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A theory is appropriate as long as it fits into the fact; when a theory doesn't fit in the fact, it's wise to walk with the fact.

Friday, July 26, 2013

Sen vs Bhagwati

Amartya Sen and Jagdish Bhagwati are probably the two most dominant Indian economists at the world stage.  Although they have been in debate (mainly from Bhagwati) for years on basic economic policies, however recently it crossed the limit of the past through Sen’s direct answer for the first time. Though Indian politics get involved in the current debate process, analysts didn’t find any clue in it. The following articles correctly evaluate issues related to the main distance between these two, and happily, those are mainly based on economic policy strategy. So enjoy!

1. Bhagwati versus Sen: What's going on?
2. Sen vs Bhagwati: Parallels from an earlier titanic clash
3. One cannotdiscuss policy differences without citing opponents' writings: Jagdish Bhagwati
4. There is nothing to panic about growth: Amartya Sen
5. 'I agree with Sen that lagging human development in India is a great shame' - Dilip Mookherjee, Professor at Boston University

MPS (July-December 2013)

Bangladesh Bank (BB) announced a new monetary policy statement (MPS) for the period of July-December 2013. BB Governor terms it as a 'balanced' one (neither expansionary, nor contractionary) and as he noted:

"We walk on two legs. We've kept one leg flexible for attaining economic growth while the other is kept non-flexible for attaining the target of inflation." Then again, he said: "It's a creative one," while explaining the diversified interest of the MPS.

Basic targets of the MPS: 
(i) To bring average inflation down to 7.0%;
(ii) To contain reserve money growth to 15.5% and broad money growth to 17.2% by December 2013;
(iii) To increase the private sector credit growth to 15.5% by December 2013 and 16.5% by June 2014.

Although the MPS took basic assumptions such as economic and trade related factors into consideration, it didn't consider political violence for setting its target.

News update on the MPS:

Wednesday, July 17, 2013

Record low credit growth and new monetary policy

Private sector credit growth recorded a five-year low of 11.4% in May 2013 (against the central bank's target of 18.3%), due to depressed private investment, which resulted in a pile of liquidity (about Tk72,000 crore in May 2013) in the banking sector. Economic uncertainty based on the current political crisis and global economic slowdown are the reasons for lower private investment. Although the central bank's Chief Economist also reasoned the greater scope for borrowing from foreign financial institutions for such trends, but this probably a negligible reason. Even if it is a leading factor, then the central bank should take responsibility of allowing such credit in the economy despite having a record level of excess liquidity in domestic banking sector. Also, this questions the central bank's decision of allowing new banks in the market.

Now, the central bank is in the verge of announcing a new monetary policy for the first half of FY14. Given the liquidity scenario and investment condition, the central bank should adopt some innovative strategy, if it is smart enough, to run for much-expected expansionary monetary policy. It is now clear that only adopting expansionary monetary policy won't be enough to attract investors at this moment. While allowing any policy, it should take into consideration a few things: (i) investment should not be allowed to those sectors which may encourage inflation; (ii) investment should be encouraged for fresh employment; and (iii) growth promoting sectors would be priority for investment strategy.

Credit growth hits 5-year low
Expansionary policy likely to revive private investment

Sunday, July 7, 2013

External sector position and 'Dutch Disease'!

Though two articles were published today in two different newspapers, but they drew almost the same conclusion. Interestingly, both (Dr. Monzur Hossain and Dr. Abul Basher) are young and promising economists of the country, working at the same institution, Bangladesh Institute of Development Studies (BIDS).

1. Active exchange rate policy and fear of appreciation
2. The looming threat of Dutch disease in Bangladesh economy

The concerns made in both articles are valid:
(1) Reserves have been accumulating fast;
(2) Reserve accumulation has a direct impact on nominal exchange rate;
(3) With lower domestic inflation, real effective exchange rate has been also appreciated which has  negative effect on export prospects;
(4) Most importantly, monetary policy alone can't handle this issue, rather a desperate effort is needed from government side, especially to vibrate investment scenario so that imports get its momentum and all concerns through reserve accumulation goes out of scene.

Well, it is certain that some will have different view, especially in the area of optimum level of reserve accumulation. In the absence of any studies on optimum level of reserve accumulation, it will be difficult to comment whether the current level of reserve is the one the economy deserves to have. There are some views that reserve accumulation should be at least 8 months of import payments (experience of China and India), far higher than the current position (4 months of import payments). Another issue is whether the current situation is a static or dynamic. Based on the current import situation and overall gloomy investment scenario, it seems that it's not a static situation, reserve accumulation will die out when investment scenario will start to move to a positive change. Who knows, then this reserve accumulation won't be enough to handle import payments!    


Era of old CPI base comes to end!

From July 2013, Bangladesh Bureau of Statistics (BBS) will report CPI-based inflation data only under the new base year (FY2005-06), meaning era of old base (FY1995-96) has come to an end after June 2013.

Report on the news!