Forthcoming monetary policy should be investment friendly

Monetary policy plays a vital role in controlling the supply of money, often by setting up a target of inflation rate or interest rate, to ensure price stability and general trust in the currency.

Monetary economics provides insight into how to craft optimal monetary policy. Fazle Kabir, governor of Bangladesh Bank, is likely to announce the Monetary Policy Statement for first half of financial Year 2017-2018 on July 26, 2017 with the aim to gear up the country’s overall economic activities through boosting local and foreign private investment.  

In the present budget the government has set the economic growth target for the current fiscal year at 7.2 per cent; it set the goal of containing inflation within 5.8 per cent. It may be difficult to reduce the inflation to 5.8 per cent as because of prolonged floods in different part of the country.

Flood damaged huge amount of food grain which will trigger food inflation. Government already imported rice and is going to import more. But the price of the coarse rice is still higher. On the other hand, increasing GDP growth to 7.2 per cent is an uncertain global and domestic environment as well as the persistent supply side constraints. Though, the private investment is showing increasing trend due to some large government projects like, Padma Bridge, metro rail, Ruppur nuclear power plants. As per the previous MPS the private sector credit growth was projected 16.50 per cent and so far attained 16.03 per cent. So the target may be achieved. In that case the economist suggests that the private sector credit growth to be fixed at 17.00 per cent in order to attain 7.2 per cent GDP growth. Moreover, government will face shortage of revenue collection as they have to come back from implementation of new VAT rate, which deferred for next two years. The finance minister already hints that he will go to revise the revenue budget.

In this context, to continue the ongoing development program, government has to borrow from the banking sector. As the banking sector is still highly liquid, hence if the government borrow more from the banking sector that will not create any pressure to private credit sector. Rather it will stimulate the economy in other ways. But the prime impediment is to maintain the quality of the private credit. It is much talked issue that our banking sector is facing serious problem with the non-performing loan which is recorded at more than Tk 11 million thousands at the end of April 2017. Think tankers, economists emphasised giving the highest priority to ensure the quality of credit. Special attention from government through Bangladesh Bank will be needed to create some exemplary instances for defaulters irrespective of their position. At any point of time some has to ring the bell, otherwise the credit cultures will not improve shortly. They (defaulters) are few known faces, just need a strong commitment. We hope Bangladesh Bank will bring some measures in the forthcoming Monetary Policy to combat the default loan cultures.  Remittances and exports are now showing negative growth. Government should take some proactive measures to find out new destination for wage earners. Alongside we need to produce skilled manpower to boost up the foreign remittances. Retired people are hesitant over where to keep their money to grow or to get rid of their monthly expenses through interest earning. But now it is not possible as the bank’s deposit interest rate is near or sometimes below from inflation rate.

Thus it may be pertinent to announce a MPS which will be capital market friendly. Let’s hope for an investment friendly monetary policy that will emancipate the economic development of an aspired country to be middle income by 2021.

The writer is a banker and economic analyst.

Forthcoming monetary policy should be investment friendly

Monetary policy plays a vital role in controlling the supply of money, often by setting up a target of inflation rate or interest rate, to ensure price stability and general trust in the currency. Monetary economics provides insight into how to craft optimal monetary policy. Fazle Kabir, governor of Bangladesh Bank, is likely to announce the Monetary Policy Statement for first half of financial Year 2017-2018 on July 26, 2017 with the aim to gear up the countrys overall economic activities through boosting local and foreign private investment. In the present budget the government has set the economic growth target for the current fiscal year at 7.2 per cent; it set the goal of containing inflation within 5.8 per cent. It may be difficult to reduce the inflation to 5.8 per cent as because of prolonged floods in different part of the country. Flood damaged huge amount of food grain which will trigger food inflation. Government already imported rice and is going to import more. But the price of the coarse rice is still higher. On the other hand, increasing GDP growth to 7.2 per cent is an uncertain global and domestic environment as well as the persistent supply side constraints. Though, the private investment is showing increasing trend due to some large government projects like, Padma Bridge, metro rail, Ruppur nuclear power plants. As per the previous MPS the private sector credit growth was projected 16.50 per cent and so far attained 16.03 per cent. So the target may be achieved. In that case the economist suggests that the private sector credit growth to be fixed at 17.00 per cent in order to attain 7.2 per cent GDP growth. Moreover, government will face shortage of revenue collection as they have to come back from implementation of new VAT rate, which deferred for next two years. The finance minister already hints that he will go to revise the revenue budget. In this context, to continue the ongoing development program, government has to borrow from the banking sector. As the banking sector is still highly liquid, hence if the government borrow more from the banking sector that will not create any pressure to private credit sector. Rather it will stimulate the economy in other ways. But the prime impediment is to maintain the quality of the private credit. It is much talked issue that our banking sector is facing serious problem with the non-performing loan which is recorded at more than Tk 11 million thousands at the end of April 2017. Think tankers, economists emphasised giving the highest priority to ensure the quality of credit. Special attention from government through Bangladesh Bank will be needed to create some exemplary instances for defaulters irrespective of their position. At any point of time some has to ring the bell, otherwise the credit cultures will not improve shortly. They (defaulters) are few known faces, just need a strong commitment. We hope Bangladesh Bank will bring some measures in the forthcoming Monetary Policy to combat the default loan cultures. Remittances and exports are now showing negative growth. Government should take some proactive measures to find out new destination for wage earners. Alongside we need to produce skilled manpower to boost up the foreign remittances. Retired people are hesitant over where to keep their money to grow or to get rid of their monthly expenses through interest earning. But now it is not possible as the banks deposit interest rate is near or sometimes below from inflation rate. Thus it may be pertinent to announce a MPS which will be capital market friendly. Lets hope for an investment friendly monetary policy that will emancipate the economic development of an aspired country to be middle income by 2021. The writer is a banker and economic analyst.