Saleh Akram :
The Central Bank is scheduled to announce country’s Monetary Policy for July-December of 2014-15 fiscal in a couple of days. It is important that the policy should embody features that could help address difficulties of the past and find a new motion in areas where stalemate persisted for most of the period. More specifically, the new policy should make way for a healthier investment climate with necessary regulatory changes and financial reforms. The last monetary policy was widely viewed as a predicament against new investment, particularly in the private sector, and criticised for its failure to contain inflation. Intending investors were whisked away by high interest rates and hidden costs of fund. Extreme frigidity was noticeable in the investment arena for the entire period of the last monetary policy. The financial sector was plagued by unforeseen corruption which was responsible, in large part, in restricting new loans and retarding investment growth. Moreover, in the wake of a series of financial scandals including Destiny and Hall mark, Damocles’ sword came down hard on new investors or those with clean records. Events that followed were even more frustrating. Existing regulations regarding approval and disbursement of loans were stiffened which caused withdrawal syndrome among the prospective investors and they stayed away.
Even more unfortunate things happened in the capital market. Innocent investors of the stock market were deceived by unscrupulous manipulators who extorted all money and left the market in tatters. The problem is too well-known to elaborate and the stock market which is one of the major providers of most sought after investment in the private sector, is yet to recover from the sinking syndrome.
Monetary policy has been defined as the process by which the monetary authority of a country controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of interest to attain a set of objectives oriented towards the growth and stability of the economy. The official goals usually include relatively stable prices and low unemployment.
The country’s economy is currently in a very sensitive stage and adoption of appropriate policy is crucial for accelerating economic growth. Disappointingly sluggish growth in investment had been a matter of great concern for the planners for last couple of years. With possibility of a looming political uncertainty in the coming days, the same situation is likely to persist if the new monetary policy is not equipped with changes that would provide encouragement for potential investors. Although public sector investment increased, albeit minimally, it can not be an alternative to private investment, which is crucial for ensuring economic growth. The damages inflicted by the political unrest last year to the national economy, also dented the confidence of the intending investors resulting in a slower growth of investment in the private sector. An investor never wants to put his/her investment at risks when there is political uncertainty around and a consensus in the political arena becomes a dire necessity. With possibility of another round of political unrest looming large, the need for peaceful solutions to political conflicts is imperative to ensure smooth economic activities round the year. On the economic front, all possible efforts should be made to push the sagging confidence level up and monetary policy has a major role to play in this direction.
Monetary policy is referred to as either being expansionary or contractionary, where an expansionary policy increases the total supply of money in the economy more rapidly than usual, and contractionary policy expands the money supply more slowly than usual or even shrinks it. Expansionary policy is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice businesses into expanding.
This is a delicate area to set foot on and the Central Bank has to judiciously decide on this aspect. However, as a matter of fact, demand for lowering the interest rates is being made from many quarters for quite some time now.
Monetary policy, to a great extent, is the management of expectations. Monetary policy rests on the relationship between the rates of interest in an economy, that is, the price at which money can be borrowed, and the total supply of money.
The new monetary policy is going to be announced at a time when challenges for the government in the coming days are many- improving law and order, developing the infrastructure, including smooth gas and power supply to entice local and foreign direct investment, creating a credit-friendly situation for industrial entrepreneurs, ensuring good governance in the financial sector, ensuring collection of targeted revenue, checking corruption in public spending and containing inflation. Naturally, it is expected that the coming monetary policy would provide necessary tools to maintain a low inflationary rate and ways to provide an upward swing to credit facilities to bolster inclusive economic growth.
Other areas, like, infrastructure development and discipline in the financial sector, call for careful consideration while framing the monetary policy. Infrastructure development which is crucial for sustained economic growth, can not be achieved without ensuring availability of funds at easy terms and therefore it is imperative that lending terms be eased.
Increased lending may push up inflation a bit, but it will not hurt the economy much if the money is provided to productive sectors. This was observed by Prof. Abu Ahmed, a noted economist. Speaking to The New Nation he said that this fund flow “will not only help flourish the industries, but also contribute to the economy by adding more jobs.”
As has been mentioned earlier, public sector investment recorded an increase during last fiscal, investment in the private sector remained more or less stationery compared to the preceding year. Prof. Ahmed emphasized on the need to lower the interest rates and maintained that once the borrowing cost is reduced, it would help create credit demands for entrepreneurs who remained investment shy due to high lending rates coupled with political uncertainty. Steps should be taken so that the unseen cost of fund involved in getting a loan sanctioned, is not transacted, he emphasized.
Another format of monetary policy is referred to as contractionary, as it reduces the size of the money supply or increases it only slowly, or raises the interest rate. According to Prof. Ahmed, our central bank is currently pursuing a contractionary policy in line with the recommendations of donor agencies, which is restricting credit flow to the productive sectors. Our policy should be accommodative instead, he suggested. In the same report, the New Nation also published comments of another economist, Dr. Mirza Azizul Islam, a former Adviser to the Caretaker Government, who said, the key feature of the upcoming policy should be to maintain a stable inflation and offer cheaper credit to the investors to facilitate higher economic growth. He also urged Bangladesh Bank to take effective measures to bring stability in the interest regime by reducing interest rate and spread between lending and deposit, the paper reports.
In addition, the credit target should be fixed at 18 per cent in the next monetary policy to provide fresh encouragement for private sector credit. At the same time, discipline in the financial sector will have to be restored to win back people’s trust in the financial institutions. Economic growth cannot be achieved by facilitating investment opportunities, alone, there are other factors responsible as well. It is essential that the central bank oversees and ensures proper utilization of the funds provided through a strong monitoring and evaluation system.
(Saleh Akram is a well-known TV personality and writes on economic issues)
