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CPD’s Reaction on Bangladesh Bank’s Monetary policy

14 July 2007
 

The Centre for Policy Dialogue (CPD) at a press briefing organised on 14 July 2007 at its dialogue room criticised government plans to curb loan-disbursing capacity of the banks and increase prices of natural gas, fertiliser, power and petroleum products, bowing down to World Bank (WB) and International Monetary Fund (IMF) suggestions.

"It will be suicidal for us if we accept these (donors' suggestions) without paying attention to our independent policy space," CPD Executive Director Debapriya Bhattacharya said while giving its reaction to the recently announced monetary policy of the central bank. He asked the government to give attention to reducing systems losses of power and gas instead of increasing their prices. Terming Bangladesh Bank (BB) plan to squeeze credit flow in the private sector a wrong decision, Debapriya said it will hamper private sector investment as well as achievement of the target of seven percent growth. "Contractionary policy will be counter productive for inflation," he added.

The BB governor is giving contradictory explanations for price spiral of essentials, Debapriya said. "We did not find any similarity between the central bank's previous statements on price hike of essentials and the views they (BB) are giving now through its monetary policy." The CPD also disagreed with the BB views on recent upward trend of inflation and claimed that the increase is not due to demand-pull but due to cost-push.

The renowned economist said inflation rate is increasing due to problems on supply side, not for increased demand as explained by the IMF. "On the basis of their (BB) explanations, the IMF suggested the government to limit credit flows and the central bank acted on the IMF suggestion," he said. "In the past, Bangladesh Bank and local economists gave similar explanations on the reasons of increasing inflation rate but this time we find that the central bank has tilted to the IMF."

Debapriya said the finance adviser and the BB governor took a U-turn on the ways to control the increasing inflation rate. The tight monetary policy would increase interest rate and thus hamper private sector investment, he thought. Describing the current situation in banking sector, he said despite excess liquidity in banks, investment in Bangladesh is very low. The economist suggested the central bank to lower existing interest rate to encourage more investment.

He also asked the central bank to find ways to control credit to government sector instead of pursuing the present policy targeting private sector. Government borrowing from the banking sector is huge, and the money is spent in non-productive sector, he said. Debrapriya said it is necessary to increase import of goods to keep prices of essentials stable. If banks limit credit flows, import and export promotion would also be affected. On the WB and IMF conditions, he said the government is bowing down to the donors' conditions to get budgetary support. One of the conditions for getting WB loan is to sign a deal with the IMF for the PRGF loan, he said."But we don't need any loan from the IMF right now as the country's current balance of payment (BoP) situation is very much positive."

The CPD found lack of coordination in framing economic policies, and said the government's other programmes would be affected if there is no stability in economic sector. It asked the government to review the monetary policy before implementation, considering some challenges ahead of the country's economy -- prices of products during Ramadan, Aman harvest and any possible flood. In the wake of Aman harvest, price of hike of fertiliser, power and fuel will be disastrous, the CPD expressed.

The CPD said the next three months are very crucial for the national economy because of these challenges. "We will have to take up economic policies more cautiously," Debapriya said. CPD Research Director Mustafizur Rahman was also present at the press briefing.