Editorial
BB's 'restrained' monetary stance
Success depends on fiscal policy
The central bank's Monetary Policy Statement (MPS) for January-June 2012 is a tightened policy package tailored to cushion external pressures and mitigate challenges to domestic economic growth.
The policy sets the twin-goal of reducing inflation to a single digit from the current level of 10.7 percent and stemming foreign reserve depletion. Inflation is sought to be scaled down through constricting credit flow to unproductive sectors. Stabilisation of external reserves, a modest aim in place of trying to enhance them is of course, contingent on growth in exports and remittances. These in turn largely depend on external environment but the increase in the value of dollar has had a countervailing effect in terms of export and remittance earnings. This is hardly an assumption on which the hope for 'a new external equilibrium' can be based.
Furthermore, the import bill needs to be cut back on, and as the trend suggests the percentage of LC opening has come down. But this can put a strain on import revenue flow as well as on the manufacturing sector.
The credit growth target of 16 percent for the private sector in contrast to 18 percent in the first half of the fiscal year looks achievable. But it will be 'difficult' to bring down government borrowing in line with the BB target, as a senior research economist has pointed out. The subsidy costs keeping high tend to pile up pressure on the government's domestic financing requirement as state owned enterprises providing fuel and electricity continue to incur losses. Recent increases in the price of fuel and electricity regardless, the subsidy costs comprise as much as 19.1 percent of the total expanding in the current fiscal as compared with 8.8 percent in the fiscal 2010.
The increase in interest rates on savings certificates will boost small savings but not necessarily investment. For that to happen, the central bank does need to focus more on monitoring interest rate spreads so that they remain below 5 percent.
Mobilizing more external and domestic resources and rationalizing public expenditure are important factors in implementing a balanced monetary policy. In other words, fiscal policy of the government and the monetary policy of the central bank will have to operate in tandem.
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