Monetary policy's prime target: growth or inflation?

Posted by BankInfo on Thu, Sep 06 2012 08:08 am

While monetary policy is regarded as the most important economic guideline in developed countries, it is treated as a complementary promise to fiscal policy in most developing countries. In Bangladesh, the scenario is even worse. Here the finance minister, as a fiscal-policy leader, dictates explicitly what Bangladesh's monetary policy should be -- exhibiting the total absence of monetary-policy independence.

Bangladesh Bank, as the central bank of the country, announced its monetary policy in July this year as it does every year. Interestingly, the central bank's restrained stance on monetary policy this July was no surprise, because the finance minister had clearly signalled the stance of the upcoming monetary-policy in his budget speech that was made public in June. The finance minister explicitly declared that the upcoming monetary policy will be 'restrained,' making the monetary-policy statement simply a 'compliance report' by the central bank. While the influence of the government on the central bank is well known, particularly in developing countries, this type of predetermination lacks respect to the monetary authority, and is never seen in neighbouring countries such as India and Pakistan.

Given the coverage of its operation, the central bank is the most powerful economic institution even in a developing country like Bangladesh. For example, the amount of banking-sector loans is almost 52 percent of total national output, whereas the fiscal budget covers only 18 percent of national income. Of course, that 18 percent is very crucial to mobilising outstanding loans of 62 billion dollars, but it must not be ignored that the central bank plays a gigantic role in growth by involving the largest segment of national workforce of the economy. As the monetary-policy statement of 2012-2013 asserts, the two main objectives of the central bank include controlling inflation and fostering economic growth. This dual mandate of Bangladesh Bank becomes hard to accomplish when the finance ministry targets high growth but low inflation. High growth is often inflationary and high inflation is always detrimental to growth. In the last fiscal year, Bangladesh had achieved economic growth of 6.4 percent, while inflation was slightly above 10 percent. For the fiscal 2012-2013, the government aims at achieving growth of 7.2 percent but targets inflation at 7.5 percent, making the task of the central bank tougher than before. Since moderate inflation is the prime goal of any monetary policy, Bangladesh Bank is left with no option but to adopt a restrained monetary policy that limits broad-money growth to 16 percent and reserves money growth to 14.5 percent for fiscal 2013.

The government's excessive influence on the central bank is a sign of authoritarian economic management that contradicts public policy on deregulation and the market economy. We have a bad tradition of seeing the central bank as an accommodating institution to fiscal desperation that usually originates from short-term political priorities. That is why money supply grows so fast in Bangladesh and hence inflation hovers over the double-digits. This tradition must be changed. The central bank must be empowered with greater monetary policy independence to bridle inflation and ensure macro-stability to eventually stimulate growth.

If money-velocity growth is assumed to be constant and economic growth turns out to be 7 percent, money growth of 16 percent will bring inflation down to around 9 percent, which is still above the targeted inflation of 7.5 percent. Hence, money supply must be more conservative than it is now, but that stance may reduce the growth of private credit, which again will lower economic growth. Thus, Bangladesh Bank is forced to operate in a difficult zone when inflation is already of double digits.

The scenario becomes even worse when the government spells out a long-term inflation rate of 5 percent in the budget speech of 2012-2013. We are not sure where this magic number of 5 percent comes from, but we are sure that the government wants moderately low inflation for the long run to make economic growth sustainable. If that is the case, Bangladesh Bank must continue its conservative stance on money growth until inflation drops down to 5 percent. Neither reserve-money growth of 14.5 percent nor broad-money growth of 16 percent looks conducive to long-term inflation of 5 percent. Money growth should fall below 15 percent in a gradual fashion, and that might temporarily lower output growth.

We have to accept this tradeoff to make Bangladesh Bank function as per long run goals of macro-stability and sustainable growth. Then monetary policy surely requires independence. Various studies show that a higher degree of monetary-policy independence is associated with a lower inflation across the globe. The government's expectations on Bangladesh Bank are too high to accomplish. It wants that the central bank will kill two birds with one stone every time. If low inflation is a priority, as it should be the case for the sake of sustainable growth, the government has to compromise on ambitious growth targets at least in the short run.

Inflation tormented the global economy over the 1970s. Paul Volcker, the Federal Reserve chair, realised that controlling inflation must be the first priority for a central banker. He tightened money supply to an extreme point even knowing that it will lower output growth. America experienced its first manmade recession in history in the early 1980s, but the scenario eventually took a positive turn. Not only did inflation come under control, but the US economy also entered the long boom for 17 years until the end of the 1990s.

Volcker was able to accomplish his goals in a sequential fashion because he could work independently. He shot one bird at a time without any concession to inflation. Time has come for our central bank to act first on inflation in the similar fashion. Are we ready to make our governor accountable directly to people and parliament, rather than compliant to the fiscal desperation? The central bank, the main anchor of the economy, must work independently to ensure macro-stability and respectable growth in an emerging economy.

The writer is an associate professor of economics at the State University of New York at Cortland. He can be reached at

News: The Daily Star/Bangladesh/06-Sep-12

Remittance grows 6pc year-on-year in Aug

Posted by BankInfo on Tue, Sep 04 2012 08:33 am

The month of August saw non-resident Bangladeshis send $1.167 billion in remittance, down by 2.84 percent from July's receipts of $1.201 billion, the central bank said yesterday.

The figure, however, is 6 percent higher than the $1.102 billion recorded for August 2011.

This is the ninth consecutive month that Bangladesh has received over one billion dollar in remittance.

The remittance in the first two months of 2012-13 rose by 11.9 percent over the same period a year ago.

Bangladesh's more than 7 million migrant workers sent home $12.84 billion in fiscal 2011-12, 10.32 percent higher than the previous fiscal year.

Along with the rebound in garment exports, the healthy flow of remittance has boosted the country's foreign exchange reserves. The reserves, which rose for the third month in a row in August, as of yesterday, stood at $11.44 billion.

August's remittance was the third highest recorded since January, as migrant workers sent more money to their relatives on the occasion of Eid-ul-Fitr.

News: The Daily Star/Bangladesh/04-Sep-12

Black money amnesty draws poor responses

Posted by BankInfo on Tue, Aug 28 2012 07:32 am

Scope for legalising black money last fiscal year brought the government only Tk 38 crore in taxes, the lowest in four years.

"It is a very negligible figure. The collection of such an amount is just an hour's business for the National Board of Revenue (NBR)," said Ahsan H Mansur, the executive director of Policy Research Institute.

Only Tk 382 crore was legalised in fiscal 2011-12, and that too after a mere 82 people decided to do so by parking money in stocks.

"[The provision to legalise black money] creates moral hazard. Honest and regular taxpayers will be discouraged to comply with the law," said Mansur, a former economist of the International Monetary Fund.

"The whole thing is unjustified on the economic ground. It also has no revenue justification," he said, stressing the need for stricter governance.

The revenue authority incorporated a provision in the law, under which a person will be able to legalise undisclosed money by paying 10 percent penalty in addition to paying normal tax.

The provision has been added in the Income Tax Ordinance 1984, widening areas for investment for undeclared money-holders, said a senior official of NBR, requesting not to be named.

In the past the NBR used to give the scope through statutory regulatory orders.

The areas where black money can be legalised via investment include the stockmarket, real estate, industry and BMRE (Balancing, Modernisation, Rehabilitation and Expansion).

The rationale behind the inclusion of the clause, the official said, is that a provision in law would encourage more people to come forward to declare their undisclosed wealth.

"Stability of law gives confidence to people. Anyone can disclose undeclared income anytime," said the official.

Towfiqul Islam Khan, a senior research associate at the Centre for Policy Dialogue, however, is sceptical of the success of the NBR provision.

"It fails to have a special impact if the opportunity is given every year.”

He feels the past low responses suggest the inclusion of a permanent provision in the law would hardly lead to better outcomes.

In recent memory, the NBR logged in Tk 803 crore as taxes in fiscal 2007-08 after 16,664 people legalised a staggering Tk 8,895 crore fearing anti-corruption crackdown by the then caretaker government.

The number of people declaring their undisclosed incomes since then has been on the wane, with the figures being 14,258 and 1,923 in the successive fiscal years of 2008-09 and 2009-10.

The tax receipts registered for fiscal years 2008-09 and 2009-10 were Tk 108 crore and Tk 121 crore respectively.

"Rather, the NBR should improve its law enforcement and increase administrative reach to net more taxpayers," said Khan.

News: Daily Star/Bangladesh/28-Aug-12

Tax on fixed deposits to discourage savings

Posted by BankInfo on Wed, Jul 18 2012 09:35 am

People will be discouraged to deposit their money with the banks as the government has imposed tax at source on profits and interests.

This will decrease the amount of deposits, which will ultimately lower investment in the country, affecting the country’s overall economy negatively, experts said.

Moreover, it is also not clear to the people whether the government will charge 15 percent tax on all fixed deposit accounts.

Economists opine, the government has imposed tax on deposits as it can be collected easily. What the government should do is to find out the persons who are able to pay tax. This kind of decision is not justified for all citizens, they said.

While placing the Finance Bill in the parliament for passage on June 27, the finance minister made a proposal to deduct 10 percent tax on profit and interests at source for depositors bearing TIN certificates and 15 percent for those who do not have the TIN.

The National Board of Revenue (NBR) has already taken initiative to deduct tax at source as per the provision. The NBR has issued circular to the banks about executing the provision from July 2012, which the banks have started informing their clients through letters.

The finance minister while placing the Finance Bill at the House said, “Those who have more than Tk 100,000 deposit but does not have any tax identifying number (TIN) will have to pay 15 percent tax at source. The clients having TIN will have to pay 10 percent tax.

Earlier in his budget proposal, the finance minister proposed to impose tax on all deposit accounts whatever the deposit amount was. Later, in face of criticism, Prime Minister Sheikh Hasina proposed to impose tax on clients who have at least Tk 100,000 deposit.

HSBC’s retail banking and wealth management chief Md Shafkat Hossain told “We are informing our clients about the government decision through letters, e-mails and SMSs. Using all kinds of communication system we have requested our clients to submit their TINs.”

Former Bangladesh Bank Governor Saleh Uddin Ahmed said, “According to my consideration, this kind of tax collection is not right and injustice to general clients.General people will be discouraged to deposit money in the banks. On the other hand, it is contradictory to another section of tax collection that states free income limit as two lakhs.”

The former BB governor observed that the government should reconsider the decision.

Non-government research organisation Centre for Policy Dialogue (CPD) Executive Director Dr Mostafizur Rahman said, “The decision will discourage small investors to keep money in the banks. Those who deposit pension money in the banks will be affected.”

“Due to this decision, those who are not under tax limit will also have to pay tax, creating discrimination among the people.”

The Daily Sun/Bangladesh/ 18th July 2012

Export-import fees to double

Posted by BankInfo on Sun, Jul 15 2012 08:29 am

The commerce ministry, in a bid to increase the government's non-tax earnings, has proposed doubling of registration and renewal fees for exporters and importers.

In the new policy, the annual import floor has been raised to Tk 5 lakh from Tk 1 lakh.

The registration and renewal fees corresponding to the import floor have been set at Tk 5,000 and Tk 3,000 respectively, from the existing Tk 3,000 and Tk 1,700.

Currently, the most that can be paid as registration and renewal fees are Tk 23,000 and Tk 17,000 respectively, corresponding to annual imports of above Tk 1 crore.

In the proposed policy, they stand at Tk 60,000 and Tk 30,000 respectively, for annual imports of above Tk 5 crore.

If an importer fails to deposit the renewal fee on time, a fine of 100 to 233 percent in excess of the existing fees, have to be paid.

The registration fee for the indenters has been increased by 45 percent to Tk 40,000, while the renewal fee has been raised by 48 percent to Tk 20,000.

For exports, the proposition has been a 100 percent rise in registration and renewal fees, to Tk 7,000 and Tk 5,000 respectively.

On the list of items banned for imports, old computers, old computer accessories, old electronic appliances, all types of industrial sludge and fertiliser and items produced with sludge, have been added.

While import of air gun ammunition will continue to be barred, with the permission from the home ministry, they can be imported for the purpose of sport and shooting clubs.

There has been a proposition to raise the highest value of essential commodities that could be imported through different customs ports.

Now, essentials worth $15,000 can be brought in through the Teknaf customs; raising that to $50,000 has been recommended.

For other land ports, an increase of $3,000 to $10,000 has been suggested.

A provision has been included for export of turbine imported for generation of electricity once it has been used.

Provision has been made for furnishing certificates of the imports of being melamine-free in case of import of food for human consumption.

The Daily Star/Bangladesh/ 15th July 2012

2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10