BANGLADESH NEWS
The Unnayan Onneshan, an independent multidisciplinary think-tank, in its July issue of Bangladesh Economic Update states that the recently adopted monetary policy by the Bangladesh Bank might pitch the economy to further decelerate due to monetary restraints, coupled with reduction in policy space and shortsighted fiscal management.
The Unnayan Onneshan, however, said that the central bank had missed a unique opportunity by adopting an across the board approach, as opposed to an innovative selective, case-by-case approach. “The central bank could have opted for a selective approach of maintaining import demand (e.g. raw materials, intermediate goods, capital machineries) and expanding flow of credit to productive capacity expanding and value adding sectors and products (e.g. garments, pharmaceuticals) while taking a belt-tightening approach to others such as restricting import of petroleum products for quick rental power plants, which, in turn, would have curbed inflation and sustain growth momentum,” added the research organisation.
While the main three-pronged challenges in formulation of monetary policy were to curb the inflation, to ease the imbalances of balance of payment and to keep the growth of the economy, the Unnayan Onneshan said that the current monetary policy stance should have focused on a balanced approach, which could accelerate investment in the productive sectors and control public spending and rent-seeking.
Elaborating the mismanagement, the think-tank stated: ‘The injudicious policy decisions to resort to quick rental power plants increased the supply of money by way of government borrowing and also exerted pressure on foreign exchange reserve, resulting into depreciation of Taka, as import demand of petroleum products rose, both contributing to inflation, while the economy was already experiencing inflationary pressures due to increased international prices and cost of input for production.”
“Again, administrative decision by the central bank to restrain money supply to rein in inflationary pressure led to increase in rate of interest and reduction in import of raw materials, intermediate goods and capital machinery and eventually dampened investment, while the central bank could not hold back the inflation at a permissible level,” reasons Unnayan Onneshan, a leading think-tank of the country. The economy contracted to a GDP growth rate of 6.3 per cent in 2011-2012 from 6.7 per cent of the preceding year.
To Unnayan Onneshan, the current monetary policy statement (MPS) is, however, “not a surprising one.” It added that the MPS was in persuasion of the restrictive monetary targets agreed in the Memorandum of Economic and Financial Policies (MEFP) by the government with the International Monetary Fund (IMF). The three-year IMF programme, according to the research organization, has also in effect reduced the fiscal space of the government as demonstrated in the current budget.
Referring to the central bank’s disappointed track record of maintaining target stated in different MPS, the monthly economic update raised the issue of credibility and realism in setting of targets. It cited the targets and realized outcomes of indicators such as inflation, growth of credit. The rate of inflation in FY 2011-12 was 8.80 against the target of 7.5 percent. The rate of growth of broad money was 16.63 percent till May 2012 as compared to the target of 17.0 percent by the end of FY 2011-12. Similar differences prevailed in cases of domestic credit to public and private sectors. Under the business as usual scenario, the research organisation cautioned that the targets set in the MPS for July-December of 2012 might not be achieved and even there might be large gaps as compared to the actual outcomes.
Dwelling on the government borrowing, the Unnayan Onneshan alerted that the continuation of current trend might result into an increased domestic debt by the government, dampening private investment. During July-April of FY 2011-12, the total domestic borrowing by the government was Tk. 18.42 billion, which increased by 39.10 percent than that of the same period of the previous fiscal year. The current MPS asserts that government borrowing from the banking sector will be around at Tk. 230 billion same as the budgetary target of FY 2012-13.
The incremental growth rate of broad money is following downward trend since June 2011 due to decrease in currency held outside the banks as a result of the tightened monetary policy. The broad money increased by 1.47 percent in May 2012 at Tk. 5010.89 billion than that of Tk. 4938.07 billion in April 2012. The central bank targeted the growth of broad money at a rate of 16.50 percent in the first half of FY 2012-13.
The Unnayan Onneshan observed that rate of growth of reserve money decreased mainly due to reduction in net domestic assets of the central bank during the first four months of 2012. During July-April of FY 2011-12, there was a shortfall of Tk. 18.81 billion in net domestic assets of Bangladesh Bank, which was 6.63 percent lower than that of the corresponding period of the previous fiscal year. This too had occurred due to pursuance of contractionary monetary policy during the period of January-June of 2012.
While referring to the justification by the central bank for resorting to the contractionary monetary policy to contain high inflation, the Unnayan Onneshan, however, noted that the non-food inflation had increased at an alarming rate during the last ten months of the previous fiscal year due to high borrowing by the government from the banking system, yet no concrete steps had been suggested in the MPS to put a check on import of petroleum products for the power plants.
The research think tank stated that though the competitiveness depend on the real effective exchange rate (REER), irregular movement in the exchange rate would have a direct effect on GDP and employment outlook, especially through export.
As regards foreign exchange reserve, the organization cautioned that the continuation of declining trend from July 2011 to May 2012 suggest that reserve might slide down by the end of this current fiscal year unless receipts of remittance and export earnings were given a positive vibe.
The Unnayan Onneshan observed that the slower rate of private savings occurred due to slower growth in real disposable income and the stock market catastrophe, which particularly hurt the small investors. “Savings rate did not increase at a satisfactory level due to increase in the rate of inflation, though the rate of interest on deposit is still low compared to the lending interest rate. Under the business as usual scenario, the domestic and national savings as percent of GDP might reach at 19.28 and 29.65 percent in FY 2012-13. Out of which, the private and public savings might reduce to 17.89 and 1.35 percent respectively,” the research organization noted.
The Unnayan Onneshan said that increase in the rate of interest might adversely affect investment. In FY 2010-11, lending interest rate was 10.72, with a private investment ratio to GDP of 19.5 percent. However, the lending interest rate rose to 13.74 by March 2012 whereas the private investment as percent of GDP declined to 19.1 percent in FY 2011-12. The declining rate of private investment as percent of GDP occurred because of the higher rate of interest on deposits, and consequential rate on advances, the research organization added.
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