Tight monetary policy alone can’t reduce inflation

Inflation in Bangladesh is not a monetary phenomenon, so only a tight monetary policy may not reduce it at the expected pace. Rather, it will reduce investment and job creation, said economists yesterday.

They were addressing a seminar of the Bangladesh Economic Association (BEA) at the Centre on Integrated Rural Development for Asia and the Pacific (CIRDAP) in the capital.

"This inflation, which has remained high for a couple of years, is not a monetary phenomenon, so it will not drop due to a tight monetary policy," said Prof Abu Ahmed, a former chairman of the economics department at the University of Dhaka.

Meanwhile, investment and job creation will be hampered due to the contractionary monetary policy. Bangladesh's inflation is high due to supply-side constraints and the massive devaluation of the local currency, he added.

Abdul Awal Mintoo, a business leader and lifetime member of the BEA, echoed Ahmed, saying that it was true Bangladesh Bank only had a single instrument—the policy rate—to contain inflation.

However, this instrument will not work in Bangladesh, said Mintoo, a former president of the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI).

On the other hand, contractionary monetary and fiscal policies work only for the private sector. So, the government's operating costs did not drop, he said.

Amidst the tight monetary policy, deposits of around Tk 3 lakh crore accumulated in the banking sector last year, while Tk 2.70 lakh crore was taken by the government, he said.

"Then, how will the private sector get funds for investments?" asked Mintoo.

The entrepreneur suggested that the government enable an environment conducive to investments, which would ensure a higher number of jobs.

Social capital is a prerequisite for attracting investment. A prompt judicial system, improved law enforcement, and better institutional capacities will also have to meet international standards, he added.

Muhammad Fouzul Kabir Khan, power, energy and mineral resources adviser, said when the interim government came to office, all state institutions were "spoilt," police were not working, and the situation was so bad that around 177 movements were taking place on the roads.

Corruption was widespread, and many funds had been taken abroad. In this situation, the interim government's target was to ensure economic recovery. One of its main targets was to reduce inflation too, he said.

Giving many examples of high corruption and wastage, the adviser said these were the two major problems in the Bangladesh economy. Hinting at politicians and bureaucrats, he said no one wants to stop corruption.

Some corrupt people left the country, and some are now asking to get projects, citing that they have been deprived in the last 16 years, said Khan.

"However, we want to create an environment of competition and set examples," he said.

This year, the government had to keep a subsidy of Tk 66,000 crore for the power and energy sector. This high subsidy cannot be afforded year after year, he said.

Regarding the reasons behind the high subsidy, Khan said the previous government entered into power purchase contracts with rates as high as Tk 80 per kilowatt, while individual consumers pay Tk 8.95 per kilowatt.

The government has already addressed this issue through tariff negotiations, he said.

The previous government had $3.2 billion worth of import payments due, and the interim government has already paid most of it, he said.

Now, $800 million to $900 million remain due, and this will also be paid soon, said Khan.

Meanwhile, liquefied natural gas (LNG) prices were high due to the import payments being due, which ultimately raised costs and burdens for the interim government, he said.

The adviser requested the private sector to invest in rooftop solar panels to generate renewable energy and contribute to the economy.

Professor Dr AK Enamul Haque, director general of the Bangladesh Institute of Development Studies, Kazi Iqbal and SM Zulfiqar Ali, research directors; Prof Rashed Al Mahmud Titumir, a former chairman of the development studies department of the University of Dhaka; Sajjad Zahir, executive director of the Economic Research Group; Prof Shafiun Nahin Shimul, director of the Institute of Health Economics at the University of Dhaka; Md Golzare Nabi, a director of Bangladesh Bank; Sayema Haque Bidisha, pro-vice chancellor of the University of Dhaka; and Prof Sharmind Neelormi of the economics department at Jahangirnagar University gave PowerPoint presentations.

The speakers focused on forming a strategic industrial policy targeting three to four sectors, an action plan for job creation, increasing budget implementation, and ensuring quality execution of public projects.

Prof Mahbub Ullah, convener of the BEA, chaired the event, while Prof Mohammad Helal Uddin, member secretary of the BEA, conducted the programme.