The latest monetary policy statement (MPS) dealing with fiscal 2021-2022 is under the spotlight from different sides, especially as it comes in a context not seen in a hundred years. It's an emerging new normal life struggles to adapt to. The policy statement, made public by the Bangladesh Bank (BB), evidently leaves some flip-sides alongside its positives.
In addition to a number of grammatical / technical errors, the document is peppered with aspirational and platitudinous expressions, thus diluting its analytical rigour. Another shortcoming is that actuals pertaining to the previous year (2020-2021) have not been compared with projections in the last MPS.
Although the ongoing pandemic is mentioned, there is no elucidation as to the difficulties facing the global community in trying to tackle the health emergency. Vaccine hesitancy, ideological resistance, slow pace of rollout, missteps on part of the authorities, unavailability of vaccines, lack of track and trace, logistical issues, mingling and mass movements of people are worth mentioning. Even within territories pockets of infection continue to spring up, the latest episode playing out in China. Moreover, dangerous mutations are making the likelihood of normalcy recede.
The MPS seems based on antiquated and conventional measures. The time has come to introduce newer indicators in order to capture a more holistic pulse of the economy. Purchasing Managers' Index (PMI) and consumer sentiment are two well-known yardsticks made use of extensively in the West. Even India has its own PMI.
Other possible indicators could be the number of courier packages handled domestically, railway freight in tonnage, petrol consumption, tolls collected on highways et al.
The report correctly states that interest rates (especially long-term bond yields) are showing signs of rise in the West as inflation rears its head. It then goes on to (tentatively) link this phenomenon with foreign direct investment (FDI) in developing and emerging economies. However, FDI does not react to interest-rate gyrations, portfolio investment does.
Concerning world merchandise trade, supply bottlenecks on the one hand and a return to normalcy in some parts of the world on the other have caused demand to far outstrip supply. Prices and availability of goods--from finished to raw materials--have been affected. On top of it all, due to a host of factors, shipping space is at a premium. These explanations do not show up in the MPS as causing inflation.
The commentary papers over the efficacy of the various stimulus packages taken in hand in response to the pandemic. Media reports say that such subsidised bank loans have been diverted to the share market and paying off previous debts. If so, the central bank is well-advised to look into such breach of trust.
The fact that food prices have started rising internationally is acknowledged but the way it seeps into Bangladesh's food inflation is left unstated.
There is much gloating over the fact that interest rates have been pushed down. However, there are two collateral damages: banks' margins are now under a lot of pressure impacting profitability. Take note that there is an overhang of liquidity preventing banks from earning interest revenue.
Depositors' returns have also entered negative territory. In effect, borrowers are siphoning profits off of depositors.
Inflation needs to come down further to put things right. On the flip side the Taka would tend to appreciate. Countries with lower inflation have enjoyed relatively stronger currencies; Japan and Switzerland are examples.
The wide gap in lending rates between banks and micro-finance institutions tells you the true cost of money in Bangladesh. A section of personal customers may, therefore, be tempted to divert savings to the capital market. But for the unwary the pitfalls are many.
Government's 2.0 per cent subsidy on account of inward remittances is bearing fruit as Bangladesh's reserves can now cover seven months' worth of imports. We remain unaware of the cost involved though.