BB should concentrate on controlling money supply
I would like to comment on something I actually know about: that is the new (and misguided) belief of the Bangladesh Bank that channeling money into productive sector is counter inflationary, since it will produce "essential" products. Even though this is intuitive and many of my friends have often commented to the agreement. It is incorrect (in mainstream economics) because of two important reasons.
Inflation is the excess of aggregate demand over aggregate supply. Aggregate demand is derived from the money supply into the economy. Now, if excess investment is made in a sector where credit is already available and output is therefore "economically optimal" (i.e. where marginal cost and price is equal), this will increase the money supply without increasing output at an economic level. Thus the net effect will be to create the same inflation that the action was meant to negate.
Capital is allocated in an economy as per the "economic profit" of its output. In other words, if the garments sector has higher returns than the steel industry, capital will automatically flow into the garment sector due to the profit motive. Mainstream economics dictates that private sector is most efficient at gathering the highest profit for the most limited input resource (which is capital in Bangladesh).
The attempt by the public sector to determine the sectors to determine this allocation has historically and internationally resulted in "zombie companies", which are unprofitable, capital intensive and consumes significant hard-earned tax and capital of the country (e.g. the ex-jute mills of Bangladesh).
Because of these two reasons, the recent effort by Bangladesh Bank to invest further in "productive" industries will most likely result in counter-inflation and future waste of public tax resources in these investments. I would, therefore, urge the Bangladesh Bank to reconsider their investment decision and have a bigger role in what they should have, mainly being the controller of the supply of money and the watcheye to ensure that scams like Hallmark, Destiny and the Stock Market Crash are avoided in the future.
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