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Monetary policy less realistic: Unnayan Onneshan
Posted By admin on February 16, 2012
The independent think-tank, Unnayan Onneshan made the observation in its January 2012 issue of “Bangladesh Economic Update” which analysed the MPS for the period of January-June of 2012.
The proposed instruments in the monetary policy statement such as hikes of repo rates may dampen investment by increasing the cost of capital, as the banks will keep borrowing at higher rates.
This implies that there will be associated risk factors in terms of targeting the productive sector for further investment, thereby contracting gross domestic product,” stated Unnayan.
Bangladesh Bank has enhanced the REPO 100 basis point than that of 50 basis point announced in the last MPS. Investment is interrelated with the levels of interest rate. Increase in interest rate poses an adverse effect on investment.
Identifying curbing inflation and keeping growth momentum of the economy as the twin challenges, the Unnayan Onneshan argues that “The recently announced monetary policy statement reveals the revision of government’s wish list without having a realistic check.”
On the basis of this growth-inflation dynamics, the report asks the government to pursue a balanced approach to ensure the controls on public spending and refocus on the investment in the productive sector. For instance, it added, huge subsidies on energy sector must not turn in to high inflation.
“A clear road map is required on the systematic shift of the balance of aggregate demand from public to private and from consumption to capital formation, with a view to keeping the inflation at an acceptable rate and to easing the liquidity situation,” added the Unnayan Onneshan report.
The Unnayan Onneshan report states that the central bank’s expectation of reduction of pressure on liquidity may not be materialised as high inflationary pressure may crowd out the attempt to increase the savings rate.
As of June 2011, the total liquid assets of the schedule banks were Tk. 1005.64 billion. By the end of December 2011, this went up by Tk. 1141.71 billion.
The excess liquidity of the schedule banks decreased by Tk. 43.50 billion in June 2011 than, that of June 2010, implying a decrease by 28.49 percent in 2011.
Due to higher inflationary pressure and increased food consumption in FY 2010-11, domestic savings as percentage of GDP falls to 19.6 percent in FY 2010-11 than that of FY 2009-10. National saving also decelerates and remittance inflow reduces in this fiscal year.
As regards inflation, the think-tank states that the MPS’s envisaged instruments may not rein in inflation because of the inadequate diagnosis of the causes of continuous increase in prices.
“The inflation has occurred for two reasons, namely, domestic prices are increasingly knotted to international prices due to the liberalisation of trade and administered prices are adjusted to global prices; and low level of emphasis on public distribution system has encouraged jacking up in prices,” it added.
Referring to the government projected inflation of 7.5 percent in the current fiscal year, the report says that this projection will remain in the oblivion and general inflation might climb up at the peak of 12.27 percent at the end of the fiscal year.
Contrary to what has been prescribed in the MPS, the Unnayan Onneshan report suggests that harmonization of monetary policies with fiscal measures is needed to address inflation, coupled with the expansion of domestic productive capacities.
Analysing on differentiating impacts of inflation, the report says that the dampening of investment and unabated rise in the price would hurt different sections of society differently. “Any failure to contain inflation is bound to increase inequality as the latter has been showing an upward trend for some time,” alerts the monthly update.
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