Real estate

Monetary policy, capital market and inclusive growth in Bangladesh

Sources :Monetary policy can be both expansionary and contractionary. When the total supply of money is increased, it is expansionary. And it is contractionary when cumulative money supply is decreased.

An expansionary policy is usually adopted in a situation where there is unemployment during recession by lowering interest rates. Conversely, a contractionary policy is espoused to stabilize inflationary pressure through increased interest rates.

Lately, we have been hearing about “accommodative monetary policy” in Bangladesh, focusing more on a balance between taming price spiral and supporting growth imperatives. Under such a policy, we see relatively quick shifts from expansionary to contractionary measures and vice-versa, to fine-tune growth in an economy prone to inflationary pressures. The latest Monetary Policy Statement (MPS) by Bangladesh Bank (BB) for the period of January-June 2011, speaks that in the same tune.

Since its inception, monetary policy in Bangladesh was conducted with full direct control on interest rates and exchange rates, as also on the volumes and directions of credit flows. However, as of today, directed lending has been abolished and gradual liberalization of interest rates has taken place. Thus, interest rates have become market driven. Exchange rate has become floating, with Bangladesh Bank (BB) buying or selling currencies to keep liquidity at the desired level, though we keep on hearing about “managed float” or “moral-suasion.” And at frequent intervals.

Bangladesh Bank’s MPS for the second half of FY’11, is focusing on continuous watch towards locating and neutralizing likely inflationary pressures from the growth-supportive monetary and credit policies, to the extent feasible, targeted to selected priority productive sectors. Deepening of financial inclusion of agriculture, small and medium enterprises (SMEs), renewable energy and ecological footprint are mentioned to remain as the priority sectors while BB continues to discourage expansion in lending for wasteful consumption and unproductive speculative investment.

Monetary policy in a transition economy like Bangladesh should be able to draw a balance between inflationary pressure and investment growth, thereby creating jobs in a labour surplus economy. It is said, if we err, it is better to err with growth than inflation. An evolving economy needs growth acceleration, adequate inputs and wealth to support that growth.

Bangladesh’s major challenge is to invest more than its current rates, i.e. 24% of gross domestic product (GDP). The country saves nearly 35% of its GDP. With the incremental capital output ratio (ICOR) value of 4.0 to 4.5, Bangladesh has enough savings to generate 8.0 to 8.5% growth. An optimal level of foreign exchange reserve is necessary, which is roughly $5.5 billion if one considers the three month import payments as the yardstick.

Bangladesh Bank seems to be panicked with inflationary pressure and huge credit growth in the unproductive sectors, while money is mostly being diverted to real estate and capital market. Credit growth has risen to 27% vis-à-vis against below 20% about a year ago with inflation inching up beyond 8.00%. Therefore, though Bangladesh Bank is talking about an accommodative monetary policy, in reality through mopping up the surplus by increasing the CRR (Cash Reserve Ratio), it was rather following a contractionary policy. However, lately they are trying to sooth the market by releasing more money through repurchage agreement or REPO. They are having a tough time in differentiating between unproductive sector credit growth and normal credit growth. Though they are committed to protect the banking sector from the effects of any possible stock market crash, the overall susceptibility to the pressure from a popularly elected regime is not allowing them to be focused on execution.

There is a big question, whether Bangladesh Bank has performed its due role while the capital market needed their help. Analysts say, despite a huge increase in money supply, inflationary pressure on food and non-food items, was not high, since most of the surplus money went into capital market. However, when they started to mop up the surplus, the market felt the pinch big time, liquidity dried out and market index came down from 8900 to 6300, pushing many retail investors to the street and the government policy planners bewildered.

I was privy to a big debate — whether Bangladesh Bank is responsible for ensuring real sector growth through monetary policy response or they should be much concerned about a temporary asset bubble or sudden burst in the capital market. Yes, there are 40 million plus bank account holders, numbers increasing with the opening of more farmers’ accounts with the state owned banks to channel subsidy. Should the monetary watchdog then be too concerned to protect the interest of about 3.2 million beneficiary owners account (BO) holders in the stock brokerage houses, which is already heated up, warranting massive correction based on fundamentals? To keep the answer short and crispy- Bangladesh Bank is more responsible for real sector growth and at the same time, it needs to protect and help nourish country’s banking sector. However, its actions so far warrant a ‘soul searching’. While they came to know (though pretty late) that banks’ exposure to the capital market went beyond the roof, they could have come up with a coordinated effort to gradually reduce the exposure to the optimum level. Instead, selling pressure by the large banks to adjust their position created a panic in the market, shaking the confidence. Bangladesh Bank somehow lent deaf ears to the Securities and Exchange Commission (SEC), on the latter’s appeal for creating liquidity in the stock market. The right arm was not obviously talking to the left arm. The level of retail investors’ engagement in the stock market — too many people chasing too less stocks, unlike to the situation in any other similar countries — may cause serious threat to the political or social security. Therefore any regulator, wanting to protect the regime, must lend helping hand in this regard. At least, do a ‘deep dive’ analysis and action in togetherness.

However, an USD 50 billion capital market with 445 listed securities and that too being quite shallow, not depicting the real fundamentals, can’t do much to create an inclusive society in Bangladesh and make growth more equitably distributed. It is rather contributing further to create an asset bubble in the economy and, at the same time accelerating the process of income inequality and regional disparity to a significant extent. In a labour surplus economy, we need more employment at home and also at abroad with an increasing rise in investments, both domestic and foreign. Only real sector investment makes this worth.

We need to revamp labour regulations, improve agricultural technology and infrastructure, help lagging divisions beyond the metropolis Dhaka and regions to catch up and empower the poor through proactive policies that help them to participate in the market on fair and equitable terms. We need coordinated efforts with clear visibility about the destination. Poverty can’t be distributed. Therefore, we need wealth creation in the right streams of the economy. (The writer is a banker and economic analyst

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