The Financial Express

Challenge to enhance domestic demand

| Updated: October 20, 2017 23:23:07

Challenge to enhance domestic demand
The country's economy is passing through a favourable time for the last two years. The think-tanks are expecting good days ahead. The country has been achieving above 6.0 per cent growth for the last consecutive five years, which is a rare phenomenon in the world economy. Despite different political and social problems, Bangladesh has shown its resilience. The country has already attained lower middle-income status. So it's the time to flourish further. The investment situation seems favourable. The interest rates have come down and it is in the trend of further declining. 
According to the recent Monetary Policy Statement (MPS), the Bangladesh Bank (BB) has lowered the policy rates - Repo and reverse Repo - by 50 basis points to 6.75 and 4.75 respectively - to realign policy rates with the market rates.  Reducing Repo and reverse Repo rate may create further pressure on the banks to reduce interest rate but may not have any impact as expected because of excess liquidity in the market. Though Chairman of the Association of Bankers, Bangladesh (ABB) Anis A Khan said they have reduced lending rates and they may further reduce it. 
Interest rate is not a big issue now. In fact, the country's domestic demand is somehow stagnant and is not increasing, thus resulting in low scope of investment. Existing entrepreneurs can't sell their products and new ones are in a dilemma to start business. The big challenge is to enhance domestic demand. Our export is in good shape and foreign remittances also are very good. To enhance domestic demand, the major step the government can take is reducing fuel price. If fuel price is reduced, then it will definitely lower the cost of production giving manufacturers and exporters direct benefits. 
Oil prices are now at the lowest in the world, which is below 30 dollars per barrel. But our domestic price is still too high and here the government is earning supra profits like a real monopolist. The state should not take such a stance. We expect that the fuel prices will reasonably come down soon. There is, however, a hope in the finance minister's announcement that he is going to reduce the fuel price. 
In the Monetary Policy, broad money and private sector credit growth are projected at 15 and 14.8 per cent respectively but the Governor explained it as slightly lower than that of the last MPS target but higher than the actual outcome. This means the credit growth is reduced more than the previous monetary policy by 0.20 percentage. The reason, he explained, is that global growth is sluggish and this also impacted our economy. But shrinking the private credit growth may somehow hamper the credit flow. It may not also happen as there is no shortage of money to lend. 
Except lowering the Repo and reverse Repo rates in the monetary policy, the other issues remain as usual. Inflation has remained under control and it may slightly increase due to some large investment by the government. Actually at the initial stages, some economies welcome inflation. Rise in inflation means people have enough money in their pockets that they can spend. And spending spree can create positive impact in the market and will work as a catalyst of economic activities. The government is implementing some big projects like Padma Bridge, metro rail, power plants, under-water tunnel and deep sea port that will vastly impact the economy to get rid of sluggishness. A large number of people will be engaged in those projects. 
Private sector investment is crucial for the economy but still some entrepreneurs are feeling shy to invest. To make the monetary policy more effective, the Bangladesh Bank may consider the theory of 'Helicopter Money' given by Nobel Prize-winner and former Professor of University of Chicago Milton Friedman. He envisioned central banks dropping money from helicopters directly to the population as a simple way to jumpstart consumer demand. This may help us as our domestic demand is not increasing. However, policymakers can accommodate this idea as per the country's perspective. 'Helicopter money' as a solution to the deflationary situation is not effective in inflationary situation. 
There are some debates regarding inflationary situation. What is the benchmark? Some say 2.0 per cent and some others say 4.0 per cent. We think it depends on the state of the economy of a given country. Considering our country, we think the present rate of inflation is okay. We need to go for expansionary monetary policy as our economy is in a take-off situation. Side by side, we need to strengthen monitoring activities so that money goes to where it is needed.
The writer is a banker.

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