With a higher growth rate (even if by a whisker) than last fiscal (7.5 per cent as against 7.4 per cent) announced in the budget for 2017-2018 and inflation reasonably under control at 5.5 per cent the Monetary Policy Statement (MPS) for the first half of the current fiscal was almost pre-ordained. It, as usual, gave a sense of deja vu, having to play a complementary role to the fiscal policy embodied in the budget.
The MPS has ceased to be the primary driver of growth even in developed countries, particularly after the financial crisis of 2007 and developing countries like Bangladesh, though spared the violent upheaval in the economy. The crisis has reinforced the reliance of the countries on fiscal policy to spur the growth rate higher. Those, which are determined to break out of the sluggish or even stagnant rate of growth, have resorted to in recent years to easy money policy by augmenting money supply through purchase of bonds from banks. Some have even tried using 'helicopter money' based on direct cash transfer to the poor. The policy, mostly followed in industrially developed countries mauled badly by the financial crisis of 2007, has had mixed results.The quantitative easing (QE) binge is nearing its end almost simultaneously in all countries. Why? Because it has now become more than apparent that collateral effects of loose monetary policy are no longer politically acceptable. Quantitative Easing (QE) prevented a worsening of the financial crisis, yet it did not solve its root cause. QE fuelled an asset-rich wage-poor recovery, widening the gap between asset owners and the have-nots. For this reason it has become necessary to bring an end to monetary stimulus. With this turn-around in policy the myth of monetary policy in boosting growth has been de-mystified to a large extent. It is not surprising that among the three 'arrows' in 'Abenomics', easy monetary policy has now taken the back seat giving priority to fiscal policy.
But there are exceptions to the general trend in respect of winding down of easy money policy. The Reserve Bank of India (RBI) cut its main policy rate by a quarter percentage point to a more than 6-1/2 year low saying a slump in inflation opened room for monitory easing. The rate cut by RBI is the first in Asia since December and is a show of confidence in the economy that has experienced a surge in foreign investment. Cutting the repo rate by 25 basis points to 6.00 per cent, the lowest since November, 2010, had been widely anticipated as slump in food priced sent consumer inflation to a more than 5 year low. It may be useful to go over these developments in the global financial landscape of recent months as a backdrop to the discussion of the MPS just announced by Bangladesh Bank.
Bangladesh economy, though registered a growth from 7.2 to 7.4 per cent in 2016-2017, that is at more than the projected rate is experiencing incipient inflation as a result of rises in both food and non-food prices. The former is due to the crop damage by the unexpected flood in Sylhet and Kishoreganj which destroyed the bulk of boro paddy just when it was ready for harvesting. The current flood is further fuelling the rise in food prices. Increase in the prices of non-food items is due to upward trend in the international market. Bangladesh Bank has prudently kept the policy rate unchanged in the MPS as the rise in food and non-food prices in still well within the manageable range. In the last quarter of fiscal 2016-2017 inflation edged up 44 basis points from the previous quarter to 5.72 per cent. Bangladesh Bank's projection shows average annual inflation for the first half of the fiscal 2017-2018 would be 5.5 to 5.9 per cent. The inflation set in the current budget is 5.5 per cent. The decision to keep the policy rate unchanged is, therefore, pragmatic as increasing it would have shown signs of panic and lack of confidence in the growth of output in the economy. Moreover, rise in repo rate from 6.75 and reverse repo rate from 4.75 per cent would have sent negative signals to borrowers and investors. The determination of policy rate has, therefore, taken into account both the need to keep inflation within the target rate and the objective of achieving growth at 7.5 per cent set in the budget for the current fiscal. The MPS has said BB is cognisant of inflation dynamics in the country's economy and so policy rates will be reviewed on a continuous basis and will be changed in future based on the exigency of the situation. By maintaining the policy continuity with the past years, even though growth target has been set higher by 0.02 points in the current fiscal, the MPS has not opted for easy money policy which would hasten the inflationary trend. By selling US dollars to commercial banks in recent weeks BB has also taken care of inflationary pressure arising from appreciation of Taka against the dollar, though it has not been spelt out in the MPS and has taken the decision in line with the strategy outlined in the policy statement. What it demonstrates is the ever watchfulness of BB over the monetary situation in order to forestall runaway inflation.
Bangladesh Bank has not played second fiddle to the Ministry of Finance in formulating the MPS, or at least has tried to do so. Admittedly, the space for taking independent decision apart from the budget outlines and targets is limited, but BB has tried its best to think independently while being supportive of the overall objective of the fiscal policy. By projecting a lower gross domestic product (GDP) growth rate (7.4 per cent) than the budgetary target rate (7.5 per cent) due to declining remittance and low export growth, the MPS has tried to be both pragmatic and independent.
In the MPS for the first half of fiscal 2017-2018 BB has set the private sector credit growth target at 16.2 per cent, 0.3 per cent less than that in the preceding MPS. Though miniscule, the reduction in credit growth has come out for some criticism from the private sector. Private sector investment requires a higher volume of credit growth, it has been argued. But the point is the new target is more than what was achieved in terms of utilising credit during the last six months. Moreover, this decision is not written in stone and can be changed if the situation warrants it. By reducing the private sector credit the BB has, not so subtly, advised the commercial bankers to select borrowers and investors prudently. Quality of lending, rather than the number of borrowers, has been emphasized indirectly about which there can be no two opinions.
To sum up, the new MPS has been a prudent policy decision that will help strengthen the macro-economic stability of the economy as well as promote growth.