Generally, monetary policy is defined as a process by which the monetary authority (ideally the central bank) of a country controls the supply of money, fixing rates of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment. Monetary economics provides insight into how to craft an optimal monetary policy.
Monetary policy is referred to as either being expansionary or contractionary. An expansionary policy increases the total supply of money in the economy more rapidly than usual and a contractionary policy expands money supply more slowly than usual or even shrinks it. The expansionary policy is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice businesses into expanding. The contractionary policy is intended to slow inflation in order to avoid the resulting distortions and deterioration of asset values.
Dr. Atiur Rahman, Governor of the Bangladesh Bank (BB), is going to announce the Monetary Policy Statement (MPS) for the first half of financial year 2014-2015 on July 26, 2014 to gear up the country's overall economic activities through boosting local and foreign private investment. To contain inflation is also to be the top priority as its target for the last financial year was not achieved as it was 7.35 per cent against the target of 7 per cent. In line with the budget's target (6.0 per cent for 2014-15FY), the central bank may take this target.
However, the BB already took some measures to control inflation and money circulation. It has already raised the cash-reserve ratio commonly known as CRR from 6 per cent to 6.5 per cent since June 26, 2014 with the hope to manage money circulation. Under this step, the BB has already mopped up Tk 32 billion from the banking system. The BB expects that due to this step, money circulation will be narrowed and inflation will also come down. If the central bank wants to keep inflation below 7 per cent or 6 per cent as per the budgetary target, then the step taken is okay but if money circulation is controlled, then how will private investment boost up? But for the sake of economic development, it is essential to encourage private investment. It has been acknowledged in all corners that private investors are keeping the momentum of economic growth of Bangladesh. Thus the BB should show the way how to raise private investment.
Businessmen are looking forward for a congenial atmosphere for investment. They are still in a dilemma regarding the political environment of the country in the future. Private sector credit growth is still very slow. The projected growth rate for private sector credit was 16.50 per cent in the last two monetary policies. But the target was not achieved for both the MPS. Achievement of private sector credit including foreign one for July-December period, 2013 was 13.80 per cent. And credit growth for last 11 months was only 11.39 per cent. According to this growth, the private sector credit growth may be 5.1 per cent lower than the projection i.e. 16.50 per cent. So it will be a challenge for the BB to increase private investment.
Our foreign exchange reserve has already crossed 21 billion US dollars. The BB Governor disclosed that even after settlement of US$967 million of ACU payment, the foreign reserves will remain above $21 billion. It's a good sign and it indicates stability of foreign reserves. This is because of rise in foreign remittances and export earnings. But foreign exchange reserve may suffer a setback as remittances are now showing a negative growth. The government should take some proactive measures to find out new destinations for wage earners. Side by side, we need to produce skilled manpower to raise our manpower export as well as foreign remittance inflow further. BB deputy governor S K Sur Chowdhury revealed that they are going to announce a capital market-friendly monetary policy. This sounds auspicious for the capital market players.
Now investors are eagerly waiting to see what kind of incentives are going to be offered in the upcoming MPS. They expected earlier that the new budget could have given them some bail-out packages but it failed to give any remedy to their miseries. Let's hope for an investment-friendly monetary policy that will hasten the pace of economic development of a country that aspires to attain middle-income status soon.
The writer is a banker. [email protected]
© 2024 - All Rights with The Financial Express
