SMEs affected mostly by contractionary monetary policy

Enayet Karim: We have two macro policies-monetary policy and fiscal policy. If these two policies are not coordinated then the overall development of the country’s economy will be difficult. The scope of fiscal policy is very large. Although the income and expenditure management of the government is through revenue, this policy directly affects everyone including the private sector. On the other hand, monetary policy exerts an indirect but not a direct influence. We don’t see its results immediately. Since the monetary policy transmission process is somewhat slow. It is transmitted through banks or markets. But its scope is also much larger. It’s time for our next budget. Considering the budget context, the association of monetary policy and fiscal policy should be kept in mind.
I have some reservations about monetary policy. I think there are some political problems in the monetary policy in Bangladesh. Our problems now are inflation, stagnant employment and stagnant growth. I think there are some policy issues behind it. Of course, corruption and institutional problems also play a role.
To explain the current problem, we need to search for its cause. We often follow strict policies. In most cases it is on the prescription of the World Bank and the International Monetary Fund (IMF). As recently the IMF has set some rules for us. But the IMF has traditionally had three policies-first, flexible exchange rates, second, flexible and high interest rates (there is nothing called chip money), and third, tight monetary policy. They follow three principles as revealed in revelation. These three are what Adam Smith described as the invisible hand that will do all the work. But actually, there are many issues beyond that, where we have to go beyond the containment policy.
A flexible exchange rate is needed. But there are dangers in having an absolutely flexible exchange rate. Recently Bangladesh Bank is talking about ‘crawling peg’ policy. But even tight monetary policy is not good for the economy. We were in the nine-to-six trap for a long time. Again, contractionary monetary policy is being adopted. But it will not happen if we do not go beyond these. Let me give an example. Argentina has been accepting IMF packages for about 40-50 years. But they still couldn’t get out. Pakistan is another example in this regard. Recently, I have seen some countries become Indebted Poor Countries (HIPC). Fortunately, the name of Bangladesh is not among those countries. I hope Bangladesh will not be such a country. Because the condition of this country is not so deplorable. But we have to get out of this foreign debt assistance.
First, we need expansionary monetary policy. Although government expenditure is driven by revenue, it has many limitations. The first thing that comes up is what will be the area of revenue collection. Revenue will be collected through direct tax or indirect tax? There is a lot of discussion about this.
Our tax capacity is low. We tend to collect indirect taxes more. Collection of direct taxes is very difficult. Indirect tax is easy to collect, very easy to impose. such as VAT levy. If a poor person pays a tax of 5 rupees on bread, a rich person who owns thousands of rupees also pays the same tax. Equal for all classes of people is implied but the question of equity (equality) comes up. Meanwhile, we are not able to show much success in direct tax collection. We have resource mobilization (resource management) problems. Monetary policy will not work if it is not compatible with resource mobilization. Now if the import is controlled then the import duty will also be reduced. It will also reduce our import revenue. This will have an impact on industrial production. In other words, suddenly imposing restrictions on imports through monetary policy will not work. By banning the import of snow-powder, bread and chanachur, you can’t increase the balance of payments (BOP) or foreign exchange reserves.
I think it is always the small and medium entrepreneurs who suffer the most in contractionary monetary policy. Bankers do not want to give them loans, they make various excuses for not giving loans. If there is a contractionary monetary policy on top of that, don’t give loans to small and medium entrepreneurs at all. A gentleman named Roy Chowdhury has researched about 40 countries and shown that the most affected by contractionary monetary policy are small and medium entrepreneurs. However, it does not affect big businessmen. Big businessmen get loans because they can provide so-called collateral. But keeping in mind the current context of Bangladesh, we need to focus on small and medium entrepreneurs. However, Bangladesh Bank also has a responsibility – to reduce the supply of currency when the demand in the market increases. That is why sometimes contractionary monetary policy is adopted. However, Bangladesh Bank should give instructions so that loans reach the hands of small and medium entrepreneurs. I heard Bangladesh Bank is doing that.
If we talk about foreign exchange reserves, financial account is negative but current account is positive. A negative financial account means that foreign exchange is not coming into the country at a higher rate. If the investment sector is not attractive then why will foreign currency come? It should not be said verbally that come to the country, do business. To attract investment. We have many complications in attracting investment. There are complications in land registration. If there are these complications, how will the outsiders come? People of the country do not invest within the country. They are anxious to send money out of the country.
Our Foreign Direct Investment (FDI) is not coming. Foreign Portfolio Investment (FPI) is even lower. How will FPI come to the pathetic state of our stock market! Meanwhile, our remittances are also low and we need to take appropriate steps to increase them. Appropriate steps should be taken to attract remittances and reduce hundi. But there are many laws to reduce hundi. Hawala or hundi is difficult to eliminate completely but it is possible to reduce it. If we do not address these issues in our policy, the situation will go from bad to worse.
One aspect of monetary policy is to promote trade and create employment. If we don’t do that, on one hand the revenue budget will include income tax, VAT etc. but revenue collection will not be possible. But we see that again and again. The budget is usually flexible. Although we have some work in it, our needs are many. That’s why it takes a lot of resources. If we make monetary policy contractionary, which it did this time, it will reduce the money supply. The main purpose of reducing the money supply is to reduce inflation. But inflation cannot be reduced. We are doing contractionary monetary policy, but the problem is that our trade is not expanding.
Talking about our fiscal policy, we have to increase the tax-DGP rate. Tax evasion should be prevented. Again, according to the IMF, the tax on irrigation water, diesel etc. cannot be increased. Abolish tax concessions, reduce incentives-such advice from the IMF cannot be taken lightly. Most of the IMF’s policy is a one-size-fits-all thing. The IMF talks a lot, not all of it will be heard. When I was governor, foreign exchange regulation was a little tougher. Once a representative of the IMF questioned the intervention in foreign exchange rates. But we tactfully tried to avoid many of their suggestions. In the banking sector, the discipline of suppressing evil must also be nurtured.
Finally, monetary policy is not a simple matter, it is quite complex. Frederick Mishkin was a member of the Board of Governors of the United States Federal Reserve (2006-2008). The former governor of the US central bank used to say that monetary policy is not a dentist’s job. If you go to a dentist and say you have a toothache, he will quickly remove that tooth. If there is a problem with another tooth, it will not see if there is a problem elsewhere in the body. But monetary policy management is not like that. Control the money supply, control the exchange rate but you have to look deeper into a problem. Why are there complications in the exchange rate in Bangladesh, financial accounts are decreasing, why money is not coming through legitimate channels – it is coming in hundi. Such crises are not unknown to anyone. Now the question is whether the right steps are being taken. All economies have risks. But if there is uncertainty then it will not happen. There is uncertainty in our banking sector, there is uncertainty in the overall economy.
End with a story, I once went to Vietnam with a friend. At the hotel where we were staying, we met a gentleman from South Korea. My friend asked him – have you ever been to Bangladesh? Bangladesh is a good country for investment, there are many opportunities and possibilities. Then the gentleman said, I know that Bangladesh has many possibilities and there are many opportunities there. Because I was there for about a year. But I could not make any investment. Because every chair, every table, every door wants money. And I managed to make my investment in Vietnam in just two months.
Due to lack of transparency and accountability and lack of consideration of people’s wishes, we are suffering from a bit of depression in politics and economy.