The two policies the policymakers use to help develop or keep the economy on the right track are monetary policy and fiscal policy. One is no less important than the other. But more are discussed about the fiscal matters than the monetary policy issues as the former is related to tax issues which affect members of the public directly. The monetary policy is also discussed but not as extensively as the former is and it remains confined to intellectual or academic circles.
Students of Economics and, to a lesser extent, those of business studies at the graduate level study a lot about the monetary policy. This policy is deemed important by the academics in understanding the trends in the economy as well as how the other variables interact with each other while they move from one position to another. The monetary policy is a policy relating to money supply and the basic ingredient is the high-powered money. The supply of money is controlled by the central monetary authority, here in Bangladesh, the Bangladesh Bank (BB) keeping in mind the needs of the economy and that of other stakeholders and also how the interests of the stakeholders will be affected.
The central bank announces its periodical monetary policy. In case of Bangladesh, the policy is announced through issuing a Monetary Policy Statement (MPS) twice in a year which, among others, contains the key policy rates like those of Repos and Reverse Repos and the programmed growth of broad money (M2) and that of credit flow to the private sector. Equally important, the BB also sees how the inflation rate can be kept at or below a target level and how to maintain stability in the foreign exchange market.
The Bangladesh Bank very successfully maintained macroeconomic stability and contributed appreciably to the stakeholders' decision-making with confidence in the last few years. But in one case, it has continued to take the blame, that is, in the case of high lending rate in the economy and also poor market regulation as far as the non-performing loans (NPLs) with private commercial banks are concerned.
In the last few years, the non-performing loans soared with the state-owned commercial banks which are increasingly losing capital to such loans. The Bangladesh Bank (BB) has failed to be strong in this case, calling occasionally for reducing the same. Frequently the BB lectured them to reduce the NPLs but those did not work. The recent MPS was just the follow-up of the preceding one; no change was made, especially with regard to key variables. But to our judgment, a little of reduction of the policy rates would have done the work of reducing interest rates in the marketplace helping the growth of investment demand in the economy. Still, we welcome the recently announced monetary policy and we hope interest rates will come down further because of pressure of excess liquidity that exists now in the banking system.
The monetary policy alone cannot help reduce the interest rates; it depends on many other factors like modes of money use, state of expectation in the economy and, more importantly, the level of non-performing loans. Fiscal matters are also important in affecting how far and where investment will go. Money can remain idle with banks even if the interest rates go down up to half compared to what they are now if the other factors stand in the way of investment.
A booming economy will have more demand for money; the reverse will happen in a slowing economy. But the Bangladesh Bank seems to be more mindful of inflation than the need for money for investment purposes in the economy. The BB is apparently reluctant to make money available at a cheaper rate to the investing public.
The stock investors were very unhappy over what the Bangladesh Bank Governor said while announcing the recent MPS. Though the Governor said nothing new or wrong, he only reminded them about past experiences, but the stock investors took it otherwise. He warned of possible havoc the margin loan can create in the stock market. Stock market cannot be built on air; it is to be built through strong and transparent regulations and also bringing good stocks to the market. A market, which is a shaken due to a comment or does not have the capacity to withstand the same, is not the one going in the right direction. The stock market behaves more like a casino when junk stocks are abundantly supplied with the market.
The writer is Professor of Economics, University of Dhaka.