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Sunday, February 28, 2016

MONETARY POLICY IN HIGH-VOLTAGE POLITICS

Mahfuz Kabir

At last, the new monetary policy statement (H2/FY2015) has got a professional look after years of experimentation, finding a balance between continued commitments and inevitable economic realities. Truly, the greatest achievement of the consecutive 'cautionary' and 'pragmatic' monetary policy over the last four years was an unbelievable taming of inflation without offending economic growth.
The document is quite elaborate, with clearly defined first and foremost objective of continuing to resist inflation to reach the target of 6.5% by June 2015 besides achieving between 6.5% and 6.8% economic growth in the current fiscal year. However, the attainments are subject to some prominent 'ifs' and 'buts' like political instability, upward risk in inflation, and infrastructure and energy deficiencies. However, the monetary policy is aimed at striking a balance between the objectives of moderate inflation and the targeted economic growth. And for the first time the policy document has sufficiently elaborated about inflation, the experience of other countries and its projected moves to justify the policy targets.
The document has four parts. The first part covers the policy highlights, key objectives and strategies for the second half of the current fiscal year. The second part includes the backdrop of macroeconomic, nominal and real sectors to set the tone and core vision of the policy stance. The third part of the policy is quite detailed, and covers global economic outlook, domestic sector, external sector, and money and financial sector. Some debated issues and myths have been objectively analysed and demystified in the appendix. These include the nexus between announcement of pay scale and inflation, point-to-point versus average inflation, growth projections and growth-inflation linkage so as to justify the direction of monetary instruments for the remaining five months of the ongoing fiscal year.
As mentioned in the policy highlights, the balance between moderate inflation and economic is a major objective in the stated policy. Interestingly, it was shown in Annexure C that inflation has been strongly and positively correlated with output growth for about two and a half decades -- since early 1990s. The stipulated output growth for this year is 8% as per the Sixth Five-Year Plan, which is still a far cry. But, higher economic growth is a must to attain the middle-income country status by 2021, which we must achieve. Therefore, it would be a big challenge for the monetary policy to tame inflation amidst pulling off the postulated economic growth as higher output is seen to be triggering inflation in the long run.
The policy document reveals that the deposit interest rate at retail level decreased in July-December 2014. It is a market based signal about the low return of savings indicating that general investment has not been considerably stimulating. The amount of private foreign borrowing due to high domestic interest rate has remained insignificant, although the monetary policy has continued 'yes card' to it for having downward pressure on lending rate. However, the actual cost of borrowing from banks has long been claimed to be higher than the official rate, as reported by many business people, due to informal transaction costs. Bangladesh Bank needs to have an investigative approach to undertake reform measures towards lessening pressure on business people. The stated punitive measures for deceitful practices that led to diffidence in the financial sector are welcome.  
The remitters who are deeply rooted in Bangladesh have no trust deficit in the economy, which is marked by their continued support with remittance. It helped regain the foreign currency reserve of a healthy $22 billion in the midst of a stressful month. Pragmatically, the monetary policy aims to continue maintaining 'comfortable' forex reserves to cover imports of five to ten months. The current reserve, however, can easily be utilised to cover import payment of the next six months even after clearing the payment of Padma Bridge for the current fiscal year. Prudence in protecting depreciation of Taka through heightening reserve is also praiseworthy. However, capital flight that usually takes place through various channels during crisis must be stopped.
Attaining the targeted growth of private sector credit set at 15.5% with further upward flexibility for the productive activities would be a challenge for the period of this monetary policy as one month has already gone under-invested. The target would be notably unrealised if the crisis period is prolonged, which is likely to dishearten the entire nominal and real sectors.   
An optimistic monetary policy is placed in the midst of a high-voltage politics when all parameters and prerequisites were set for Bangladesh to grow fast despite infrastructural, energy and governance deficiencies. At the same time, inflation was tamed down to 'moderate' level due to incessantly cautious monetary instruments for a half decade despite many harsh criticisms. In fact, the output growth-inflation trade-off was smartly translated into an extremely rare dividend of 'trade-on' through fair means of financial sector policy. Now, attaining overarching goals of the new monetary policy, which has built on the successes of the past ten policies, hinges critically on the on-going destructive pursuits, burning and killing. Disappointing indeed!

The writer is Senior Research Fellow, Bangladesh Institute of International and Strategic Studies (BIISS).

The Daily Star, 03 February 2015