BANGLADESH Bank has announced its semi-annual monetary policy on July 25, 2013 for the first half of this fiscal year. As the last monetary policy of current government it has been placed before the nation in the midst of a 'low level equilibrium trap' emanating from lower economic growth than stipulated, low private investment, low aggregate demand and low external sector performance. In fact, monetary policy is gradually becoming an area of attention of the scholars, practitioners and donors because of its influence over the economy through financial sector.
The outgoing fiscal year witnessed a number of unwanted dissident events riding on the economy's shoulder. The stipulated growth path therefore skewed downside even though there were different speculations over the GDP growth by influential international actors that predicted considerably lower growth than our national projection. The economy, by dint of its 'intrinsic strength', could cross the hurdle of six per cent growth as its exports showed U-turn since outset of this year despite incidents. Thanks to four million diligent RMG workers who still have not lost heart notwithstanding being burned and crushed alive. Now we expect a reasonable breathing space without scare in the coming days to let the economy walk. This calls for a rather flexible monetary policy through pumping money to productive and economically vibrant sectors.
The two fundamental objectives of our monetary policy are boosting economic growth and curbing inflation. The previous couple of monetary policies are claimed to be have been successful in pursuing the second objective. However, the first one has remained a formidable challenge in the context of projections made in the Sixth Five-Year Plan. The budget speech 2013-14 reaffirmed 7.2 per cent growth that seemed to be a 'mere' target. Speeding up growth should now be the most important agenda during transmission of the monetary policy even at the cost of moderate inflationary pressure.
The policy statement is, however, not that firm in steering growth; rather it seemed to be more scared about stringent credit policy for private sector by the domestic financial institutions that recently led the borrowers to gradually switc to external credit. While it is a welcome news neither for 48 plus banks nor for the external balance of the economy, it is the high time for Bangladesh Bank to motivate a few private banks friendly and motivated to serve the private sector and help them introduce flexible credit strategy. Boosting aggregate demand should now be the first strategy to accelerate growth, which would be followed by economic expansion. This should be pursued by pulling investment demand through devising lucrative credit package. We are keeping the private sector unfed standing on a 'mine' of loanable excess fund. Lowering the lending interest rate can be a pragmatic short term strategy for contributing to economic expansion and edging out the foreign competitors, both of which can protect their business interest.
Bangladesh Bank will continue aggressive sterilisation of foreign assets to maintain a 'stable' foreign exchange rate as the monetary policy reaffirms, but it cannot continue for long in the midst of poor import demand. Forceful sterilisation is likely to create bubbles more in the asset market than recurrent sectors. The government has set export target of 30 billion in the current fiscal year, which should be trailed effectively. This would help increase import demand of intermediate goods, raw materials and capital machinery. Nevertheless, careful attention should be paid so that the reserve is not exhausted by imports of unnecessary consumer items.
Some experts criticise the overemphasis of lending in trade and commerce, thereby leading to relative deprivation to other deserving domestic sectors that immensely contribute to the economy through feeding, and forward and backward linkages along with generating employment. True, external trade is now more than half of the country's GDP. But the contribution of RMG that has the overwhelming majority in export basket is meagre in the value of total supply in the economy as revealed from social accounting matrix of the economy. Keeping in mind the economic lifelines, there is a need for comprehensive indexing the sectors for devising credit strategies keeping in mind their employment generation alongside other virtues. A very recent good initiative is the Agricultural & Rural Credit Policy for current fiscal year that updates the eligibility conditions based on the changing realities in the rural economy.
The monetary policy seems to very wary of inflationary pressure compared to the likely benefit of wage growth in public and private sectors due to a potential Pay Commission in the public sector. Point to point general inflation was 7.97 in 2012-13 with an upward trend since January of this year, which is still higher than the target of the ongoing fiscal year stipulated in the budget document. Core inflation that takes into account non-food, non fuel prices is also on the rise. Bangladesh Bank's apprehension may be that an incautious monetary policy may open the 'flood gate' of price hike while curbing inflation which is considered to be its one of the major successes in the last couple of years. What harm would the wage growth do other than partly offsetting the additional wage through further inflation? It would immensely contribute in pulling aggregate demand which is now badly needed. Then what else: demand-pull itself provides boosts in output growth and employment in the short run that is also desirable. Therefore, let us help reap the benefit of addition income exploiting the advantage.
A missing component of the policy statement is to devise ex ante measure towards credit scam in both public and private banks. As the news reports are gradually uncovering indiscipline in the financial sector, the entire check and balance in the monetary system needs to be examined thoroughly. It calls for constituting a high level independent taskforce including scholars and practitioners in the relevant field with sufficient technical knowledge, which would find facts and suggest remedies besides the ongoing vigilance of Bangladesh Bank. It is an imperative for ensuring financial stability in the near future.
Finally, the share of public investment in the investment-GDP ratio has increased considerably in the last fiscal year while share of private investment has reduced. Public investment is required especially in providing durable social goods but it should be considered as a facilitator of attracting private investment. The investment ratio grew at 0.3 percentage point in the last fiscal year which was due to increased public investment. Now we need to pull off the aggregate demand necessarily to let the economy move ceteris paribus, which must be supported by a cautious transmission of the monetary policy measures.
The writer is Economist and Senior Research Fellow, BIISS, Dhaka.