As advancement of science and information technology (IT), globalisation of businesses, industries and finance raise the international capital flows, determining the appropriate monetary policy is becoming more multidimensional for developing countries. The challenges for policymakers are to gauge the different trade-offs among policy objectives, evaluate which economic developments are likely to be the most imperative in the medium term and long term, identify the key constrictions on the operating management, and measure the necessary degree of monetary policy transparency.
In today's economically and financially forward-looking world, every developed and developing country has a monetary policy with the common objectives of price stability, controlling inflation, maintaining strong supply chain, increasing export, increasing foreign trade, improving current account position, creating employment opportunities, enhancing economic growth and so forth.
The monetary policy varies from country to country, considering their economic conditions. The monetary policies of the developed world are not readily applicable as models for developing and underdeveloped economies as a whole. Naturally, the economic ends and means and conditions of developed and developing nations are bound to be unalike, and hence the role of monetary policy should also diverge in both cases. Japan, an economically giant country, had been trying to change the economy from deflation to inflation through its fiscal and monetary policies and, finally, became successful by changing the law, the government of the country and the governor of the central bank of Japan.
COMBATING INFLATION: The monetary policies of most of the developing countries struggle to combat inflation. Proponents of the inflation-targeting policy have argued that central banks should embrace just one clear objective of maintaining price stability. Others have argued that rather than focusing only on price stability, central banks should also actively use monetary policy to foster economic development and job creation.
The advanced countries of today can afford the luxury of debating whether full employment should take antecedence over price stability or controlling inflation, whether the aim should be to achieve internal or external balance at the expense of economic growth. However, developing countries cannot at any time think of anything but the policy of promoting rapid economic growth and employment generation. Under the growth-oriented monetary policy, monetary management by the central bank becomes a strategic factor of development in a developing country. Since the developed economies have strong control on price stability, inflation and current account, they always emphasise "employment generation or reduction of unemployment rate" and on "economic growth" in their monetary policies.
INVESTMENT-FRIENDLY AND PRODUCTION-ORIENTED MONETARY POLICIES: However, the monetary policies of developing countries have to take care of price stability, inflation, economic growth, employment generation, and maintaining strong current account. And for obvious reasons, preparing monetary policies for developing countries need more know-how, caution and prudence by their governments and the central banks.
The precondition for economic growth and employment generation is to generate investment in production, businesses and services, both in private and public sector organisations. The monetary policy should be investment-friendly and production-oriented. Economic development requires investment on a gigantic scale both by the public and private sectors. For this low-cost money-policy should be conformed to, because it makes public borrowing cheaper, keeps the cost of serving public debt low and thus steamrolls investment both in public and private sectors. The developing economies demand that credit should be made available to the private entrepreneurs at as low rates as possible.
But in terms of perceptibility, the finance costs are atypically sky-scrapping in the developing countries in Asia and Africa. Bangladesh is a developing country in South Asia, and is not an exception in this respect. Finance costs are abnormally high in the country in comparison with other developing, emerging and developed countries. Borrowing rates of interest in most of the developed and emerging economies vary from 1.75 per cent to 4.75 per cent, whereas in developing countries, the borrowing rates of interest vary from 10.5 per cent to 20 per cent.
REAL ESTATE SECTOR: Housing is one the basic needs of human life. It is really a serious problem in developing countries with huge population, especially in Asia, where the house rent is always sky-high in comparison to the purchasing power of the people. Fiscal and monetary supports in the form of easy financing facilities, low-interest-bearing loans, are extremely required in this crucial sector. The developed and emerging countries have very low interest rates for housing. Interest on housing loans in developing countries, like Pakistan, India, Bangladesh and Nigeria, varies from 10.5 per cent to 20 per cent (20 per cent in Nigeria) as per latest data. In contrast, interest on housing loans in developed and emerging countries varies from 2.47 per cent to 4.95 per cent.
The real estate sector in Bangladesh is an economically and socially important one. This sector provides employment to 2.5 million people including engineers, architects, accountants, and skilled and unskilled workers. But shockingly, the sector remains uncared for and neglected, and presently is termed a moribund sector. Apartments remain unsold, people engaged in the sector lose employment as sales dwindle drastically. To resuscitate the sector, special housing loan schemes with easy terms, low interest rate, tax rebate, reduction in abnormal registration fees, etc. need to be offered by the central bank through its monetary policy. Boosting the real estate sector will create employment opportunities, accommodate people at home and solve the acute shelter problem of the overpopulated country to a great extent.
REGULATING CREDIT: To meet the developmental needs, the central bank of a developing country must function effectively to control and regulate the volume of credit through various monetary instruments, like bank rate, open market operations, cash-reserve ratio etc. Greater and more effective credit controls will influence the allocation of resources by diverting savings from speculative and unproductive activities to productive uses.
RMG SECTOR: Apparel and textile industries in Bangladesh play a vital role in the activities of production and marketing, and employment of millions of people. This sector earns huge foreign exchange from abroad. The sector needs monetary support to ensure a solid place in the global cut-throat competition. Initially, a cash incentive at 15 per cent on export earnings was granted that had been scaled down to 5.0 per cent, although the sector was facing myriad problems at home and abroad. The existing cash incentive rate may be enhanced to 10 per cent that would help in the survival of this sector and provide employment for more people. The procedures and formalities that are required to get the cash incentive benefits are lengthy, time-consuming, cumbersome and costly for the beneficiaries.
The exporters of RMG items are of the opinion that the formalities to get cash-incentive benefits ought to be simplified. They should be made easier, less costly and less time consuming. The central bank can make customer-friendly rules and regulations through its monetary policy to ease the procedures in getting the cash incentive benefits on time.
ACCESS TO FINANCIAL SERVICES: Bringing the banking services to the door-steps of the general people of a country is imperative for creating small and medium enterprises (SMEs). SMEs in developed and emerging countries play a pivotal role in production and in employment generation. Developing countries may also expand the financing facilities to their general people. In these countries there is dearth of financial institutions, and banking facilities are available only to a limited extent. In this situation, the savings of the people cannot be mobilised effectively for economic development and, consequently, the rate of growth is very slow.
About 85 per cent of the people in Bangladesh do not have access to formal financial services, though a large number of the people have mobile phone connections. The authorities dealing with monetary affairs can help in the expansion of financial entities by granting subsidies and special concessions in the form of 'free remittance' and 'rediscounting' facilities to new institutions; and by providing training facilities to their staff. The financing terms should be easy and rural investment-friendly.
ROBUST ROLE OF CENTRAL BANKS: The recent global financial crisis and the collapse of giant businesses and financial institutions like Merrill Lehman, Lehman Brothers, American International Group (AIG), Global Crossing and others, has prompted highlighting of the robust role of central banks and their monetary policies around the globe.
Central banks can help governments achieve employment objectives through their monetary policies. Several national development plans in Asia and Africa have adopted employment targets. Indonesia's medium-term development plan, announced in 2009, aims to reduce unemployment rate to 5.0 per cent by 2014. Malaysia's Tenth Development Plan, announced in 2010, plans to add 1.4 million jobs and reduce the unemployment rate to 3.1 per cent by 2015. Meanwhile, all the United Nations member-states have committed to the Millennium Development Goals (MDGs), which include full and productive employment and decent work for all, as well as halving, between 1990 and 2015, the proportion of people in extreme poverty.
In countries where central banks adopt a full employment objective, timely data in this regard is of significant importance. In Australia and the United States, comprehensive reports of labour force surveys are released on a monthly basis with only a one-month lag. This allows central bankers to respond rapidly to changes in labour market conditions.
The employment situation and the rate of unemployment in developed and emerging countries are regularly (monthly) revealed by the central banks through monetary policies. The developing countries, on the contrary, do not show the unemployment rate in their monetary policy statements. The central bank of Bangladesh appears to be reticent about the unemployment rate -- whether it is increasing or decreasing. The recent MPS (monetary policy statement) of the central bank of the country has revealed that the "remittance growth slowed sharply", but it did not mention the roots nor did it put forward any policy guidelines to improve the situation.
Education is the backbone of any nation and an important prerequisite for economic growth and development. In the literacy rate, the developing countries lag behind the developed countries. The changes in the illiteracy rate need to be echoed in the MPS (monetary policy statement) of the developing countries, like the unemployment rate. It is a matter of regret that even in the 21st century, many countries in Asia, Africa and Latin America have more than 50 per cent illiteracy rate which needs to be highlighted in the MPS of the countries concerned. Compulsory education with the support of incentives for higher and technical education needs to be included in the monetary policy of a developing country, the illiteracy rate of which is abnormally high.
"Accommodative monetary policy (AMP)" and "tight monetary policy (TMP)" are two vital concepts in monetary policy followed by the central bank of a country. When the economic situation oscillates, the central bank shifts from the accommodative policy to the tight policy or vice versa, to fine-tune the policy to meet the economic needs. It is frequently noticed in developed economies. In developing countries, like Bangladesh, TMP has been trailing for many years with the common plea of controlling inflation and for price stabilisation. TMP helps control inflation. The authorities behind the monetary policy, especially the chiefs of central banks in developing economies, may review the existing monetary policies and follow the successful ones of the developed and emerging world to bring about a remarkable change in the economy.
The writer is the CEO of a private group of industries.
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