The IMF says the era of cheap money is over
Farid Bakht
After engineering a reduction in interest rates in 2004, an IMF mission suddenly announced a change in policy in 2005. Apparently, inflation is rising and therefore we need to raise interest rates to combat this. There have been justifiable complaints that they have not done much analysis. The IMF presence here is rather small for such an influential organisation. They rely on a small office deep in the heart of the central bank, Bangladesh Bank, for data and have an extremely close relationship with the Ministry of Finance. Moreover, they can rely on second-hand figures from their sister organisation, the World Bank. The announcement has resulted in howls of protest by an unusually united group of business associations. They have examined the conditions on the ground and conclude that instead of going up, interest rates should actually go down! The gap between the IMF/Bank and the captains of industry could not be wider. The view from the North
The IMF representative is merely relaying the call from Washington, London, and Frankfurt that the era of cheap money is over, everywhere. Money has been available at next to zero percent interest (and in real terms, actually negative) in the US and Japan, to stave off deflation, following the collapse of the dot-com boom at the turn of the century. Now they realise that this policy has created unsustainable booms in the price of real estate throughout the North. American consumers are up to their eyeballs in debt, spending as if there was no tomorrow. Since they no longer save, millions of consumers are making a one-way bet that their houses and condominiums will always be worth more in the future. This sorry state of affairs will one day come to an end. Still, consumers do not seem to have got the message, so interest rates are being raised to encourage them to do so. This works because as interest rates rise, the mortgage repayments (debt) also go up, dampening down price increases. Thus consumers should feel less secure and restrain their spending on TVs, cars, furniture etc. If they do so, then the inflation rate comes down. What has this got to do with us?
You may have noticed that we are discussing the rich countries. What has this got to do with Bangladesh? Good question. We are not at that stage of the cycle where we would need to raise interest rates. Our money cannot be termed "cheap" at rates of between 12 to 14 percent! It is shocking to see the handicap our businesses have to face compared to their regional competitors. Interest rates are almost double those of India, nearly triple that of Pakistan, and more than four times higher than in Sri Lanka. The business groups have correctly pointed out that the IMF and its partners recently insisted on fuel, oil, and gas prices going up. This is seriously inflationary as transportation and power generation costs rise, as does the cost of irrigation. They also point out that currency depreciation raises the costs of imports. Unfortunately, some of their own associates, such as the BGMEA, have always pressed for a weaker taka, in the misguided belief that it will raise exports! Extortion at every stage of the production cycle raises costs, i.e. inflation. We cannot imagine "mastans" reducing their "take" on the basis of the level of interest rates. The poor bloody infantry
The majority of people are poor and spend the bulk of their money on food, i.e. basic staples, such as rice. This most crucial commodity has risen by 22 percent in the last twelve months. Does the IMF suggest that raising interest rates will reduce the price of rice? Of course not. Our food distribution system is plagued by bottlenecks, bribery, kickbacks, and disincentives to our farmers to produce. Truck drivers tell us they have to pay up several times on their way to market. These costs are reflected in the final price to consumers. Interest rates will reduce economic growth if big business cuts back. This will increase unemployment. Less new businesses will sprout up. All sectors will suffer. However, inflation will not necessarily decline because a Third World economy such as ours will not respond to interest rates hikes as a sophisticated First World economy can. We have structural bottlenecks and rigged local markets that do not play by the rules. What will big business do now? I notice the politicians are remarkably silent on such an important matter. Farid Bakht, Futurebangla Network, Dhaka.
|
|
