Bangladesh Bank is likely to announce a monetary policy statement (MPS) for the first half of the fiscal year 2017-18 (FY1 18) on July 25.
A good monetary policy has the capacity to boost and strengthen the economy, and therefore it is imperative that this upcoming MPS is designed with careful consideration of known as well as potential challenges.
Key programs like broad money, net domestic assets and foreign assets, and inflation, under the upcoming July-December period’s monetary policy statement should have achievable performance targets. And the central bank should apply all its monetary tools to reach these targets.
Stable monetary management and fiscal discipline should be supported by macroeconomic stability, allowing the economy to benefit from favourable external demand, high remittance, high export growth, and low commodity prices.
The result may be strong output growth, falling inflation, moderate public debt, and a rebuilding of external resilience.
A strong and healthy growth supported by increased private and public investment along with public spending would be expected to lead to higher investment-related imports, pushing the current into a modest but manageable deficit.
It is important to keep the public debt-to-GDP ratio at moderate levels while appropriately raising revenue-to-GDP ratio.
Maintaining the output growth would become more challenging and would require not only prudent macroeconomic policies, but also upgrading the macroeconomic policy-making practices and institutions to support the country’s ambitions of reaching middle income status of the country by 2021.
MPS must account for existing economic problems
The current MPS is coming at a time when the country’s economy is facing major challenges such as savings-investment gap, unsatisfactory collection of revenue vis–a-vis target, infrastructural underdevelopment, institutional weaknesses, slowdown of investment, low rate of ADP implementation, and shortfall of revenue. All these may hinder the desired rate (may be double digit) of growth in GDP.
A strong financial system is needed for successful implementation of monetary policy.
Now the running crisis in the banking and financial sectors due to mainly rapid increase in non-performing loan reflects the institutional weakness in financial system in the country.
Huge capital flight is a concern for the economy, and the widening saving–investment gap is a signal of illegal capital flight. This unaccounted transfer of funds is a big blow to the economy as it means loss of investment and revenue income for the government, and this should be factored into the monetary policy statement.
The policy should be a balance of expansionary and contractionary, and the proportions of each should be tailored according to the economy’s needs
The inflationary trend took an upturn since January 2017 and climbed to 5.94% in June. Some economists predict far higher inflationary pressures in the near term as the country is facing some supply-chain problems with rice in addition to floods in some areas of the country with severe crop damage in Haor regions as well as in other parts of the country. Looking into this matter carefully and embracing a flexible inflation targeting approach is a possible solution.
The trend in interest rate is declining, which reflects favourable inflation performance, ample liquidity, and greater competition in the banking systems, where spreads between lending rate and deposit rate should be a reasonable level.
The private sector credit growth is now a little bit in decline, but in order to achieve a desired and remarkable growth of GDP, it should be accelerated at any cost to attain the steady economy of the country. The current account and trade balance recorded a deficit due to higher import growth, lower export growth and slowdown of remittance inflows during the last couple of months. A deteriorating current account and trade balance is undesirable but it can be improved through cautionary and consistent monetary policy.
Various indicators should be considered
To promote financial stability with sustainable development of banking and financial institutions a sound, consistent and effective monetary policy is needed to optimise different indicators which help the economic growth of the country.
There are some vital indicators like economic growth, inflation, interest rate, excess liquidity, clarity around deposits, and nonperforming loans. Besides those, there are other indicators like, forex rate, productive investment, import trend, export trend, remittance inflow, capital adequacy, expanding banking services, domestic credit including private and public sectors, broad money, borrowing by government, job employment opportunities, cost of doing businesses, etc.
Weighing the effects of each action
The central bank needs to consider the effects of the welfare-oriented government budget and the private sector investment on the price and the external sector stability.
Likewise, it is necessary to appropriately manage the existing excess liquidity in the banking system in order to support development activities and the investment promotion. Excess liquidity, lower interest rate and interest rate differential with neighbouring economies are some challenges facing the economy.
If the situation of this kind prevails for long, there is a risk of informal capital flight, dominance of imports along with luxurious consumption and increasing speculative businesses.
Considering the likely impact of such situation on financial stability, monetary policy will focus on managing liquidity, inflation and interest rate at an appropriate level and channeling the financial resources towards productive sectors.
In the context of lower-level financial inclusion, limited access to financial services, and low level of financial literacy among the general public in remote rural and high-poverty areas; utmost priority must be given to address these concerns.
A tailored MPS
In a nutshell, the monetary policy statement is to be designed considering the effects of possible excess demand on prices, external and financial sector stability, arising from construction-driven private investment and the implementation of fiscal policy.
The situation warrants that accommodative monetary policy will have difficulty in attaining its primary objectives and the tighter one will not be able to contribute to construction and growth.
The policy should be a balance of expansionary and contractionary, and the proportions of each should be tailored according to the economy’s needs.
Thus the monetary policy in the first of fiscal year 2017-2018 should be cautious, consistent and balanced.
Md Abdus Sobhan is a Deputy General Manager of Bangladesh Krishi Bank. He may be reached at: [email protected].
