Monetary Policy Statement—a critique

Parsing the recently announced Monetary Policy Statement (MPS) of Bangladesh Bank for the first half of fiscal 2018-2019 was tedious. Trudging through dense language I had to link different parameters. Tracing cause and effect was virtually impossible. It won't be unfair to say the document was opaque. The humble 'dal' was served in a tureen just to impress!

Because the contours of our financial system are fairly straightforward (compared to say, India) there is no need to dress analyses in arcane language; made worse by the choice of words. For example, the word 'programme' substituted 'target'. The authors seemed unaware of the connotation of 'upside'.

At the outset, the document should have spelled out to what extent the previous MPS' predictions bore out. Variances, if any, should have been highlighted and explained.

According to the MPS private investment is buoyant. But pundits opine that slack in private sector investment has been compensated by a surge in public sector investment, mega-projects being worthy of mention. Private sector credit growth in the order of 17 per cent when private investment is subdued is inflationary; incremental credit gets channelled towards consumption.

The central bank has taken credit for keeping core inflation tame but remained silent on ways to tackle food inflation. For the poor food and shelter take a substantial bite out of their incomes. Higher commodity prices internationally and floods fed into food price inflation, the MPS noted.

The comparison between call money rates and repo (and reverse-repo rates) is inappropriate. Borrowing in the call market is meant to tide over temporary liquidity problems, hence reactive. Repo (and reverse-repo) rates are deliberate policy instruments, hence proactive. The report indicates that credit growth caused liquidity pressure. I don't see the connection. Pressure on liquidity is exerted when the advance-deposit ratio (ADR) exceeds prudential bounds or there is a mismatch in the maturities of assets and liabilities. Skewed ADR pushes commercial banks to hold additional cash for meeting withdrawals. 

The fact that Taka came under pressure was mentioned without offering any reason. Prices of imported commodities may have risen along with quantities imported. Over-invoicing of imports and under-invoicing of exports may have been resorted to by some quarters to augment their war chests ahead of the general election. The MPS does point to a reduction of net foreign assets (NFA) as a likely cause.

Inflationary pressure must have been accentuated by increased government programme expenses on account of pay hike. This point was missing. In places the MPS was tautological when, for example, inflationary risks and inflationary expectations were mentioned in the same breath. Surprisingly, the MPS was mum about the prospects of the liberalisation of capital account. 

The MPS rightly stressed the need for rejuvenating the bond market. The government could finance ADP (Annual Development Programme) with long-term bonds, to test the waters. Not only will this help establish a yield curve but improve and diversify the portfolios of institutional investors. 

The MPS conflated measures to improve liquidity with a reduction in interest rates. The factors behind interest rate determination and liquidity are not congruent. The report asks the government to align sanchayapatra interest rates to market rates. In support it can be said that the Government of Bangladesh's (GoB's) borrowing costs would come down somewhat. Contrarily, one could also say that this is neither essential nor practicable, especially because it works against the interests of retired people. There is no mention of non-bank financial institutions (NBFIs), perhaps because of their marginal role. 

In the west, normalisation of monetary conditions has begun after a long period of easy money. The gradual increase of interest rates should boost income on Bangladesh's forex holdings thus alleviating the recent strain on the current account. However, the MPS is silent on this issue.    

The tables and charts are not numbered - an academic's nightmare. A table on page 7 shows sectoral growth rates in constant Taka over three years; however, the deflator is missing.

A glaring hole in the governance of financial sector is that the role of Bangladesh Bank (BB) role is at best diluted when it comes to the nationalised banks, especially Sonali Bank. Moreover, it has failed to deal effectively with Farmers' Bank and others of this nature. The loss-making Basic Bank is another blot on BB's track record. So, BB really can't get away just by issuing platitudinous statements.

We expect that BB will produce more balanced, professional and cogent monetary policy statements in future, especially in view of the countless man-hours involved. 

Raihan Amin is Visiting Faculty, International University of Business Agriculture & Technology.

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