Inflation is a sensitive issue in an economy, particularly in countries such as Bangladesh where economic decisions are influenced by political pressures many a times. As a result we observe that the policymakers along with other citizens of the country get worried when inflation rises. This worry stems from the fact that ours is a developing economy where many economic and non-economic issues are not dealt in the right way. Such is the case of inflation. Therefore, we debate on the desirable rate of inflation. How much inflation is desirable from an economic point of view?

Renowned economist and a champion of monetary policy biased economic management Milton Friedman mentioned that for a developed country in Europe five percent inflation should be acceptable. Growth and inflation are often positively correlated and a high growth economy will also experience relatively high level of inflation. Taking a clue from there and taking cognizance of the importance of employment creation and growth facilitation requirement in a developing country like Bangladesh one could say that we should be okay with a lower double digit inflation rate. Recently a study done by some young economists revealed that 12 percent inflation is tolerable for Bangladesh. However, one should be very cautious in making any statement supporting

that level of inflation, where price spiral led inflation or vice versa has become the main political weapon against the opposite political regime in Bangladesh. The country has experienced a seven percent plus inflation in 2006 compared to around two percent in 2001. Though this was mainly due to an increase in prices of fuel and essential commodities in the international market, (domestic political uncertainty along with rent seeking by political hoodlums and various government agencies have also contributed significantly), political mud slinging and blame-shifting was rampant. Incidentally, we have seen growth happening in Pakistan, Kazakhstan, Indonesia, Egypt, Argentina, and Russia even with historically high inflation rates.

The tasks of the central bank like any other central bank in a developing country has become a delicate one in controlling inflation, as it essentially involves money supply management. Limiting money supply in a bid to contain inflation may turn out to be undesirable. If that leads to any across-the-counter credit squeeze to reduce money supply, the credit needs of businesses especially industries may suffer. Moreover, excessive focus on reducing inflation does not allow the central bank to support dollar for the exporters and the nonresident remitters. This was experienced in the recent past when the value of dollar was sliding down. Supporting dollar would have put in

more money in the market or circulation, thereby contributing to rising inflation.

Therefore, the authorities need to apply policies with extreme care in the forthcoming election when both administrative spending and the election-related flow of money from the political parties are likely to soar. The central bank is expected to meet the needs of the economy while taming inflation. Already, there are fears about the great deal of unproductive spending by the government. Such possibilities appear to have increased with the government's borrowing from the financial system reaching a record level. According to a newspaper report, government's borrowing from the banking system stood at Tk 41.59 billion till October 2006. Borrowings were less than half of this amount in October 2005.

The challenge for the caretaker government is to put a leash on government's spending so that the borrowings are reduced. The relevant ministries will have to plan promptly how government's spending can be rationalised without hurting essential programmes and necessary election preparations. Ironically, advisers concerned are constrained by political uncertainties and have less scope to attend these issues. But controlling governmental expenditures in unproductive sectors merits a priority consideration. A short-term action plan has to be prepared and implemented immediately. This would be

an important step towards controlling money supply and putting a brake on inflation. But while doing this, every effort should be made to meet the genuine credit needs of the private sector, in tandem with efforts to help maintain a congenial business environment as far as possible even under the current difficult political situation. Credit expansion to the private sector that leads to production of goods and services under enabling conditions does not so much add to inflation. Because of this monetary expansion is then matched by increased production of goods and services. Inflation can become a formidable problem if the supply of idle money increases and is used for unproductive purposes, such as high spending on election related activities. In order to get the desired results the government, therefore, needs to limit such spending, on the one hand, and ensure adequate credit flow to the private sector for productive activities, on the other.

At the same time, all out efforts should be made by the government to increase revenue collection. If this can be done, the need for the government to borrow from the financial system, which raises the national debt level, will decline and the private sector will not be crowded out as far as the credit flows are concerned. The caretaker government is not supposed to consider political pressures. It is expected, therefore, that they will move forthright to

improve collection of taxes, notwithstanding pressures from interest groups. Even within its short tenure, it can also execute a scheme to improve collection of such taxes as VAT. However, lot of these are dependent on peaceful environment in Chittagong and Mongla seaports and Benapole and Burimari land ports and of course political stability, since trade tariff/customs duty still dominates in the basket of revenue for the government, coming next are VAT and income tax. Next important focus should always be cutting the losses of the state owned enterprises like BPC and Biman by making them profitable or transferring those to private sector.

In a market-based economy, there are two primary macroeconomic tools that the governments use to have control over economic growth and direction of the economy- fiscal and monetary policy. Fiscal policy outlines the process of decision making by the government in deciding on the level of public expenditure and its funding plan. It also reflects governments' purposeful change in spending, borrowing or taxes to accelerate or rationalise the growth of the economy. In a fiscal policy biased or driven economic management system, the government funds the spending through taxation, printing money and borrowings from individuals and institutions by issuing treasury bills and bonds.

Monetary policy through manag-

ing money supply focuses on achieving specific goals, relating to the inflation, exchange rate, full employment as well as economic growth. Central banks control the economic management by changing the interest rate, setting certain reserve requirements and trading in foreign exchange markets. Governments often use expansionary policy to tackle unemployment during a recessionary period by lowering interest rates, whereas contractionary monetary policy dictates raising interest rates to handle inflation at times, even at the cost of curtailing credit expansion in a growth economy like Bangladesh.

The global economy is opening up with increasing trade liberalisation, tariff rationalisation, integration of global financial system and lowering of barriers in movement of factors of production such as capital and labour, therefore monetary policy based or biased economic management system is getting prominence as it contains most of the factors relevant to any market based economy, such as inflation, interest rate, employment and money supply. Though Bangladesh is still following a fiscal policy biased economic management to drive growth, soon it has to bring in a balance between the two along with a structured approach for the management of inflation.

The writer is a banker