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Forthcoming monetary policy

Mahfuz Kabir
IT is quite commendable that Bangladesh Bank has started consultation meeting with the experts, bank representatives and businesspeople to shape up its upcoming monetary policy statement in a participatory way. Indeed, monetary policy, like fiscal policy, has profound implications to a country's nominal and real economic sectors. The two major objectives of Bangladesh's monetary policy are to promote overall economic growth, and to curb and maintain inflation at an acceptable level. The general point-to-point consumer inflation has come down at 8.56 in June, which is perceived to be a success of the "cautionary" monetary policy pursued for quite some time. The new fiscal year has just started with many challenges and opportunities in both internal and external sectors, which have to be realised, addressed and accommodated properly in the forthcoming monetary policy statement.
The title of the policy needs revision. As it is being prepared semi-annually to outline the monetary instruments in order to target, achieve, and sustain some specified economic outcomes, it should be re-titled as "Monetary policy outline/outlook." Currently it provides a small outline of the monetary policy for the following two quarters after detailed review of global and domestic economic performance, inflation, external sector, government revenue, and monetary growth. The forthcoming monetary policy statement should detail out the small outline as it is the main part of the policy and the reviews will have to be significantly trimmed to a small paragraph or two as the prelude of the policy as the detailed review can be found in other Bangladesh Bank and Finance Division documents. In addition, the policy outline must be based on scientific achievable projections of different monetary variables by month along with their linkages with nominal and real sectors. These might need rigorous modeling exercises like computable general equilibrium and macro-econometric modeling to come up with meaningfully tangible trajectories of the monetary instruments and their outcomes for the following six months.
When we discuss the economic growth and other crucial statistics for Bangladesh, we recall Benjamin Disraeli's celebrated phrase: "Lies, damned lies, and statistics." Economic growth has been estimated to be 6.3% in the last fiscal year, which has already fallen short of the projected growth of 7% in
line with the Sixth Five-Year Plan. Agriculture has been estimated to grow at 2.53%. Now we see an excess aggregate supply situation in the market especially in crop sector due mainly to bumper rice harvest and timely food grain imports, which, according to standard economic theory, might have contributed to dampening food inflation along with the long-pursued monetary contraction. However, this conclusion is based on popular intuition; we do not have any scientific evidence yet.
Inflation has a detrimental impact on the people in the traditional understanding because it takes away their purchasing power. Inflation also has differential impact on different income groups according to their expenditure share on food and non-food items. The ongoing monetary policy has a commendable sympathy, especially towards the medium and low people, aiming at easing their lives through curbing inflation. However, macro-economic theory implies that there is a short-term trade-off between inflation and unemployment. Thus, we can tap the opportunity of a short-term positive output and employment effect of high
Monetary policy should be facilitative to attain all the economic and social development policies.
inflation through effective economic strategies.
Positive growth of narrow money, broad money, exports and foreign remittance had no evidence of triggering inflation if we consider the monthly data for the last two years even though the textbooks infer that direct relationship. Monetary contractions have been evident to have ambiguous impact on inflation as of many renowned studies. For developing countries the inflation elasticity of monetary contraction has been found to be quite low. Then why are we actively pursuing a rather tight monetary policy at the cost of some additional economic growth, which is crucial for Bangladesh to achieve the status of a middle-income country as per Vision 2021? We have again projected7.2% growth in the current fiscal year, which is likely to be curbed if another round of tight monetary policy is pursued, indicating a progressive divergence from our "Vision!"
Sharp depreciation of foreign exchange rate in the last fiscal year has contributed to triggering inflation, which is evident from data of the last 24 months. Even though depreciation is supposed to
result in higher exports according to economic theory, we ended up with a mere 7% growth mainly due to resurgence of global recession from euro zone crisis. Another debate is whether we should continue to subsidise consumers of high income countries through incentives to our exports. On the other hand, international transactions become costlier due to higher exchange rate growth at around 15% while private credit grew at 18.4% against the target of 16%. Public sector credit witnessed significant growth at 31% against the target of 24.8% due to meeting up sudden need in the midst of widely perceived "crowding out" effect even though estimates show no such evidence in both short and long run (Kabir, 2012).
Government has never been a defaulter but we have plenty of private credit defaulters for whom we tend to aggressively "classify" and "reschedule" credit in the banks. Now there is a serious need for looking into the credit target keeping in mind the projected output growth as envisioned in the Outline Perspective Plan, Sixth Five-Year Plan, and related Medium Term Macroeconomic Framework -- not merely the inflation target. Monetary policy should also have a plan to manage transitory liquidity shortages emanating from internal and external shocks through contingency, but subject to assurance that it would not be abused. Moreover, the policy should also say something about the new banks and their role in achieving monetary targets.
Coordination between monetary and fiscal policy is much talked about by implying that the former should not be too tight to assist the latter to function. However, monetary policy should be facilitative to attain all the economic and social development policies. Thus, it should remain in conformity with all the sectoral and thematic policies because all the policies are important to the country's development and sustenance, which means greater synchronisation amongst policies.
Finally, the forthcoming policy needs to be explicit on regional and international coordination. It will help avoid "beggar thy neighbour" effects and reduce adversities of international linkage on Bangladesh economy. It can be easily done by looking into the monetary policies of the countries that have significant trade linkage with us.
The writer is an Economist and Senior Research Fellow at Bangladesh Institute of International and Strategic Studies (BUSS), Dhaka.
E-mail: mahfuzkabir@yahoo.com.