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Careful management of monetary policy seen urgent
Crisis in forex market to ease next month: BB governor
FE Report

          Bangladesh Bank (BB) governor Salehuddin Ahmed Monday said the ongoing crisis in country's foreign exchange market will ease next month (March) with the reduction in import volume and payment settlement of previous letters of credit.
Terming the dollar crisis very natural in the backdrop of huge import of machinery in the recent years, the central bank governor hoped the situation will improve within a short period.
He called upon the businessmen not to import luxury items at the cost of hard-earned foreign exchange while addressing a seminar titled 'Half-yearly review of Bangladesh economy', arranged by Islamic Economics Research Bureau (IERB) in the city.
Industries Minister Motiur Rahman Nizami, State Minister for Finance and Planning M Anwarul Kabir Talukder, economists Abu Ahmed, Ali Ahmed Rushdi and banker M Abdur Raquib also spoke on the occasion.
Economist Ayubur Rahman Bhuiyan presented the keynote paper in the seminar which was chaired by former secretary and IERB chairman Shah Abdul Hannan.
The BB governor disclosed that the inflation rate came down to 7.00 per cent in this month (February) from 7.07 per cent of December, 2005.
On rising government borrowing, the central bank chief said state-owned Bangladesh Petroleum Corporation (BPC) was the top borrower.
He said the external shocks contributed a lot to the rising government borrowing as oil and sugar prices marked a significant rise in international markets.
Economist Ayubur Rahman Bhuiyan, in his keynote paper, said the central bank has been pursuing a tight monetary policy since March 2005 to check inflationary pressure ignoring the fact that the narrow monetary approach in the past adversely affected investment instead of having any impact on inflation.
"Large credit growth does not necessarily translate into higher inflation because several other factors have a sobering influence on prices," Bhuiyan said refuting the argument that high credit growth will necessarily result in inflation.
He said the recent rise in the inflation rate has been due mostly to external price shocks and such other factors as rising government borrowing from the banking system, supply shocks in the form of decline in output, increase in the administered prices of utilities, low capacity utilization in industries, production losses due to structural impediments and infrastructure bottlenecks.
"The real cure of the inflation problem lies in increasing the supply capacity of the economy without increasing the cost of production," the paper said adding a careful management of monetary policy is needed urgently, rather than a mere tightening policy of credit.
It said criminal activities such as extortion from businessmen and illegal toll collection by miscreants from vehicles during the movement of merchandise, activities of unscrupulous traders, hoarders and profiteers having political connections are also responsible for the rise in prices of essentials.
"A contractionary monetary policy cannot solve the inflationary problems, rather it will raise the cost of borrowing for the entrepreneurs, curb the enthusiasm of genuine businessmen to invest in the formal economy and subdue economic growth," the paper commented.
The keynote paper suggested an improved fiscal management by enhancing revenue collection, reducing the extent and magnitude of government borrowing from domestic sources, slashing non-essential public spending, adopting appropriate public policy measures to prevent hoarding and profiteering by unscrupulous traders.
"On top of everything, the government must take strong deterrent measures to curb the rise of misguided religious extremists and uproot the menace of militancy and terrorism in the country," it said commenting that country's prosperity rests on the growth of investment, industry and trade which will greatly depend on how quickly and firmly the government will be able to eliminate the menace from the country.


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