Did lax monetary policy help?

If we err, let us err with investment and employment generation

  • A transition economy has its challenges
    Photo- Nashirul Islam

With support from the World Bank and more importantly the IMF, Bangladesh Bank has, over the last seven to eight years, significantly improved its policy analysis capability. The watchdog agency has been announcing the half-yearly monetary policy statement (MPS) for the last eight years or so.

Monetary policy is usually either expansionary or contractionary in nature. When the total supply of money is increased, it is expansionary, and it is contractionary when cumulative money supply is decreased. An expansionary policy is usually adopted in a situation where employment generation is a priority by lowering interest rates. Conversely, a contractionary policy is followed to stabilise inflationary pressure through increased interest rates.

Lately, we have been hearing about “accommodative monetary policy” in Bangladesh, focusing more on a balance between taming price spiral and supporting growth. Under such a policy, we see relatively quick shifts from expansionary to contractionary measures and vice-versa, to fine-tune growth in an economy prone to inflationary pressure.

Since its inception, monetary policy in Bangladesh was conducted with full direct control on interest rates and exchange rates, as also on the volumes and directions of credit flows. However, as of today, the directed lending (other than loans at times directed by the state-owned bank’s board) has been abolished, and gradual liberalisation of interest rates has taken place. Thus, though there are debates, interest rates to a great extent have become market-driven.

The exchange rate has become floating, with Bangladesh Bank (BB) buying or selling currencies to keep liquidity at the desired level, though we do hear about “managed float” or “moral-suasion” at frequent intervals.

Bangladesh Bank’s MPS so far has been focusing on continuous watch towards locating and neutralising likely inflationary pressures from the growth-supportive monetary and credit policies, to the extent feasible, targeted to selected priority sectors. Deepening of financial inclusion of agriculture, small and medium enterprises (SMEs), renewable energy, and ecological footprint are mentioned to remain as the priority sectors while monetary watchdogs remained focused to discourage expansion in lending for wasteful consumption and unproductive speculative investment.

Though Bangladesh Bank has mostly been talking about an accommodative monetary policy, in reality, through mopping up the surplus by increasing the CRR (cash reserve ratio), it was rather following a contractionary policy. However, at frequent intervals, they were trying to soothe the market by releasing more money through repurchase agreements or REPO. They were having a tough time in differentiating between unproductive sector credit growth and normal credit growth.

Though they are committed to protecting the banking sector from the effects of any possible stock market crash, the overall susceptibility to pressure from a popularly elected regime didn’t help them much in focusing on execution.

Allowing black money to be invested in capital market or real estate or support packages to sick apparel industries carry enough policy contradictions and put unnecessary pressure on the central bank in effectively managing its monetary policy. Added to these is increasing debt default in the state-owned banks and weak monitoring of the classified loans, specially to release the reserve made against classified loans, impacting the overall liquidity in the banking sector.

Economists have raised questions about whether Bangladesh Bank has performed its due role while the capital market needed their help. Analysts say, despite a huge increase in money supply, inflationary pressure on food and non-food items was not high since most of the surplus money went into the capital market.

However, when Bangladesh Bank started to mop up the surplus, the market felt the pinch, liquidity dried out, and market index came down from 8900 to 6300 and ultimately to below the 4000 mark, pushing many retail investors to the streets and bewildering the government policy planners. Now, the situation is reported to have improved much, but confidence still needs to increase to bring back the investors.

There are more than 40 million bank account holders, and the number is increasing with the opening of more farmers’ accounts with the state-owned banks to channel subsidy. Should the monetary watchdog then be too concerned to protect the interest of about 3 million beneficiary owners account (BO) holders in the stock brokerage houses, which was already heated up, warranting massive correction based on fundamentals?

If we go back to the basics, Bangladesh Bank is more responsible for real sector growth and, at the same time, it needs to protect and help nourish the country’s banking sector. However, a $30bn capital market with 300 traded issues, and that too being quite shallow, not depicting the real fundamentals, can’t do much to ensure “inclusive growth” in Bangladesh and, more importantly, make growth more equitably distributed. In a labour surplus economy, we need more employment at home and also abroad with an increasing rise in investments, both domestic and foreign. Only real sector investment can make it happen.

While it remains a tough job for the central bank to do justice between price hike of essentials and growth warrants, they need to be more watchful about private sector credit growth and unusual and undesirable support being provided to unproductive sectors.

It should tightly monitor debt default in the banking sector, especially in the state-owned banks and, more importantly, effectively manage the exchange rate. They should remember taming inflation has almost become an issue of “governance” or “ensuring rule of law” in a weakly governed country. Too much focus on taming inflation or, at times, forcing inflation down is not helping investment growth or even national wealth creation.

Bangladesh is a growing economy offering policymakers all the challenges of “managing growth in a transition economy” with an apparently weak regulatory framework and pressure on capacity. Even if we perform at 60% of the desired level, striving continuously to maintain a balance with fiscal measures, the country does not have a high risk of slipping from the growth track. If we err, let us err with investment and employment generation.

Source: Dhaka Tribune


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