On stock market and government borrowing

After prolonged and painful dips that dashed millions of small investors to the ground, the stock market index seems to be picking up slowly. In the last two to three days the DSE index is apparently showing a sign of confidence as reflected by the DGEN. Turnovers were higher following the news that some positive steps are in the offing. Thanks to the Prime Minister for her keen and quick response to the crisis by sitting with the stake holders. But it should not be expected that a PM would always be available to overview the stock market. The market needs to build its own mechanism of dealing with highs and lows of indexes. And that is the most fundamental problem of the stock market in Bangladesh. The recent Enquiry Report submitted by Ibrahim Khaled Committee on the share scam brought to the fore a number of weaknesses retarding this market. It has also hinted at the culprits responsible for the crash. Unfortunately, no discernible steps have so far been taken to bring them to book. Instead, the killers have allegedly been appointed as healers on the heels of heightening hiccups in the market. By and large, there is a common perception that a group of unscrupulous traders, leaning on their political hot-line, are making a mockery of the market. Remember that Adam Smith, the proponent of the' invisible hand, espoused a vital role for government to ensure that the market functions properly. Lack of monitoring and absence of the application of the rule of law tend to militate against a smooth market. The stock market in Bangladesh is faced with these two basic problems. We agree that the proposed package of concessions might help the market in the short-run. Admittedly, it may not be possible to compensate investors directly, but they are likely to gain from these steps. The sustainability of these arrangements, albeit on adhoc basis, is the most important concern now. However, given the inflationary pressure on the economy, Bangladesh Bank should be judicious in using its two important monetary tools: CRR and SLR. Lowering the ratios would help banks invest more in the stock market, and thus ease the pressure there, but a grandiose exposure of the banks to the stock market could turn out to be counter-productive in the long-run. A bail-out by the banks might need a bail-out for the banks in course of time. There is nothing better than a transparent and creditable market for the share market to sail through safely, and attract investor's confidence. The other economic eyesore seems to be government borrowing from banks. It has been alleged that government's borrowing has already crossed the full-year target in 4 months. Reportedly, the government has borrowed about Tk 19 thousand crores (190 billion) -- 29 crores (290 million) more than the borrowing target for the whole year -- from the banking system deepening the risk of inflationary pressure. The main reasons behind bulk borrowing could possibly be heavy spending on subsidy, fall in revenue generation and a shrinkage of foreign aid flow. Special mention may be made of the fact that government's borrowing from central bank creates more inflationary pressure as it increases the money supply in the market. The typical argument against government borrowing from banks is the famous "crowding-out effect". It is stipulated that as government borrows heavily from banks, the liquidity shortage forces banks to raise interest rate to contain growing demand from private sector. The fall in investment affects economic growth. And the total borrowing fuels inflationary pressure on the economy. The critics could be correct and we can imagine. But a counter argument is that if the borrowed money is spent on building physical infrastructure, and to raise production and productivity, the borrowed money could turn out to be a blessing in disguise. Thus, it is not only the amount of borrowed money from banks, but also an enquiry into the spending pattern that warrants attention before providing any judgment on this issue. For example, and to be specific, the budgetary allocations of subsidy for agriculture, export and foods could be rewarding with the provision that such subsidy is targeted properly. The allocation of subsidy for BJMC seems to be a simple drag as many of the plants have been incurring losses over years. The subsidy on fuel needs to take account of the fact that the institutions concerned dealing with fuel provide huge amount of tax to the government, and that there are also "system losses". By and large, serious efforts at the moment should be made in containing inflation by cutting both government and private sector credit. In the meantime, steps should be furthered to attract more remittances, ensure that foreign aid is properly disbursed and shedding the "not so urgent" projects from the ADP. Abdul Bayes is a Professor of Economcis at Jahangirangar University. abdulbayes@yahoo.com