Profile of Peter Blair Henry

Finance and Development, IMF profiles Peter Blair Henry, Dean of the Leonard N. Stern School of Business at New York University (NYU). Peter is the most youngest dean in the 113-year history of the school, an economist and a policymaker.

Link of the profile.

Who saved the rupee?

Arvind Subramanian from the Petersen Institute of International Economics writes on the recent fall of the rupee and its recovery later. Interesting conclusion! 

Link for the article.

WB Development Update on Bangladesh

World Bank publishes the Bangladesh Development Update (October 2013) with the following key points:

The GDP growth in FY13 decelerated, for the second year in a row, to six percent.

The most pressing challenges lie in rebuilding the image of the garment sector, removing supply bottlenecks and maintaining economic and financial reforms.

Global risks to the economy have receded, only to be off-set by internal risks, which have grown in stature.

Link of the report.

IMF concludes 2013 Article IV Mission

International Monetary Fund concludes its 2013 Article IV consultation mission and third review under ECF agreement with the Bangladesh government and, as always, provides its comments on the overall macroeconomic development and structural policies.

Press Release of IMF 

Asian Development Outlook 2013 Update

Asian Development Bank publishes its flagship publication 'Asian Development Outlook 2013 Update' with a focus on 'governance and public service delivery'. One can find the Bangladesh Chapter in pages 131-136.

Link of the Outlook. 

Impact of Rupee Depreciation on BD Economy...

Analysts keep making their observations on the impact of recent drastic Rupee depreciation on the Bangladesh economy. The following articles are notable ones:

A lesson for Bangladesh

India sneezes, will we catch the cold?

StanChart analysis on the impact of depreciating Indian Rupee on BD

Rupee Plunge: Opportunities and Challenges for Bangladesh

Comments: Some missing areas which were not discussed in any of the articles are as follows:

1. For making comments on the competing goods of Bangladesh and India in the world market, importers from the rest of the world will look for real effective exchange rate (REER) of both India and Bangladesh  when they will decide whether they will import from Bangladesh or India, if other things remain the same. Recent Rupee depreciation will definitely put India in a better position. However, Bangladesh receives GSP facility in the Eurozone, where Indian exporters rarely can compete. But Bangladeshi exporters will face the reality from Indian exporters for the U.S. and other markets.

2. For making comments about the impact on Bangladesh exports to India, it is important to see the composition of India imports from Bangladesh. Theoretically, exports to India would have been costlier. Over the last few years, Bangladesh has been mainly exporting jute goods and RMG products to India. Latest data reveals that jute exports to India are on a sharp declining trend, while RMG exports to India still hold its position.

3. For making comments about the impact on Bangladesh imports from India, one should look after the composition of Bangladesh imports from India over the last few years. In general, imports will be cheaper. But three issues are important here: (i) whether the good is a necessary one (example, food items); (ii) whether substituting industries in India and other countries use the same input product (example, cotton); and (iii) whether storing is possible for the good (example, fabrics).

In case of (i), import may rise irrespective of the price if storing is possible. If storing is not possible, then import will be as usual. If the similar product is currently imported from other sources, say, China, and if import from China becomes relatively expensive now compared to India, then import from India for the same product will increase. In case of (ii), availability of the input product is only possible after the demand from Indian industries is met, and Bangladeshi importers can compete with importers from other countries. If the input product remains available for Bangladeshi industries, then cost of production will decline. If cost of production declines for Bangladesh export industries, then Bangladeshi products will remain competitive in the world market. In case of (iii), import will rise given the availability.

4. Even if the current pace of imports from Indian remains the same, then it will bring better outcome for inflation scenario through having lowered prices of import commodities.        

Negative import growth after 10 years!

Bangladesh experienced negative import growth of 4.4% in FY2013 after 10 long years!

Reasons:
(i) Large negative import growth of food grains and major consumer products like edible oil and sugar.
(ii) Import bills declined for capital goods, and fertilizer.

Implications:
(i) Current account surplus widens, refers to positive impact of balance of payment surplus.
(ii) Probably, this is the basic reason why foreign exchange reserves have been rising fast, and thus appreciation pressure on Taka.
(iii) As everyone knows, lower capital machinery imports signal transitory and gloomy investment picture, probably related with the upcoming election.

Report on the issue.   

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!