Profile of Stanley Fischer !

IMF’s Finance and Development profiles Stanley Fischer, one of the most influential macroeconomists at current time. The Guru of so many renowned and influential macroeconomists just stepped down from the service of the central bank governor of Israel. Previously, he was a professor of MIT, Chief Economist of the World Bank and First Deputy Managing Director of IMF.

In 2012, the magazine Global Finance gave Stanley Fischer, then central bank governor of Israel, an A for his handling of the economy during the financial crisis. Fischer is a real role model as a central banker and how a central bank governor should be.  

Link of the profile.

Profile of Esther Duflo !

The Financial Times profiles Esther Duflo, the MIT Professor and well-known economist for her works in development economics.

Link of the profile.

Arguments on new MPS

Bangladesh Bank, last week, presented its half-yearly monetary policy statement (MPS) for July-December 2013. Several newspaper articles written by experts were published:

1. A critique of the MPS: Economic Analysis vs Populism 
2. Monetary policy stance: how effective is it?
3. The conduct of monetary policy

Defense: No doubt that recent monetary policy has been successful to pull down the credit growth, and thus inflation rate. Experts also praise the monetary policy for reducing the pressure on the balance of payment and for maintaining the stability in exchange rate. However, experts also don’t like to blame the monetary policy for the current sluggish investment scenario. This is quite an inconsistent behavior by experts. Lowering credit growth also confirms that monetary policy was not supportive for credit for trade, if not overall investment. Pressure on the balance of payment lowered because of lower imports and reasonable growth in exports and remittances. Lower imports have a clear link with lower investment and consumption.    

Having an excess liquidity of over Tk60,000 crore in the banking sector tells that there is no liquidity shortage in the economy; that’s correct. However, why investment is not taking place despite this pile of excess liquidity, and why banks are reluctant to push more credits to the economy with drastic cut in lending interest rate. From the banking sector perspective, either the number of excess liquidity is incorrect, or there is a serious accounting problem while to estimate the amount of excess liquidity.

Against the view that there is no relationship between the current monetary policy and current economic scenario of the country, there are several grounds through which it can be shown that there is strong relationship between those.

One, there is no logical ground to believe that private sectors are not applying to banks for more credit. Recently, private sector has been desperately borrowing from foreign sources for their investment. The basic question would be then why private sector is borrowing from abroad while there is a huge excess liquidity in the economy. Is it because of high interest rate on lending? If it is, then where is the role of monetary policy in this case? 

Second, in the past, banks desperately gave credit to the asset market (like land, apartment, real estate and capital market) while having strong guidance from the monetary policy. Lots of applause went to the monetary policy at that time for adopting growth oriented strategies. Since late 2010, when the monetary policy held back the growth of asset market, things started to change and the boom period of asset market were gone. And now, the monetary policy is not brave enough to confess its role for such change. It’s not correct at all!

Third, there is a clear link between government borrowing from the banking sector and private sector borrowing from the same source. Usually, government borrows from banking system with lower than market interest rate. To cover the cost of lending, banks usually then charge high rates for private sector lending. Prevailing high interest rate on bank lending is one of the basic reasons why investors are not interested to take loans from banks during a gloomy economic scenario, and/or why they are more interested about foreign sources for borrowing.  

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:

1. BB aims to cut inflation rate to 7pc

2. Central bank aims to cut inflation rate to 7%

3. BB aims to lower inflation, keep up growth momentum

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

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! 

Stagnant private investment !

The 6^th Five Year Plan (SFYP) rightly drew attention to stagnant private investment situation while reasoning issues related to investment climate and infrastructure for such trend (Page 54, Part 2). The SFYP envisaged reducing the investment gap through basically acceleration of public investments in major infrastructure projects (e.g. Padma Bridge, Elevated Expressway) and implementation of PPP projects (Page 55, Part 2). To achieve the target GDP growth rate of 8.0% by the end of SFYP (FY15), it targeted to achieve the rate of gross domestic investment equivalent to about 32.5% of GDP. In which, the target private investment for FY15 is 25.0% of GDP (Page 74, Part 1).  

In reality, private investment (as a share of GDP) remains stagnant around 19.0%-20.0% during the last half decade (FY07 - FY13). And gross domestic investment reached to 26.8% of GDP in FY13.

Certainly, the government couldn’t realize the envisaged large public investment projects. But some criticism must go to the policymakers who were involved in SFYP formulation. Others have the right to know, what sort of policy prescriptions those policymakers provided to the government to boost up private investment. In reality, private investment didn’t boost up at all; rather it was quite stagnant throughout their policy implementation period. The government should be also responsible for not providing enough credit flows to the private sector because a large portion of bank credit was taken by it to spend for its annual expenditure. The relevant question would be: whether the restrictive policies for restraining private sector credit growth taken by Bangladesh Bank have been reasonable over the last few years, while at the same time, BB’s support has been quite impressive for the fiscal authority.   

Questions on targets in the budget announced !

Growth (whether the target of 7.2% in FY14 is feasible to achieve?)

• More political violence is expected in coming days, and if the policymakers do not want to count the impact of hartal in its forecast, then the opposition can justify its hartal type movements. Or, allowing black money into real sector would overcome the impact of hartal?

• Bangladesh’s export-based industries are largely depended on import-based capital goods. Import growth of capital goods is negative (-5.1% during July-March FY13) based on the latest information, then how come policymakers expect more export growth, and consequently higher GDP growth? The share of both export and imports in GDP declined in FY2013 as compared to FY12.

• It’s a common knowledge that private investment is the main instrument of growth (please see the documents of 6^th Five Year Plan). Unrestrained bank borrowing by the government will surely leave lesser options for private investors to borrow from the banking system. Even if they do so, the borrowing would be costly, which may discourage them to borrow for investment, and in some cases, they will borrow with high costs, and ultimately the consumer will face the burden. The government may argue that there is already a huge excess liquidity in the banking system, so its borrowing won’t hurt private sector investment. Then question is: why private investors are not borrowing from the banking system despite huge excess liquidity? Does it mean that a preferable investment environment doesn’t exist, right now? In reality, private investment as percent of GDP declined to 19.0% in FY13, down from 20.0% in FY12, although public investment as a share of GDP rose. But, the quality of public investment is still in serious question, so how it may boost up the overall growth, it remains as another question.

• What about another source of growth – domestic consumption demand? Consumption demand as percent of GDP remains flat at 80.8% in FY13 (80.7% in FY12). What does one expect for FY14 in this area when more political violence is expected (people will consume more at home?)?           

Inflation (whether the target of 7.0% is feasible to achieve?)

• Whatever the policymakers shout on, increased bank borrowing remains as a major concern, which has a direct linkage to the inflation hike.  

• During the last couple of years (if one carefully reads BB’s Monetary Policy Statement), to check inflation, BB was utterly vocal for bringing down the impact of asset market bubble through discouraging loans for land and housing markets, and directing banks not to involve in stock market transactions. Now, in the budget, the government made a U-turn as it made a few measures such as welcoming black money into stock market and housing sector, and injecting government-sponsored money into the stock market. Then where does the monetary policy stand now? Won’t these steps hurt price level in the coming year?        

IMF Country Report (June 2013)

International Monetary Fund publishes its Bangladesh Country Report (June 2013) with several documents such as Staff Report and Joint Debt Sustainability Analysis Update.

Link for the Report

Budget FY14 Documents!

One can find all budget FY14 related documents in the following link.

Budget Documents 2013-14

Budget related articles!

There are lots of good articles published in different newspapers on the occasion of budget announcement. In a true sense, policymakers may like to read these articles while setting their priorities. Because these articles portray true concerns, explains logical analysis and provide appropriate directions for the next urgent steps.

1. Investment and Growth by Professor Taslim
2. Falling investment: a big worry
3. Growth concern
4. Bank borrowing in last four years leaves fiscal discipline in tatters

Macroeconomic Review, CPD

The Centre for Policy Dialogue (CPD) comes with an analytical review of Bangladesh macroeconomic performance in FY13. This review covers interesting issues like why growth target slips in FY13, banking sector performance, a review of power sector, why Padma bridge financing is not feasible decision, and economic implications of hartal.

Link of the report.

Time series data since 1972!

Researchers often struggle while collecting time series macro data on the Bangladesh economy. Bangladesh Bank (BB) recently took an excellent initiative while compiling its data base and making it public. The following link will provide the data based on indicators set in the Monthly Economic Trends, a BB monthly publication. Cheers!

Link for the data.