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.