January 25, 2022
InM, in collaboration with Water.org, implemented an in-country exposure visit during 12-13 December 2021 in Rangpur and Thakurgaon districts which was participated by InM’s WCAD partner organisations. As a part of learning and gaining field-level operational experience on the WaterCredit Adoption (WCAD) programme, the exposure visit was organised by InM. It may be mentioned that the WCAD programme is currently being implemented by InM. Two successful partners of Water.org namely TMSS and RDRS were selected for the visit. These two partners are successfully implementing the WaterCredit programme for several years through which they have gained useful experience to share with other partners.
Under the WCAD programme, the participant partner organisations included IDF, SETU, BASA, BEES, CODEC, PMUK, SFDW, CDIP, DISA, and SDC; two senior staff from each partner participated in the exposure visit. InM facilitated the visit for creating opportunities for mutual learning by WCAD partner MFIs through which the partners got an opportunity to share their ideas and experiences regarding challenges and practical measures that could be adopted to facilitate effective implementation of the WCAD programme.
The objective of the visit was to learn WASH activities of Water.org partners, types of water and sanitation products being adopted in the plain land, awareness raising and borrower selection process, area selection criteria, loan disbursement process and related activities, WaterCredit loan celling, technical assistance, staff and beneficiaries training and capacity building process, water and sanitation product installation and maintenance process etc. In addition, RDRS and TMSS WaterCredit programmes were also discussed and on-sight visits were made to the programme areas. For InM, the aim was to create a strong bridge among the partner organisations so that all MFI partners could gain practical knowledge, ideas and experience from successful partners of Water.org.
During the exposure visit, the participants attended group meetings, courtyard sessions, and visited households to observe WASH interventions and share experiences of the borrowers. During the discussion sessions in the Kobirajhat branch of RDRS in Thakurgaon and Bhabanipur branch at Badorgonj of TMSS in Rangpur, overall implementation process and achievement of the programme, challenges in implementing WaterCredit programme, strategies to overcome the challenges, threats and opportunities, programme monitoring and evaluation process, programme outcomes/impacts, reporting system etc. were discussed.
Furthermore, the participants also gained experience from classroom trainings/visits, discussion with branch managers on WSS loan disbursement process, with field officers on programme monitoring, with higher officials about management strategies and feedback, opportunity of WaterCredit programme etc. A total of 20 participants from InM WCAD partner MFIs participated in this exposure visit which enabled them to gather useful field level experience on overall WaterCredit programme implementation. With successful ending of the visit, the participants seem to have instilled useful motivation and practical knowledge to adopt new leanings to implement and achieve the WCAD programme goals for respective organisations.
December 15, 2021
MUSTAFA K. MUJERI | Published: December 15, 2021 20:06:50
According to the latest (October 2021) forecast by the IMF, Bangladesh’s GDP at current prices is likely to rise to $565 billion in 2026 from $355 billion in 2021 (59 per cent increase) while, over the same period, India’s GDP is expected to increase from $2,946 billion to $4,393 billion (49 per cent rise). Accordingly, the GDP per capita of the two countries are forecasted to rise over the next five years (Table 1). The forecasts show that Bangladesh’s GDP per capita has surpassed India’s GDP per capita in 2020 and this is expected to remain so over the next five years along with increasing gaps between the two. This indicates that the income per capita (in current dollar terms) of an average Bangladeshi citizen at present has exceeded the income per capita of an average Indian citizen and this will remain so in the near future. This further shows that, in terms of growth, Bangladesh has been catching up rapidly in recent years among the developing nations despite the Covid-19 pandemic.
One must, however, recognise that the GDP per capita of Bangladesh based on PPP terms is $5,733 in 2021 which is nearly 22 per cent lower than India’s $7,319. Further, India’s GDP per capita in PPP dollars is projected to rise to $10,866 and Bangladesh’s to $ 8,859 by 2026 so that Bangladesh’s GDP per capita in PPP terms would remain more than 18 per cent lower than India’s in 2026.
In practice and as a matter of convenience, a country’s economic strength is typically measured on the basis of GDP growth and the absolute size of GDP. If one looks at the history, it is seen that India’s economy has performed better than Bangladesh’s in terms of both the above indicators during most of the period since 1971. However, when one computes the GDP per capita, this also involves the total size of the population since GDP per capita is arrived at by dividing total GDP by the total population. This shows that there could be three underlying factors that have contributed towards changing the scenario in which Bangladesh’s GDP per capita has surpassed that of India in 2020. The first and the most important factor is that the Bangladesh economy has been growing at sustained and rising rates (with very short and minor downturns) since the early 2000s which is continuing at present with some short term recession during the Covid-19 pandemic period. On the other hand, in the case of India, the average economic growth since the early 2000s until 2016 has been higher than the growth rate achieved by Bangladesh. But India’s GDP growth rate has decelerated rather sharply since 2017 while Bangladesh’s GDP has grown even faster.
Secondly, India’s population grew from a total of 1.057 billion in 2000 to 1.38 billion in 2020 indicating an increase of nearly 31 per cent over the 20 year period. Over the same period, Bangladesh’s population increased by only 16 per cent from 142.3 million in 2000 to 164.7 million in 2020. As a result of the above two factors, Bangladesh could acquire a rapid catching up speed to close the GDP per capita gap with India. The GDP per capita of Bangladesh was around half of India’s GDP per capita in 2007, which narrowed down to about 70 per cent in 2014; and the gap closed rapidly by 2020.
A third factor may also be noticed after the outbreak of the Covid-19 pandemic. The relative impact of Covid-19 pandemic differed significantly between the two economies. While India’s GDP growth suffered significant setback, the Bangladesh economy suffered significantly less in terms of growth decline. This has also contributed towards Bangladesh’s success in surpassing India’s GDP per capita in 2020. As the projections in Table 1 shows, Bangladesh is likely to remain slightly ahead of India in this GDP per capita race till 2026. And if Bangladesh can remain on track in its journey towards an upper middle income country by 2031 and a high income country by 2041, Bangladesh will be able to take a convincing lead over India in GDP per capita as well as a lead in South Asia as well!
In the above context, one key question is: How has Bangladesh been able to achieve sustained high GDP growth as well as social development as reflected in rapidly declining population growth?
After independence in 1971, despite the dire predictions and pessimistic prophecies of the initial years, Bangladesh was able to achieve an inflection point within a short time; and subsequently the country has emerged as one of Asia’s most amazing and unexpected success stories of recent times. Bangladesh’s transformation from a ‘basket case’ in the 1970s into one of the most startling development successes of the 21st century within a span of fifty years provides a rare example of a neo-liberal development model in which social progress has far outstripped economic growth. In the process, the role of the state has been critical in the pursuit of sound macroeconomic policies, disaster management, investments in public health and education, partnership with non-government organisations (NGOs) and civil society organisations (CSOs), reducing population growth rate, and encouraging overseas labour migration.
In the post-1980s decades, Bangladesh’s economic and social development can be termed as nothing short of a ‘miracle’ since the country’s remarkable progress has been achieved under several unfavourable conditions e.g., weak governance and political instabilities, economic and social inequalities, risks emanating from rapid and unplanned urbanisation, and frequent exposure to severe disaster risks. Since the 1990s, the country’s successful development transformation has been led by three country-specific characteristics: (i) penetration of microfinance institutions (NGO-MFIs) and the government agencies (including banks and financial institutions) into the rural communities that led to relaxed credit and other binding constraints of the rural poor households and spearheaded the women empowerment revolution; (ii) development of the RMGs industry resulting in the rapid transformation of the economy from an agriculture-based to an industry-oriented one; and (iii) significant investments in infrastructure–particularly in roads and bridges–which helped to connect the formerly fragmented spatial economy and support the emergence of functioning value chains. As a result, tremendous success has been achieved in several key social indicators which have created supportive micro-foundations of rapid growth and development. The success of Bangladesh’s development model can be seen in sharp contrast with India in terms of several key indicators (Table 2).
Bangladesh’s development story over the past fifty years suggests that the successes achieved by Bangladesh are among the fastest improvements in basic living conditions in modern history; and many development observers are surprised because Bangladesh’s achievements do not fit the traditional pathways of human and social development. In this context, Professor Amartya Sen distinguishes between ‘income-mediated’ and ‘support-led’ pathways to human development. The first refers to improvements in social indicators brought about by rapid and broad-based economic growth (e.g. as happened in South Korea), while the second is based on high public spending on social development programmes (for example, the case of Sri Lanka). However, Bangladesh does not clearly fit into either of the pathways.
The key to success of Bangladesh lies in the fact that, alongside the progress in social sectors including education, health, and gender equity, Bangladesh successfully achieved a growth takeoff which accelerated rapidly in the 2000s that reduced poverty and increased per capita income at rapid rates. Bangladesh also progressively ensured the essential preconditions that allowed private sector dynamism to fuel economic growth during the last two decades.
Structural reforms in the 1980s and 1990s led to broad macroeconomic stability and low fiscal deficits. This allowed the banking system to cater to private investment needs and caused a significant rise in the investment-GDP ratio (currently at around 35 per cent of GDP). Successive governments also had considerable success in keeping inflation at a moderate level. Although FDI inflow has been relatively modest, strong performance of remittance inflows succeeded in bolstering the foreign exchange reserves and smoothing out fluctuations in GDP due to varying domestic economic conditions.
One notable feature of the past fifty years is that Bangladesh’s structural transformation process since independence has been very distinct on several counts. As traditionally happens, labour at the aggregate level did not move from agriculture into manufacturing and services sectors in the ?rst phase followed by labour movement from agriculture and manufacturing into services. In Bangladesh, the share of the services sector in output has turned high at relatively low income per capita. With its relatively limited size, manufacturing has emerged as the growth-driver of the Bangladesh economy while services activities, nontradable services in particular, has become the major source of employment of the bourgeoning labour force.
At the sectoral level, Bangladesh’s agricultural modernisation trajectory since its independence has been relatively fast, enabling Bangladesh to shift from an agriculture-based to a transition country in only 15 years (from the mid-1990s to 2010). This shift resembles the one that China experienced ten years earlier, from the mid-1980s to 2000. In fact, Bangladesh’s agricultural modernisation model characterises the sequencing of chemicalisation and mechanisation. The policymakers in Bangladesh initiated the process of agricultural transformation to increase food production and reduce poverty since the 1970s. Mechanisation has come with higher capital intensity later on, as chemicalisation has enabled the small farmers to adopt practices that increased both the application and efficiency in the use of chemical fertilisers and other modern inputs required to produce higher levels of output per unit of land.
The pattern of industrialisation, on the other hand, has been closely linked with urbanisation resulting from a host of factors covering, for example, external market demand (e.g. export-oriented RMGs and other manufacturing products), internal supply of production inputs (cheaper skilled labour and infrastructure services), policy bias towards primate city favouritism, and migration of labour from rural areas and peripheries into urban and peri-urban areas for better opportunities. The services sector, on the other hand, has been highly heterogeneous with both tradable and nontradable segments. The comparison of the sectoral total factor productivities shows that agriculture has been the least productive, followed by services and manufacturing.
At present, in terms of productivity and employment, manufacturing is located between tradable and nontradable services, as it is less productive but employs more workers than tradable services, but is more productive but employs fewer workers than non-tradable services. Thus, future structural transformation towards manufacturing is the major route to industrialisation in Bangladesh. As a matter of fact, the key would be to use industrial policy to push the limits of the country’s static comparative advantage and diversify into new and more sophisticated activities based on dynamic comparative advantage. Historical evidence across the countries shows that the employment share of manufacturing increases until it reaches a threshold of about 30% of total employment, and then it flattens out. There also exists a strong positive relationship between the share of employment in services and income per capita. India, on the other hand, has struggled to boost and bring dynamism into its industrial sector and still has far too many people employed in agriculture.
Any keen observer of Bangladesh’s development is led to the conclusion that a tremendous turnaround has taken place in Bangladesh’s overall growth performance over the last fifteen to twenty years. But, for the present, the key challenge is to identify and employ new and additional growth drivers to transit to a still higher growth trajectory and make the development path less volatile in the face of multiple internal and global destabilising forces. On the social front, the biggest challenge is in education. Most of the education parameters of Bangladesh trail behind India, and this largely explains the lower ranking of Bangladesh than India in UNDP’s Human Development Index (HDI).
Another challenge is to build effective, accountable and inclusive institutions at all levels as part of the means to pursue sustainable development. At the present level of development, the role of good governance and effective institutions is pivotal for Bangladesh for ensuring a more adequate delivery of basic public services critical to making progress towards achievement of the development goals. Further, effective, responsive and responsible political leadership, with long-term strategic vision for development, is of paramount importance in achieving the development goals. Political commitment and leadership is critical to galvanising political will, transforming vision into national strategies, mobilising scarce resources and social capital, forming broad partnerships, coordinating actions, and motivating and ensuring accountability for results.
For moving forward, corruption poses one of the most important governance challenges in Bangladesh. Transparency International’s 2020 Corruption Perceptions Index shows that Bangladesh ranks a low of 146 out of 180 countries while India has a rank of 86. Combating corruption has emerged as an urgent priority as Bangladesh strives to mobilise more public and private resources and ensure their efficient use in pursuing the development goals. There exists compelling evidence that corruption undermines development. On the other hand, underdevelopment also breeds corruption. By increasing the cost of doing business, corruption discourages investment and reduces economic growth. It also increases inequality and political instability. These developments have the ability to slow down Bangladesh’s progressive social reforms that have led to women empowerment and reap economic miracle.
No doubt, Bangladesh provides one of the most striking examples in the study of present day development along with rapid growth and catching up. In this context, one important question is: Why has Bangladesh succeeded in making this quiet transformation? As with all large-scale historical changes, there are many factors and no definite answers are likely to emerge. Still, one might argue that Bangladesh’s economic transformation over the last fifty years has largely been driven by social changes, probably initiated by women empowerment. There exists a large number of micro-level success stories of innovative, low-cost solutions, such as social development-intensive microfinance programmes targeted towards women empowerment and social mobilisation both by the government and the NGOs; women labour-intensive, export-based garments industry; and the boost to earnings and human capital provided by labour migration and inward remittances that has made significant strides towards educating girls and giving women a greater voice, both within the households and in the public sphere.
In sharp contrast with India’s development pathway, the above transformations have created the essential building blocks for developing critical linkages between micro and macro levels which are the unique features of Bangladesh’s development model that have ignited the rapid transformation of the later years. Further, the structural and policy reforms, both economy-wide and sector-specific, carried out since the mid-1980s, had prepared the macro economy to effectively respond to the micro-signals for change and adopt appropriate transformations. In reality, these micro-macro transmissions and their role in overall development are seldom acknowledged in the traditional development literature. But Bangladesh does provide a glaring example of success of the process in reality.
Dr. Mustafa K. Mujeri is Executive Director, Institute for Inclusive Finance and Development (InM).
December 6, 2021
MUSTAFA K. MUJERI | Published: December 06, 2021 20:07:43
Unexpected challenges to the prospects of growth and the economy are quite common in Bangladesh; and the country is widely known as a land of natural and manmade disasters. At present, the coronavirus disease (Covid-19)–declared as a global pandemic in January 2020 by the WHO–has strained the humanitarian and socioeconomic system of the entire country. Furthermore, the havoc of the pandemic is still ongoing along with recurrent variation in intensity which has severely affected all aspects of life and economy across the country. The damages are unprecedented in the country’s history threatening all dimensions of development outcomes. Since the virus has grown exponentially, the deadly and highly contagious disease has turned from a moderate to a strong category in Bangladesh within a period of three months. Further, as one of the most densely populated country in the world, Bangladesh’s healthcare facilities have proved to be too limited to serve more than 165 million people of the country.
The sudden onset of the Covid-19 pandemic has brought about deep changes in the Bangladesh economy. During the initial periods, the rural economy displayed an extraordinary resilience to the effects of the pandemic, in sharp contrast to the experience of the country’s urban economy. In reality, the performance of the rural and urban economy after the onset of the pandemic has progressed along two different lines-the rural economy flourishing at close to the normal vigour while the urban economy struggled to keep up.
Since most of the rural economic activities (including farming) remained relatively unaffected from the Covid-19 restrictions, farming and allied activities continued without much hindrances; thus allowing the rural economy to move forward. According to the BBS, GDP growth edged down to a 30-year-low of 3.51% in 2019-20 due to the Covid-19 fallout, while GDP growth has been estimated at 5.43 per cent in 2020-21. The growth in industrial production in 2019-20 dropped to 3.25 per cent and rose to 6.12 per cent in 2020-21 although the rate had been more than 12 per cent for the last couple of years. The manufacturing sector logged more than 14 per cent growth in the fiscal 2018-19 that slipped to 1.8 per cent in 2019-20. The growth turned around to 5.77 per cent in the last fiscal year. For the service sector, growth was 4.16 per cent in 2019-20 which slightly increased to 5.61 per cent in 2020-21. On the other hand, the growth rate in agriculture edged up in 2019-20 to 4.59 per cent which fell in 2020-21 to 3.45 per cent. In fact, the agriculture sector was able to retain a relatively healthy performance in the post-pandemic period mostly on the back of increased rural consumption, relatively stable weather conditions, little disruption in the supply chains, as well as increased government spending on rural support programmes and varied measures to strengthen agricultural and allied sectors in the rural areas.
Traditionally, the rural economy is the driver of the country’s economic growth, given that around two-thirds of the population and 77 per cent of the workforce reside in the rural areas and the rural economy generates nearly half of the total income. Further, agriculture and allied sectors absorbed the labourers who lost their jobs and migrated to the rural areas due to the Covid-19 pandemic. However, things have now started to take a turn in recent months with the continuation of the pandemic. The sector’s labour absorbing capacity seems to have been overstretched giving way to rising un- and underemployment in the rural areas as well as causing significant changes in the expenditure pattern of the rural households due to increased out-of-pocket expenses on precautionary measures and healthcare services. This has also been vastly compounded by the disruptions in remittances sent by migrant family members.
One important aspect of the continuing Covid-19 crisis is that even the rural informal economy (comprising of both small businesses and individual workers) has been encountering major disruptions and finds it extremely challenging to sustain survival in the face of the current pandemic. A range of workers, including salaried cottage, micro, small and medium enterprise (CMSME) workers, small/daily wage earners, home-based (including gig) workers, and migrant labourers are undergoing serious hardships.
In the rural areas, direct cash/food transfers under the government’s safety net programmes typically and predominantly target the extreme-poor populations. Due to exclusion errors, informal workers are mostly left out. Further, an adverse income shock is distinct from their baseline wealth/asset scores often employed to determine enrolment into existing social protection programmes. In the absence of any coping mechanism to counter economic shocks, the migrant workers residing in big cities (like Dhaka and Chottogram) were left with no choice after the implementation of the lockdown but to rush back to their villages. In the face of limited access to savings and contingency funds, these households had mostly resorted to negative coping strategies, such as selling assets, borrowing from informal moneylenders, or engaging in child labour.
A major constraint in rolling out targeted assistance programmes for these rural informal workers has been the lack of information. While technology can be used to fill critical information gaps, one needs to be realistic in expectations regarding reliance on spatial data and mobile phones to gather geo-tagged data. Using digital technology to make mobile payments may not be as effective in places where access to such technologies is limited. The government had already adopted stimulus packages to provide support to the most economically vulnerable, including emergency funding/relief for businesses and individuals. But these packages were relatively modest and reflected the country’s limited financial resources. However, they did include some form of relief to the needy, mostly in the form of rations and/or cash transfers. But although these economic support packages were probably well-designed, but these were not large enough to address the urgent challenges of all the informal workers.
However, recognising the contribution of the rural informal workers to the national economy, the government will have to work with what already exists along with working out new and better options. The key will be to devise mechanisms to extend the coverage of existing social protection programmes to all informal workers mainly to enable them to survive the immediate impact of the pandemic. Where existing registries or databases exist, quick assessments can be made on their relevance for the scale-up of social protection interventions. The government also needs to introduce reforms to stabilise the long-term impacts of the economic shocks on informal workers and find innovative and sustainable ways to identify and reach those who need assistance. Restoring disruptions in the food supply chain and strengthening market linkages for local producers can benefit these informal workers and ensure the provision of essential services and products.
While the steps taken to push rural recovery are essential, in order to reduce income disparity and regional inequity in the long run, localisation of industries and employment are critical. Apart from providing enhanced access to credit and support services to agriculture and CMSMEs, there is also a need to work on institutional factors and a robust governance framework for effective implementation of these programmes. A renewed focus on the use of technology in agriculture, promoting fintech, creating opportunities for self-employment and entrepreneurship, as well as building resilient value chains in both rural and urban markets will go a long way in making the economy disaster-resilient for the future.
In order to be comprehensive, the government’s response strategy with regard to Covid-19 should be guided by three major objectives: minimise loss of human casualties; reduce the loss of livelihoods especially of the low income populations; and contain adverse growth and employment impact due to Covid-19 related measures. However, since there are complex trade-offs between these objectives, the key for the government would be to ensure a proper balancing among them to minimise the overall adverse impact of the pandemic.
While the official estimates of Covid-19 casualty cases are relatively low, the economic costs are already deep in Bangladesh. The country has rising levels of domestic and external debt and can attract a generally low level FDI. The economy is highly dependent on external sources of income, such as RMGs exports and remittance incomes. It has also experienced severe impacts on tourism, although not very important, but it is a rapidly rising source of foreign exchange earnings and job creation. For the global community, Bangladesh presents an excellent opportunity to extend the benefits of development and invest in supply chains and increased connectivity for goods and services with its rapid development. Further, ensuring rapid progress of the country is essential to consolidate its nascent democracy which is still susceptible to authoritarianism. Moreover, as the Covid-19 pandemic still continues to wreak havoc on public health and the socioeconomic developments in the country, the global community has an added responsibility to maintain its commitment to demonstrate the superiority of the emerging economic cooperation model in this new era of globalisation and technological advancement.
There is no doubt that the pandemic has pushed the rural economy further towards a massive technology upgradation phase with e-commerce channels developing, low ticket electronic items becoming essential commodities, and mobile phones becoming household necessities for education and other purposes. However, the long term compulsion for Bangladesh would be to adopt an integrated disaster and development paradigm, particularly with respect to its ongoing development process. The current paradigm needs to evolve and integrate practical ways to deal with such future crisis for the sake of survivability and sustainability. The experience of Covid-19 has no doubt contributed to some progress in the policy environment; but the reality is that such progress in policy making can only be effective only if the capacity to respond to the complex intersections of economic, social, environmental and other impacts especially on the most vulnerable population increases commensurately.
Dr. Mustafa K. Mujeri is Executive Director, Institute for Inclusive Finance and Development (InM).
November 25, 2021
Mustafa K. Mujeri | Published: November 25, 2021 21:45:16 | Updated: December 02, 2021 20:34:10
In fact, the broader mandate of the central banks across the world has expanded the single objective of price stability to triple objectives of price stability, financial stability and sovereign debt sustainability giving rise to the new ‘trilemma’ along with many issues underlying the trilemma such as nature of complementarities and conflicts among the objectives, their impact on growth, degree of responsibility of the central banks in terms of achieving each of these objectives, degrees of freedom and capacity of the central banks to handle these additional responsibilities, and above all, the impact of the expanded mandate on effectiveness and autonomy of the central banks.
For Bangladesh Bank, the objectives of monetary policy have evolved around the concerns of maintaining price stability and ensuring adequate flow of credit to the productive sectors of the economy. Monetary stability cannot be ensured without stabilising the purchasing power of the currency (Taka). The credit system helps promote economic growth which in turn strengthens monetary stability. Hence, maintaining inflation at a low level and stabilisation of output around its potential level remain the typical objectives of monetary policy in most countries. The Bangladesh Bank also endeavours to maintain a cautious balance between economic growth and price stability.
However, recent global financial crisis shows that low levels of inflation and high growth do not necessarily guarantee financial stability. This has favoured the argument for making financial stability an explicit objective of monetary policy in addition to price stability and economic growth. As such, monetary policy in Bangladesh has broadened its focus to achieve the triple objectives of price stability, economic growth and financial stability since price and financial stability are important in sustaining high economic growth, which is the ultimate objective of public policy. Accordingly, the monetary policy framework has evolved in response to and in consequence of financial developments and shifts in the underlying transmission mechanism of monetary flows.
For BB, the challenge is to achieve its objectives indirectly using instruments under its control. One must also remember that the structure of monetary policy undergoes changes over time along with developments in the financial markets and institutions and the degree of global integration. In fact, the monetary policy framework in Bangladesh has undergone significant changes especially in recent years. Until the mid-1990s, the broad money (M2) was used as an intermediate target for monetary policy which became increasingly inadequate afterwards due to developments emanating from economic and financial sector reforms which significantly deepened the financial sector. This has improved the effectiveness of monetary policy transmission through indirect instruments such as interest rates.
Further, with the opening up of the Bangladesh economy, increased liquidity from capital inflows has raised the ratio of foreign assets to reserve money (RM) which has rendered the control of monetary variables more difficult. The transmission mechanism of monetary policy also underwent changes with interest rate and the exchange rate gaining importance vis-à-vis other variables. Consequent upon these financial innovations, the stability of the demand function for money has also come under question. Recognising the challenges posed by financial liberalisation and the growing complexities of monetary management, BB has also adjusted its approach with greater emphasis on rate channels for formulation of monetary policy. This has made the monetary policy operation more broad-based along with greater flexibility in the conduct of monetary policy.
The key challenge for BB, however, is to ensure the effective implementation of the monetary policy using a supporting operating procedure. The operating procedure is the daily management of monetary conditions consistent with the overall objectives of the monetary policy. It involves, for instance, defining the operational target, setting a policy rate which could influence the operational target, setting a bandwidth for short-term market interest rates, conducting liquidity adjustment operations to keep the operational target interest rate stable within the band, and signaling of policy intentions. As with the monetary policy framework, the operating procedure has also been following an evolving process in the country. For example, application of cash reserve ratio (CRR) on bank liabilities and open market operations (OMOs) have traditionally been the instruments of monetary policy. But, with the introduction of changes, overnight management of general liquidity at desired interest rate through overnight fixed repo (i.e., the central bank’s liquidity injection rate) and the reverse repo rates (i.e., the central bank’s liquidity absorption rate) to provide necessary guidance to the market interest rates has emerged as the most active instrument of monetary policy.
One must also recognise that the above monetary policy procedure has limitations as well. With the lack of a single policy rate, the operating policy rate alternates between repo and reverse repo rates depending on the prevailing liquidity condition. Bangladesh Bank is continuously working with required modifications in the framework in order to make it more relevant and effective.
It is true that the new operating framework presupposes the dominance of the interest rate channel of monetary transmission, which becomes more effective under a deficit liquidity condition. The new framework helps to maintain the overall liquidity under the deficit mode. As a result, the transmission of monetary policy in terms of movement in call money rate has shown improvements. Money market interest rates are now better aligned. However, the transmission of monetary policy changes to the credit market is complex and takes place through the cost channel. Banks respond to policy changes by altering deposit rates depending on liquidity conditions and credit demand. As the cost of deposits rises with money market rates, lending rates respond to policy rate changes with a time lag.
The monetary policy formulation process of BB has traditionally been an in-house exercise, with only the end-product of its actions made public. But, over time the process has changed; it has become more consultative and participatory along with an external orientation. The process leading to monetary policy actions entails a wide range of inputs mostly involving the in-house expertise of trained experts. Pre-policy consultations with external experts and representatives of financial institutions, business and trade associations, and other stakeholders are also arranged regularly to ascertain their assessment of the economic situation and monetary policy recommendations.
For an upper middle income Bangladesh, the price stability challenge is complex and requires a careful review of what should be the realistic short-run inflation, how low it should be, and how it is calibrated through potential inflation-growth trade-off. It is also important to trace the multiple causes of inflation, and the policy instruments that are traditionally applied to contain inflation. In Bangladesh, available evidence shows that the volatility in inflation comes from factors affecting both non-food inflation and food inflation. There are various factors behind food price fluctuations; for example, supply disruptions due to floods and other natural disasters, price distortions by market intermediaries, and rise in food import prices, among others.
Clearly, controlling inflation in Bangladesh requires other interventions to complement the monetary instruments. Long-term public investments and other measures would be needed to address structural factors and food price volatility. It may be noted that, over the last two decades, the rate of inflation in Bangladesh has fluctuated, and the level of fluctuation was much higher in the 1990s than in the 2000s. Thus, volatility of inflation has not been a major concern during the past two decades in Bangladesh.
Moreover, monetary policy seems to have limited power to control inflation in Bangladesh. The instruments at the disposal of BB are often not effective to respond to inflationary tendencies. The Bank rate (the policy rate) has been held nearly unchanged (BB uses the repo rate as a proxy policy rate); instead, it addresses price stability largely through the credit/deposit channel, often by maintaining a closely monitored relationship between broad money (M2) and reserve money (RM). The use of control over money aggregates (credit channel) provides a pseudo control over the credit flow to the private sector. The credit channel, however, has its limitations, and may miss the inflation target. On the other hand, the policy rate channel cannot be made effective since the transmission mechanisms are very weak, and financial infrastructure is underdeveloped.
Overall, the transition of the monetary policy framework in Bangladesh has been dominated by the continuously broadening and deepening of financial markets, increasing integration of the economy with the global economy and the resulting changes in the transmission of monetary policy. The pertinent question, however, is how the transition has impacted growth performance and inflation in the economy. It is true that growth of real GDP, on average, has rapidly increased over time and has become less volatile. Moreover, inflation has remained under control during the last decade. However, it appears that inflationary situation has somewhat deteriorated in recent years which has followed the global financial crisis. It is true that managing inflation while an economy is recovering from a downturn is much more complex than under normal conditions because of various uncertainties and trade-offs.
One must also remember that the evolution of monetary policy is influenced not only by the changing monetary and banking performance, but also by the developments in the financial markets and macroeconomic outcomes. Adverse developments like the recent Covid-19 pandemic have created global economic turmoil which has put the prevailing monetary theory and policies to test. The crisis has also changed the perception as to how BB should go about achieving its macroeconomic stabilisation objectives.
It has now become clear that the mandate of monetary policy should cover macro-financial stability and not just price stability. This has drawn attention to the impracticability of Tinbergen’s rule of assigning one instrument for one objective. In practice, interest rate changes affect financial stability. Similarly, macro prudential tools impact credit growth and hence monetary transmission. Therefore, recognition of the interaction between interest rate and macro prudential tools becomes critical to the appropriate design of monetary policy. This underscores the importance of close monitoring and analysis of financial sector developments so that possible risks can be better integrated into the formulation and implementation of monetary policy. Further, the monetary policy should not aim solely towards fine-tuning of short-term objectives such as short-term demand management which may contribute to building up of medium and longer term risks.
The issue of operational flexibility of BB in the conduct of monetary policy and regulation of the financial system is also of paramount importance. In this regard, required changes in the Bangladesh Bank Act should be considered to accord greater operational flexibility to BB in the conduct of monetary policy. No doubt, the operational autonomy to the central bank and its relationship with the Ministry of Finance are vexed issues not only in Bangladesh but elsewhere as well. But the issues need to be resolved keeping Bangladesh’s own economic perspectives in view.
Further, the objectives, instruments and mechanism of operation of monetary policy operations in Bangladesh are undergoing rapid changes as the structure of the economy is experiencing deep transformation. The aim for BB would be to set an example among the central banks in developing countries through constantly innovating the structure, techniques and transmission of monetary policy to serve the triple objectives of inclusive growth with reasonable inflation and financial stability. No doubt, monetary policy formulation and implementation involve continuously evolving techniques both in response to and as a consequence of changes in the financial system and the real economy. In the process, monetary policy needs to be increasingly transparent along with greater involvement of all stakeholders for ensuring better policy outcomes.
Dr. Mustafa K. Mujeri is Executive Director, Institute for Inclusive Finance and Development (InM).
November 18, 2021
Over the last few years, especially since the adoption of the sustainable development and ‘leaving no one behind’ agenda in 2015, equality and inclusion have emerged as the major themes in global development. The need for ‘inclusive development’ has been articulated forcefully in different forums along with heightened concerns about the unsustainability of high and rising inequalities. Studies on inequality such as Piketty’s (2014) ‘Capital in the Twenty-First Century’ focuses on wealth/GDP ratios, and Wilkinson and Pickett’s (2010) ‘The Spirit Level: Why Equality is Better for Everyone’ emphasises the negative consequences of inequalities, all of which stress the need for inclusive institutions for sustainable socioeconomic transformations.
Since the 1990s, growing evidence on the relationship that reducing inequalities and growth may not be con?icting objectives prompted a debate and research on ‘pro-poor’ or ‘broad-based’ growth. While there is consensus that growth is pro-poor if it reduces poverty, alternative de?nitions have also emerged–such as focus on the rate of income growth of the poor without necessarily bringing about a change in income inequality; or alternatively, growth is pro-poor if inequality falls or if the income share of the poorest rises. Overall, the perception of inclusive growth is the most recent conceptual innovation that looks at the interrelationship between economic growth and various aspects of distribution.
Although the perceptions vary, inclusive growth deals with policies that allow people from different groups such as gender, ethnicity, religion and across sectors -agriculture, industry, services–to contribute to, and bene?t from economic growth. In the literature, several specific conditions of inclusive growth in low-income countries are also highlighted, given the importance of asset inequality and the limited fiscal capacity of these countries. The policy emphasis is directed to business environment and boosting productivity in labour-intensive production; along with the primary role of the private sector in production and the state’s role in redistribution.
The differing de?nitions of inclusive growth primarily highlight the differences between outcome measures of well-being (e.g. income, human development), and those that focus directly on access to economic opportunities (employment, asset ownership). This brings into the forefront policies and institutions that directly impact how wealth is generated and takes the issues beyond the redistribution and safety nets agenda. The conceptualisation of inclusive growth that focuses on access to or participation in markets and economic opportunities can support the explicit consideration of governance and social inclusion into the analysis of growth. The emphasis on the importance of institutions has brought into focus various measures of governance on voice and accountability, political stability, government effectiveness, quality of regulation, rule of law, corruption, and so on.
Regarding the type of institutions relevant for inclusive growth, it is argued that there are links between inclusive institutions and (inclusive) growth. The hypothesis is that inclusive political and economic institutions -e.g. property rights that create a level playing ?eld and encourage investment, and an ‘inclusive market economy’-enable countries to grow, while concentration of power and opportunity in the hands of a few is more likely to lead to failure. There is evidence that inclusive political institutions are associated with more equality of outcomes. Power sharing in the political process is likely to impact distribution of income and opportunities with employment opportunities remaining at the centre of inclusive growth. Similarly, governance -notably the expansion of voice -is important in creating mutually beneficial and reinforcing public expenditure and economic growth relationships.
In effect, the conceptualisation of inclusive growth helps the policy makers to move to the issues of whether and how the poor participate in and contribute to growth and the institutions -formal and informal -that can enhance their participation. Thus, the inclusive growth agenda highlights the need for an inter-disciplinary perspective on growth. This makes it relevant to incorporate the ‘non-economic’factors into the growth analysis and extends the focus on identifying the type of institutions that can promote both growth and more equal distribution at the same time. In the traditional poverty literature, less attention is usually paid to understanding the institutions that promote or hinder the participation of the poor and disadvantaged in, or sharing of, the bene?ts of growth. For example, little is known about the institutions that can articulate the voices of the poor, particularly the more marginalised groups in society and the type of alliances that can create inclusive growth patterns in specific contexts.
In the ultimate analysis, inequality reflects political choices. As Piketty (2014: 20) identifies the danger of economic determinism and stresses that the ‘history of the distribution of wealth has always been deeply political, and it cannot be reduced to purely economic mechanisms’. This requires a better understanding of the institutions that mediate political preferences and outcomes for the poor. In many developed countries, the route has been the sustainable redistributive mechanisms including through social insurance and tax-funded bene?ts. In the developing countries, the experience with cash transfers shows growing interest in and commitment to redistribution, and how this can promote productivity as well. But, particularly where the state’s ?nancial capacity to redistribute is limited, broader institutions, at national and international level, such as tax regimes, competition authorities, consumer organisations, and trade negotiations and institutions, impact growth at least as much as growth, whether it is inclusive and whether it can be sustained.
Dr Mustafa K. Mujeri is Executive Director, Institute for Inclusive Finance and Development (InM)