The Metropolitan Chamber of Commerce and Industry (MCCI) has criticised the central bank,s recently announced monetary policy, saying it will push up inflation and lending rate. The chamber urged the government to ensure that administered prices of fuels, utilities and fertilisers are not increased, as higher prices will aggravate the inflationary situation. “It is for such price increases, the inflation rate was higher in the rural areas than in the urban areas,” the MCCI said.

In a statement on July 18, the MCCI urged the central bank to consult the leaders of private sector business and industry, and collectively evolve a strategy for controlling inflation and achieving and maintaining the highest attainable output growth in the immediate and medium terms. “We record our resentment as the Bangladesh Bank (BB) did not consult the stakeholders in private sector in formulating such an important policy, although it is the private sector industry and business, which will mostly bear the consequential credit contraction. We maintain that the policy objective and the premise on which Bangladesh Bank’s policy move is based are not without their flaws,” the chamber said.

The chamber urged the central bank to drop from the action plan under the MPS (Monetary Policy Statement) increase of interest rates and hike of SLR (statuary liquidity requirement) and CRR (cash reserve ratio) of banks in its bid to ease the inflationary pressures. “It should be mentioned that it is being recognised that increased interest rates in the least developed countries cause higher inflation instead of helping reduction of the same,” it said.

The chamber also urged the BB to ensure that government borrowings are reduced by 11 percentage point to 21percent as mentioned in the MPS. “Reduction in government’s borrowings for non-productive expenditures can have significant lasting beneficial impact on the overall inflationary pressures.” The MCCI said the current rise in inflation rate is induced by cost-push factors manifested through higher global prices of major imports (fuel, food and fertiliser, for example) and frequent increases in the government-administered prices of the utilities. “A contractionary monetary policy cannot affect any of these factors. Instead, 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, while the major source of inflation will remain beyond reach,” it said.

The BB argument that its tight monetary policy stance is intended to prevent the excess demand in the economy has little empirical support. Its policy document seems to regard the increased volume of investment in the real sectors and the associated production growth rates achieved in these sectors as symptoms of excess demand that has generated inflationary pressure, the MCCI statement said.

“The truth however is that the increase in the growth rates witnessed in certain segments of the real sectors around the end of the first quarter of FY07 was merely the beginning of a recovery of these sectors from a long period of downturn.” It said industrialisation has picked up due to increased investments, mainly in the textile sector to face the post-MFA challenges, and in some small industries that chiefly serve the domestic market.

Curtailment of credit will hamper growth of industry, especially small and medium industries, and dampen efforts at boosting production in import-substituting and export-oriented industrial units, the chamber added. “While the MPS focuses on curbing inflation, it does not set any inflation target that will be acceptable to the central bank, except that the rate of inflation with the tightened monetary policy stance now adopted will be below 4 percent.”

The MCCI said much of the inflationary pressure in the economy is believed to have been due to excessive public spending out of large borrowings from the banking system. Such expenditures and with that the government’s borrowing are likely to increase further in the coming year which is due to see a general election. The chamber recommended that an appropriate inflation control measure should include mechanisms to rein in the government’s profligate spending and thus cut budgetary deficits.

It should be understood that any increase in government borrowing from the banking system means less credits available for the private sector. Lesser credit to the private sector will have a negative effect on industrialisation and growth, The MCCI noted.