Regaining confidence in financial sector
The new monetary policy for the first half of FY2014-15 was announced in the backdrop of a large number of challenges in the macro economy and financial sector amidst an apparently stable political atmosphere giving a breathing space for the economy. Keeping aside the apprehension of political turmoil in the coming months, there are mainly three persisting critical policy questions. First, how to attain a growth of 7.3% stipulated in the present national budget? Second, will the monetary instruments work to accelerate private investment which has been disappointing for the last couple of years? And finally, is there a strategy to remove the disgrace of the financial sector which has been suffering from lack of people's confidence for quite some time due to critical incidents in two public banks.
Curbing inflation has been an overarching 'mission' of monetary policy since 2010, which gained success due partly to tightened monetary regime of three consecutive years despite criticism. The new monetary policy has followed the footprint of the earlier ones in this regard. Achieving higher growth in line with the Sixth Five-Year Plan (SFYP) and even the downward revisions in the budgetary targets still remain a mere 'vision.' In the 'mission' side, consumer inflation (measured by CPI) came down to 6.97 in June 2014, which is well below the target although the annual average is 7.39 for 2013-14, which is still higher than the target. Conversely, progress in attaining the 'vision' is quite dismal, which can be readily observed from divergence of growth stipulated in the SFYP and realised ones (see the Figure). The realised growth has also been falling short of the budgetary targets continuously even though the last fiscal year can be regarded as an exception due to unprecedented political turmoil.
Private investment ratio has been discouraging, suffering from acute divergence between the SFYP target and realisation due mainly to structural factors like infrastructure, energy and governance deficiency; political turmoil, however, adds to the miseries of the existing and potential investors. Even though the stipulated private investment was 24.4% of GDP in the SFYP it was estimated to be about 18.7% of GDP in 2013-14. Promoting accelerated growth through attracting private investment would, therefore, be the top challenge for the monetary policy given a seemingly stable macro economy for a while.
Export performance was quite satisfactory amidst dark polity, and crossed the landmark of $30 billion, but this was due to untiring efforts of the exporters who had to spend considerably more to comply with the buyers. Now the government is thinking of crossing $33 billion in the current fiscal year, which would be a big task for the monetary policy. The governor has pressed the banks to reduce interest rate on industrial credit. If realised, this would be a good signal for the investors to come forward although the real interest rate may not alter due to declining inflation. At the same time, the efficiency and productivity of capital must be improved. Currently, the incremental capital-output ratio is about 8.7 calculated based on constant price of the base year 2005-06, which would be even higher for the base year 1995-96. The ratio is about 3 in most of the countries, which clearly indicates that our capital can produce less when compared internationally. Merely fiscal incentives and lessening interest rate for investment are unlikely to help attain the 'dream growth.'
Coupled with amazing export performance, forex reserve crossed the landmark of $20 billion in April 2014. It has been a notable success of monetary policy that continued to have discouraging impact of spending foreign currency on unproductive sectors. This happened due to strong and macro-prudent policies taken by Bangladesh Bank despite upheavals in the financial sector, and deserves a big applause. By contrast, a big chunk of forex will be spent on Padma Bridge, which would create pressure on the reserve.
The declining trend of foreign remittance, especially since March 2014, is a matter of concern in the short run; it is likely to alter shortly because of two Eids. However, increasing export of manpower services is necessary to achieve sustained growth of remittance, a major lifeline of the Bangladesh economy. On the other hand, productive use of remittance is yet to be encouraged sufficiently through monetary policy. Perhaps a separate policy document is required to yield desirable national returns to support graduation of Bangladesh to a middle-income country.
Stock market is still on the 'Penelope stairs' portraying the recurrent story of a monkey on an oily pole. A recent scam has added another black feather in its dark crown. Indeed, the market is currently suffering from acute capital crunch, which could be largely addressed through operation of Bangladesh Fund. Incentives of small investors who lost their capital have to be realised. More importantly, the market price of most of the shares, including ones of some good banks, is very close to the scheduled price, which can be well utilised by the government institutions. Since price earning ratio of these shares is good, it is even better than earning of fixed deposits. Therefore, the government should come forward as a pull factor to bring dynamism in the market.
Finally, a big problem is the overall negative impression about the financial sector, which is due to credit scams in two public banks. The supreme oversight authority, Bangladesh Bank, performed its duty to uncover the scams and advised the government to take rapid measures. Taking punitive measure is the job of the government, not of Bangladesh Bank, and strong will is required to prevent recurrence of such events. The implementation of monetary policy should aim at creating further pressure on all banks through intensified vigilance, which would help regain people's trust in the financial sector. Without such an invaluable but intangible capital this sector may be like a house of cards, which would ultimately lead to schism in the entire economy.
The writer is Economist and Senior Research Fellow at Bangladesh Institute of International and Strategic Studies.
E-mail: [email protected].