The Reserve Bank of India (RBI) raised its base rates for the ninth time in just over a year. The Bank of China (BOC) intervened four times over the past year to cool down the economy.
Compared with the RBI and BOC, our central bank, Bangladesh Bank (BB) raised its key rates by a mere quarter of a percentage point in (April/March). This represented only the third time that the BB increased the interest rates since 2009; and before that, it increased the reserve requirements twice during the same period. In broadly the same time period, the RBI increased the intervention rates and reserve requirements 12 times and the BOC 15 times.
As economic growth picks up, economies generally tend to become overheated. The overheating is usually measured in terms of inflation (consumer price index and wage pressures), asset price developments, and external sector imbalances. In China and India, policymakers are concerned about the overheating of the economy as inflation rates are considered to be higher than their respective policy targets. Accordingly, both countries have adopted tighter monetary policy by increasing intervention interest rates and continuing with further tightening of policies to ensure macroeconomic stability.
Inflation in Bangladesh is now running at a high pace and is certainly higher than that of China. Land and real estate asset prices in Bangladesh are unquestionably inflated, exceeding most of its comparator countries. One katha of land selling at $1.0 million or even more in Gulshan Avenue cannot be justified in terms of the discounted present value of the future stream of income. Stock prices, with price-earning ratio reaching about 35 at its peak in December 2010, did already go through a bubble before the burst and that cycle has not yet settled.
Bangladesh, unlike China and India, two very large Asian economies, is also experiencing a somewhat difficult balance of payments situation. A sharp rise in import (more than 40 per cent) and other payments associated with services and income accounts swung the external current balance from a surplus in Fiscal 2010 to a deficit in Fiscal 2011. This deterioration, arising primarily from a surge in import payments despite a promising growth of export receipts and some steady remittance flows, is surely worrisome. The Bangladesh currency has also depreciated against the US dollar, though the latter itself has been depreciating against other international currencies.
Creating domestic demand through a loose monetary policy would most likely exacerbate inflationary pressures and external imbalances in Bangladesh. If the Indian economy can expand at about 9.0 per cent with 17 per cent credit expansion for the private sector, why would Bangladesh need 29 per cent credit expansion to achieve 6.7 per cent real GDP growth?
This is not the time for the BB to relax its fight against inflation. The recent inflation data, with headline inflation reaching nearly the double-digit level, indeed call for stronger action on the monetary front. To the critiques of BB's recent tighter monetary policy stance, we will urge for letting BB work on its most important mandate of price and macroeconomic stability. This is not the time to inject liquidity into specific markets (stock market) or sectors (small and medium enterprises, public enterprises or agriculture) through administrative interventions, beyond what such sectors are expected to absorb for proper use of funds under the given circumstance.
In this context, it will be timely to reflect upon whether the Bangladesh economy and the government can afford an injection of Tk 5,000 crore (Tk 50 billion) in the name of Bangladesh Fund to 'engineer' a recovery of the stock market. The stock market needs reforms, enhanced transparency and accountability and the regulators need credibility. Liquidity injection alone cannot achieve that.
The fight against inflation and for macroeconomic stability must not be lost. Policymakers in Bangladesh need to take lessons from the experiences and policy strategies of other developing countries in their fight against inflation. It would be interesting to see whether the BB continues along its timid route and gets distracted by its critiques, or adopts a more forceful approach like its counterparts in other developing economies.
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