Ultimately, no easy solution
Saturday, 21 July 2007
Qazi Azad
A growing gap between the real delivery and the goals of the macroeconomic policy -- expansion of the national output or real gross domestic product (GDP), low unemployment and a stable price level or low inflation, may explain the current desperation of the Bangladesh Bank with its monetary policy. High inflation causes economic distress and political unrest. Unemployment on a large scale compounds these problems. Small increases in terms of value in the GDP, however high in percentage point, does not help significantly reduce inflation and unemployment if both external and domestic factors are simultaneously hostile.
Worryingly, both high inflation and high unemployment characterize the economy of the country now to make its policy makers increasingly anxious and seek to contain at least one of them. They have chosen to combat through a tighter monetary policy the most notorious one of the two -- inflation -- which immediately accentuates economic distress and can provoke unrest.
According to a recent report in this paper, the monetary policy for the first half of the new fiscal year would raise the statutory liquidity ratio (SLR) and the cash reserve requirement (CRR) of the commercial banks and also interest rate on treasury bills and other short-term monetary tools to mop up excess liquidity from the banking sector. The indication in this respect came from the governor of the central bank while making a statement to the reporters on the monetary policy for the first half of the new fiscal year. The bank governor, however, said that an increase in interest rate on treasury bills and other short-term monetary tools, apparently aimed primarily at helping government borrowing, may take effect with a simultaneous decrease in interest rate on long-term monetary tools. The latter are basically saving instruments that promote saving habit of the people and thus the national saving rate to enhance the available cash for higher investment. The likely effect of this policy may frustrate the purpose of the tighter monetary policy as it would discourage saving and promote a culture of unnecessary spending among the people with surplus money.
Inflation in this country until now is broadly import -- induced. It has been whipped up by higher import prices of oil and some of the essential commodities -- soybean, lentils, wheat, etc. The partial readjustment of domestic oil prices in tune with that in the world market late last fiscal year and the resultant increase in the costs of production of local goods, including the agricultural items, have significantly internalised the inflationary trend in the production process to become an enduring feature.
Another spate in the domestic oil prices alongside the rates of gas, fertiliser and electricity, now being contemplated, will certainly stoke it further with similar effect -- no possibility of a signifiant decline ever. The crude oil price in the world market has meanwhile jumped to record high to warrant a domestic price readjustment. Neither the central bank nor the government can do much to resist these shaping realities without putting the state at the certain risk of incurring huge losses in some other sectors, like the Bangladesh Petroleum Corporation and the Power Development Board. Both state-owned corporations have previously suffered and continue to incur huge losses for continuously selling petroleum products and electricity at prices much below the costs of procurement and production.
The crisp message of the condensed wisdom that 'what is not to be cured must be endured' should now form the basis of the state policy on price control and inflation. The market price of fine rice per seer, which is close to one kg, was 62 to 75 paisa or Tk 0.62 to Tk 0.75 in 1970. Now its price is about Tk 28. Similarly, the price of beef has risen from Tk 2.50 per seer to Tk 180 within the period. A big hilsa that used to be sold at Tk 2.50 now sells for Tk 350 to Tk 400. An egg now sells for the price of a hen. What is the cumulative rate of inflation in respect of prices of these consumer items? Can we now recreate the 1970 market conditions or that of 1972 when the oil prices mercurially shot up over the years?
A high inflation rate, well over 8.0 per cent, based on consumer price index, no doubt is taxing the nation. It also poses a big challenge to the government. Perhaps, it is necessary now for all concerned to appreciate that the increased cash wealth in the country due to higher and rising remittances of the expatriate Bangladeshis, without a concomitant proportionate contribution to domestic production, is generating progressively greater domestic demand for services and goods, particularly the agricultural and other consumable products. The higher prices of the latter category of products, a reflection of the rising mismatch between supply and demand, should also drive home the point that the current GDP growth rate of 6.0 or 6.5 per cent, as variously estimated, is not enough to absorb the impact on demand of the rising flow of cash wealth to a big section of people who lived close to the poverty-line until the other day. Enhanced SLR and CRR to mop up excess liquidity in the banking sector will squeeze money availability with banks for lending and lead to higher interest rate to discourage investment. The goal of higher economic growth may thus be frustrated.
Obviously, there is no easy solution to the problem of high inflation in this country. Higher remittances are needed to step up domestic investment, to reduce the impact of high unemployment, meet trade deficit and to have a comfortable foreign exchange reserve. These also fuel inflation. Containing inflation through a tighter monetary policy alone would thus offer no permanent solution. Rather, it would create the embarrassing situation of having to go for more and more tighter monetary policy in the days ahead. Call it a catch 22 situation. Yet we will have to move forward with a workable policy to go on.
As land is scarce in this country, there is not enough scope here to optimise the yields of agricultural products to be always enough for meeting the rising domestic demand. A greater emphasis on agriculture, as being pursued, may not, therefore, suffice to keep inflation always under control by way of synchronising demand with supply of agricultural and other essential products, such as fishes and meat. A sizeable degree of dependence on import for these products may increasingly characterize this economy, which means that the world market prices of those products will always have a bearing on the domestic market prices.
The demographic fact of its high population density dictates that the country should seriously pursue the other two goals of macroeconomic policy -- a much higher real GDP growth, preferably industrial which requires less land, and a very low unemployment -- to reduce and minimize the effect of inflation. Both the monetary policy and the fiscal policy should be creatively used for it.
Under the current situation, which offers no easy solution to the vexing problem of inflation, the policy makers also should weigh different options to decide which policy would help value addition -- higher production with some inputs, like gas, oil and power, sold for some more time at existing rates or reduced production with those sold at higher rates. The balance-sheet of the economy should be drawn in advance on basis of realistic assumptions for deciding the policy drive.
A growing gap between the real delivery and the goals of the macroeconomic policy -- expansion of the national output or real gross domestic product (GDP), low unemployment and a stable price level or low inflation, may explain the current desperation of the Bangladesh Bank with its monetary policy. High inflation causes economic distress and political unrest. Unemployment on a large scale compounds these problems. Small increases in terms of value in the GDP, however high in percentage point, does not help significantly reduce inflation and unemployment if both external and domestic factors are simultaneously hostile.
Worryingly, both high inflation and high unemployment characterize the economy of the country now to make its policy makers increasingly anxious and seek to contain at least one of them. They have chosen to combat through a tighter monetary policy the most notorious one of the two -- inflation -- which immediately accentuates economic distress and can provoke unrest.
According to a recent report in this paper, the monetary policy for the first half of the new fiscal year would raise the statutory liquidity ratio (SLR) and the cash reserve requirement (CRR) of the commercial banks and also interest rate on treasury bills and other short-term monetary tools to mop up excess liquidity from the banking sector. The indication in this respect came from the governor of the central bank while making a statement to the reporters on the monetary policy for the first half of the new fiscal year. The bank governor, however, said that an increase in interest rate on treasury bills and other short-term monetary tools, apparently aimed primarily at helping government borrowing, may take effect with a simultaneous decrease in interest rate on long-term monetary tools. The latter are basically saving instruments that promote saving habit of the people and thus the national saving rate to enhance the available cash for higher investment. The likely effect of this policy may frustrate the purpose of the tighter monetary policy as it would discourage saving and promote a culture of unnecessary spending among the people with surplus money.
Inflation in this country until now is broadly import -- induced. It has been whipped up by higher import prices of oil and some of the essential commodities -- soybean, lentils, wheat, etc. The partial readjustment of domestic oil prices in tune with that in the world market late last fiscal year and the resultant increase in the costs of production of local goods, including the agricultural items, have significantly internalised the inflationary trend in the production process to become an enduring feature.
Another spate in the domestic oil prices alongside the rates of gas, fertiliser and electricity, now being contemplated, will certainly stoke it further with similar effect -- no possibility of a signifiant decline ever. The crude oil price in the world market has meanwhile jumped to record high to warrant a domestic price readjustment. Neither the central bank nor the government can do much to resist these shaping realities without putting the state at the certain risk of incurring huge losses in some other sectors, like the Bangladesh Petroleum Corporation and the Power Development Board. Both state-owned corporations have previously suffered and continue to incur huge losses for continuously selling petroleum products and electricity at prices much below the costs of procurement and production.
The crisp message of the condensed wisdom that 'what is not to be cured must be endured' should now form the basis of the state policy on price control and inflation. The market price of fine rice per seer, which is close to one kg, was 62 to 75 paisa or Tk 0.62 to Tk 0.75 in 1970. Now its price is about Tk 28. Similarly, the price of beef has risen from Tk 2.50 per seer to Tk 180 within the period. A big hilsa that used to be sold at Tk 2.50 now sells for Tk 350 to Tk 400. An egg now sells for the price of a hen. What is the cumulative rate of inflation in respect of prices of these consumer items? Can we now recreate the 1970 market conditions or that of 1972 when the oil prices mercurially shot up over the years?
A high inflation rate, well over 8.0 per cent, based on consumer price index, no doubt is taxing the nation. It also poses a big challenge to the government. Perhaps, it is necessary now for all concerned to appreciate that the increased cash wealth in the country due to higher and rising remittances of the expatriate Bangladeshis, without a concomitant proportionate contribution to domestic production, is generating progressively greater domestic demand for services and goods, particularly the agricultural and other consumable products. The higher prices of the latter category of products, a reflection of the rising mismatch between supply and demand, should also drive home the point that the current GDP growth rate of 6.0 or 6.5 per cent, as variously estimated, is not enough to absorb the impact on demand of the rising flow of cash wealth to a big section of people who lived close to the poverty-line until the other day. Enhanced SLR and CRR to mop up excess liquidity in the banking sector will squeeze money availability with banks for lending and lead to higher interest rate to discourage investment. The goal of higher economic growth may thus be frustrated.
Obviously, there is no easy solution to the problem of high inflation in this country. Higher remittances are needed to step up domestic investment, to reduce the impact of high unemployment, meet trade deficit and to have a comfortable foreign exchange reserve. These also fuel inflation. Containing inflation through a tighter monetary policy alone would thus offer no permanent solution. Rather, it would create the embarrassing situation of having to go for more and more tighter monetary policy in the days ahead. Call it a catch 22 situation. Yet we will have to move forward with a workable policy to go on.
As land is scarce in this country, there is not enough scope here to optimise the yields of agricultural products to be always enough for meeting the rising domestic demand. A greater emphasis on agriculture, as being pursued, may not, therefore, suffice to keep inflation always under control by way of synchronising demand with supply of agricultural and other essential products, such as fishes and meat. A sizeable degree of dependence on import for these products may increasingly characterize this economy, which means that the world market prices of those products will always have a bearing on the domestic market prices.
The demographic fact of its high population density dictates that the country should seriously pursue the other two goals of macroeconomic policy -- a much higher real GDP growth, preferably industrial which requires less land, and a very low unemployment -- to reduce and minimize the effect of inflation. Both the monetary policy and the fiscal policy should be creatively used for it.
Under the current situation, which offers no easy solution to the vexing problem of inflation, the policy makers also should weigh different options to decide which policy would help value addition -- higher production with some inputs, like gas, oil and power, sold for some more time at existing rates or reduced production with those sold at higher rates. The balance-sheet of the economy should be drawn in advance on basis of realistic assumptions for deciding the policy drive.