The Bangladesh Bank (BB) is expected to announce its half-yearly monetary policy for the remaining six months of the current fiscal year (FY), 2011-12. The new monetary policy, as the reports in the media indicated, will be more contractionary in its essence to curb some avoidable spending in both public and private sectors in order to help rear in inflation.
The monetary policy is the process by which the central bank controls the supply of money, interest rate, exchange rate and price levels. It has not been a long time since when BB started announcing its monetary policy stance.
* The Monetary Policy Statement (MPS) was first issued by the BB in January 2006.According to reports, many experts made strong pleas to the central bank to be more cautious in preparing the monetary policy for January-June period of 2012 -- the second half of the current FY. They have drawn the attention of the authorities of the Bangladesh Bank (BB) to some challenging issues such as soaring inflation, depreciation of taka and making credit-flow available to productive sectors, in the context of an otherwise rising public borrowing by the government from the banking system.
The new monetary policy is considered very important as it warrants some strong steps by the central bank to tame inflation and help keep the government's borrowing within the limits of 6.7 per cent and 5.0 per cent respectively, while being pro-active on making sustained efforts to help achieve the growth target of 7.0 per cent for the country's gross domestic product (GDP) in FY 2011-12.
Under the current economic situation, the BB has otherwise no option but to go for a contractionary monetary policy. That is what some economists have stressed. If needed, the central bank, as they have suggested, should go beyond its normal practice of preparing the monetary policy alone, and sit particularly with the ministry of finance and the National Board of Revenue (NBR) to make the monetary management more effective and help achieve its key objectives.
Inflation, depreciation of taka and the extent of public borrowings are major challenges for the government. The central bank needs to address such issues very carefully. Achieving the objectives of the monetary policy for the second half of the current fiscal is important in the view of the snags that the BD's last half-yearly monetary policy hit, leading to problems in implementation. It has to give an effective attention now, particularly to contain the rising trend of non-food inflation and to ensure exchange rate management in effective ways to help minimise the pressure on the country's foreign exchange reserve.
The new monetary policy statement (MPS) does need to reflect the BB's outlook on the real sectors and monetary developments over the immediate future and the goals, objectives and targets that it plans to pursue, based on its assessment of the developments over the preceding period. In its policy approach, the central bank will have to take, what some economists have noted, appropriate measures to influence real sector prices using 'monetary targeting'.
The country's monetary policy, as it is well-known, is conditioned by the fiscal policy and the BB has to accommodate itself to the latter, while pursuing its efforts to attain some given targets. It has so far been neither realistic nor possible to independently determine an inflation target by the BB.
On its part, the central bank, according to reports published in the media on the basis of views expressed by some economists, has reportedly shifted its focus from the foreign asset based monetary expansion strategy of FYs 2009-10 and 2010-11 on to a domestic credit based strategy in recent times, in view of a slowdown in the growth of remittance inflows and a marked decline in disbursements of external aid. In the immediate past policy document, the BB had also set the target to lower credit growth to cut inflation and maintain external stability.
However, it is certainly not always possible to attain the target. Last fiscal year, a target was also fixed for cutting credit growth. But it crossed the target because of increased government borrowing, exceeding its initial projection. It is a reality that the BB has always been trying to adjust with the changing borrowing needs and strategies of the government. Hence, the question arises as to whether it is it really possible on its part to control borrowing by the government and state-owned enterprises.
Moreover, a large chunk of credit is provided by the state-owned banks, where the BB can not influence much the credit policy with regard to accommodating the needs of the government and the parastatals, even as the regulator. In such a situation, a sound policy document should come up with constructive suggestions and a way-out for better outcome.
For ensuring a smooth functioning of the country's banking system with efficiency, the central bank needs to enforce its given regulatory ceilings relating to capital market exposures, sound liquidity management, and prudent advance-deposit ratios. Its policy should project and identify the path for attaining some goals. Even when the goals are fixed, the path may be changed with the changing circumstances.
In Bangladesh, the monetary policy goals are largely determined by the fiscal policy and the BB has, as of necessity to identify, paths to accommodate that. In this context, the success of the central bank with regard to implementation of its monetary policy depends, to a large extent, on how efficiently and quickly it adjusts its goals, targets and objectives to the changing ones of the government.
Although the central bank has been pursuing a contractionary monetary policy, the government has been following an expansionary fiscal policy -- mainly on account of safety nets and subsidies. According to some experts, the contractionary monetary policy has reduced the amount of total loanable funds in economy. The government deficit, being met by its borrowing from the banking sector, has tended to crowd out the private sector, as far as the availability of credit funds is concerned. If this practice continues in the coming months, it will further raise the cost of borrowing, as the experts have feared.
Bangladesh is otherwise an import-dependent economy. As such, it is also important to consider how a contractionary monetary policy, coupled with continuing depreciation of taka, is affecting producer and consumer welfare. Producers are affected when their productivity is hampered due to rising costs; consumers are affected when producers pass on such costs to consumers.
Under the circumstances, the imperative on the part of the BB to coordinate its policy with that of the government is all the more strong. If there is misalignment of two policies, it can lead to more strains and stresses in the country's financial sector. The monetary policy does also need to be pursued with extra care in a low income country like Bangladesh where narrow money use is still wide.
A contractionary monetary policy, running in tandem with an expansionary fiscal policy, can not serve useful purposes, more so if the government would like printing money to finance its deficit. This will only aggravate the inflationary situation.
Meanwhile, the BB would, at this stage, also need to use its policy tools to allow further recapitalisation of domestic banks, which are mostly in the private sector.
click here to read the policy:
http://www.bangladesh-bank.org/openpdf.php
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