Bangladesh Bank announced its monetary policy statement (MPS) for the second half of the current fiscal year (January-June 2012) on January 26. Explicitly or implicitly, the objectives that the MPS seeks to accomplish are:
* Curbing inflation to single digit level,
* Limiting depletion of foreign exchange reserves and establishing external sector equilibrium, and
* Supporting GDP growth of 6.5 - 7.0% in the current fiscal year (FY)
The instrument to achieve these objectives is the containment of broad money growth; primarily by reducing the growth of credit components of monetary aggregates. This article seeks to explore the efficacy of the instrument in realising the avowed objectives. ...view middle of the document...
These problems have been compounded by a relatively slower growth of revenues, albeit at a satisfactory pace in an absolute sense (the growth of tax revenues during July-November 2011 was 16.9% compared to 27.5% in the corresponding period of the previous year). There is hardly any indication in the MPS about how these problems will be resolved. It would, therefore, be unrealistic to expect that growth of credit to the public sector will be halved from 62% to 31%.
The target of growth of credit to the private sector set at 16% (marginally lower than 18% in December 2011) appears achievable. However, recent evidence does not support the assumption that the slowing down of private sector credit growth will greatly reduce inflationary pressure. In fact, private sector credit growth fell continuously from 25.8% in FY11 to 22% in September11 and 18% in December 11; yet inflation has aggravated. The most likely reasons are (a) low growth of private sector credit affects the supply side adversely and (b) the recent increase in inflation is attributable more to the depreciation of exchange rate which stokes cost-push inflation. This point leads to the discussion of the effectiveness of MPS in establishing external sector equilibrium.
External sector equilibrium
MPS hopes that the depreciating exchange rate will accelerate exports. This again is likely to prove unrealistic. Exchange rate has been more or less consistently depreciating since December 2010, but export growth has been consistently falling (it was 41.5% during FY 11, 22.6% during July-September and 14.8% during July- December of FY 12). An in-depth examination is needed to ascertain what is causing this scenario. There may be impediments both on the supply side and the demand side. There has been some improvement in remittance growth, rising from 6% in FY 11 to 9.3% during July-December of the current fiscal year.
Import growth has been falling, but at a considerably slower rate than exports (its growth...