went down systemically since the BB started adopting such a policy from July 2010. Will the BB's monetary policy be supportive to an investment aiming to achieve a growth rate of 7.0 per cent to 7.3 per cent?
The other question is whether in Bangladesh inflation is a monetary phenomenon at all. The BB's monetary policy pushed up the interest rate to such a high level in the last few years that borrowing investment fund became too costly. It was also noticed that the private sector investment started being squeezed with such a high interest rate as a result of the contractionary monetary policy the BB pursued since 2010.
Definitely the fall in investment had a relationship with high interest rate which in return was the result of a tight monetary policy. Our businessmen protested the high interest rates but failed to understand that this was the result of the BB's monetary policy. Even they were late in taking note of the monetary policy the BB was pursuing since 2010. They protested high interest rates two years later. Now many say the banking system has idle money. That too because of monetary policy the BB is pursuing. Few borrowers are found to be willing to borrow at 15 -18 per cent interest rate.
Bangladesh missed the train of high growth in the past. When there was a strong demand for investment fund, it was strangulated by raising the interest rate. Now demand for money has gone down because of some other reasons and perhaps no type of monetary policy will help us to have a high growth in the economy. But still this scribe feels the BB should do its part.  It can help private sector investment through an eased-up monetary policy.
Interest rates should go down to spur a growth in private sector credit flow. Will the announced monetary policy bring down interest rate by any percentage? The BB should design and follow a monetary policy which will be suitable for a supply side economics.
Unfortunately, the BB is on a wrong track. Its policy will only deepen the private sector's reluctance to borrow from the banking system. We urge the BB to understand the potentials of our economy. It should not put cold water on the potentiality of the economy. More importantly, the BB should keep a distance from the IMF's policy framework. We do not receive that much of foreign credit under the Extended Credit Facility (ECF) from the IMF. But more harm is being done to our economy because of its prescription.
The countries which ignored the IMF- designed policy achieved higher growth. Examples are India, China, Brazil and some other African countries. Bangladesh should not mortgage its policy framework to that of IMF orthodoxy. The BB should think twice while putting any ceiling on private sector credit flow. Rather it should use its policy instruments like discount rate in favour of investment in the economy. If investment increases, the resultant increase in output will neutralise the threat of high inflation.   
Achieving a high growth rate with a tolerable inflationary pressure should be the option. The policy the BB has been pursuing will present us with a situation of low growth and low inflation. Will it be good for our economy? What is the harm if private sector credit flow touches 18 per cent or beyond if it pushes up the economy on a higher growth path.
Another question to be asked is, why are the Bangladeshi entrepreneurs borrowing from overseas market? Simply because they are finding borrowing from domestic banks more costly. Should the BB policy drive our entrepreneurs to foreign borrowing when it has enough foreign exchange in its coffer?  
The writer is a Professor of Economics, University of Dhaka.
 abuahmedecon@yahoo.com