The monetary policy for the second half of 2013 (Calendar year) is
coming up. There are widespread rumors that this will be an expansionary
monetary policy with a potential policy rate cut. Some even go to the
extent of saying that reserve requirements will be reduced. As an
analyst I strongly believe that an expansionary monetary policy would be
the wrong move and maintaining status quo would be the more prudent
policy decision.
Before I delve into my arguments let me try to understand what can
prompt central bank to go for monetary easing. The only factor that
comes to my mind is the sharp decline in private sector credit growth
which stood at 11.43% at the end of May 2013. Despite the decline in
loan demand, lending and deposit rates remained quite sticky and have
not been coming down as much as central bank would have liked. So, maybe
central bank believes that further easing would cause interest rates to
decline and thus spur on credit growth and investment in the economy.
I have two major points against this theory.
First, I believe that the slowdown in credit growth was less due to
high interest rates and more due to the global economy, political
violence etc. We have also seen from the past that credit growth comes
down during the election year and thus 2013 was no exception. No
businessmen in his right mind would go for heavy investment in such an
uncertain situation. If that is the case, then going for further
monetary easing would not really spur on growth at all. Credit demand
would normalize once the election is over by itself without a monetary
stimulus.
Secondly, we do know that there is enough liquidity in the banking
system. As per a Financial Express report, loanable excess liquidity
rose to BDT 695 bn in April 2013 from BDT 456 bn in June 2012. M2 growth
is around 18% as of March 2013 driven largely by unsterilized dollar
buying by the central bank. This is quite high by any global standards
and going for further monetary easing is quite risky from an
inflationary standpoint. The situation reminds me of 2009-10 periods
when central bank went for unsterilized dollar buying to prevent the BDT
from appreciating. The result was a stock market bubble and double
digit inflation. The real estate market also was in a bubble like
situation and has been correcting ever since. We surely do not want a
repeat of that situation.
I think that the policymakers should put more attention to supply
side bottlenecks such as energy and infrastructural constraints. Trying
to boost GDP growth during times when ‘real’ demand is low, will only
haunt the economy in the future.
