Dhaka, Bangladesh (BBN) – A non-government research organization said the existing monetary policy may dampen investment by increasing the cost of fund.
“….the proposed instruments in recent policy statement such as hikes of repurchase agreement (REPO) rates may dampen investment by increasing cost of capital, as the banks will keep borrowing at higher rates,” the Unnayan Onneshan (UO) said in its latest report released on Saturday.
The Bangladesh Bank (BB), the country’s central bank, unveiled a ‘restrained’ monetary policy on January 26 last aiming to bring down inflation to a single-digit from the current level of over 10 per cent through discouraging credit flows to unproductive sectors.
“This implies that there will be associated risk factors in terms of targeting the productive sector for further investment. And at the same time, the central bank’s expectation of reduction of pressure on liquidity may not be materialized as high inflationary pressure may crowd out the attempt to increase the savings rate,” the research organization noted.
The independent think tank in the January 2012 issue of “Bangladesh Economic Update Myopic views of Monetary Policy Statement (MPS)” also said the MPS’s envisaged instruments may not rein in inflation because of the inadequate diagnosis of the causes of continuous increase in prices.
“In order to meet up the objectives of the MPS, both REPO and Reverse REPO are used. Due to the increase in the world price of food and oil, the pressure of inflation is increasing in Bangladesh,” the report said.
There has been increased pressure of demand both in domestic taka and foreign exchange markets. While workers’ remittance inflows slow down and trade deficit increases due to import growth; reduction in capital account inflows creates the stress on taka and foreign exchange markets. In this situation, the BB has enhanced the REPO 100 basis point than that of 50 basis point announced in the last MPS, according to the research organization.
Identifying curbing inflation and keeping growth momentum of the economy as the twin challenges to the economy, the research organization said the inflation has occurred for two reasons, namely, domestic prices are increasingly knotted to international prices due to the liberalization of trade and administered prices are adjusted to global prices; and low level of emphasis on public distribution system has encouraged jacking up in prices.
“Contrary to what has been prescribed in the MPS, harmonization of monetary policies with fiscal measures is needed to address this externally induced inflation, with the expansion of domestic productive capacities,” it added.
The Unnayan Onneshan also said the dampening of investment and unabated rise in the price would hurt different sections of society differently. “Any failure to contain inflation is to bound increase inequality as the latter has been showing an upward trend for some time,” it noted.
“The MPS reveals the revision of government’s wish list without having a realistic check,” the report stated, adding it is apparent that the current MPS should focus on areas with a clear medium term goals on the basis of this growth-inflation dynamics.
It also suggested a balanced approach is required to ensure the controls on public spending and refocus on the investment in the productive sector.
“In order to shift the balance of aggregate demand from public to private; and from consumption to capital formation, the policy stance related to public borrowing, real positive interest rate, widening the transmission channels are welcome,” the report noted.
However, along with this, a clear road map is required on how systematically these instruments will be monitored with a view to keeping the inflation at an acceptable rate and to easing the liquidity situations, the Unnayan Onneshan added.
BBN/SSR/AD-12Feb12-9:13 am (BST)
