When the price of almost everything tends to go up, as is happening now, one must assume that some kind of money mischief is at work in the economy. Outwardly, there is nothing wrong in price hikes if earnings go up commensurably, excepting that an increase in money supply, that exceeds output, leads to a gradual depreciation in the value of the currency.

Cheap currency retards growth

Taka's depreciation makes foreign investors more cautious to invest, or to purchase government bonds issued usually to finance deficit. Higher interest rate too curtails demands for funds and leads to higher prices to offset higher costs.

The Consumer Price Index registered an inflation of 4.64 per cent in April 2003, which is substantially higher than the 2.14 per cent registered in 2002. Increased food prices are blamed for 56 per cent of the inflation. Whatever is the cause, Taka's depreciation is depriving consumers of their limited purchasing power; suppressing expected demands for goods and services and hampering growth.

If the quantity of goods and services available for purchase were to increase as rapidly as the quantity of money, prices would tend to be stable. But the supply of narrow money (M1) registered 10.9 per cent growth in the 12 months leading to July 2003, which was only 7.1 per cent in the same period last year. At the same time, broad money (M2) grew by 15.35 per cent in July 2003 compared to 13.55 per cent of the preceding year. We did not produce as much goods and services to match the money we minted.

Money mischief and inflation

Inflation is a global phenomenon as it occurs in many countries simultaneously due mainly to high government spending and large budget deficit. Both the reasons seem absent in our case. Hence, one can confidently posit that money mischief lay at the center of Taka's depreciation, hence the inflation.

Net domestic financing accounts for only 2.5 per cent of our overall GDP. On the other hand, Bangladesh is the only country in South Asia with a current account surplus, the government expenditure being below 8 per cent of the GDP. Curiously, the rearing of our bureaucracy is so costly that the total public expense by various ministries eats away over 15 per cent of the GDP.

The government's cash flow crisis also stems partly from the huge loss incurred by the 44 State Owned Enterprises (SOE), the cumulative amount of which stands at Taka 1461.55 crore. Add to this the impact of fallen revenue in FY 2002-2003, which was Taka 416 crore less than expected. This led to an increase in the government's public debt to 50.07 per cent of the GDP while the debt service milked off another 7.5 per cent. Total external debt, which is 34.3 per cent of the GDP, is a huge sum totaling over $14 billion.

The yawning gap between gross domestic saving and investment is another indication of money mischief playing its fullest part in our economy through restrictive regulations and underhand dealings. Savings stalled at 17.9 per cent of the GDP over the last three years while investments rose to 23 per cent.

Although the public investment rose by a fraction, the private investment dropped from 7.4 per cent to 7.1 per cent between 1999-2002 due to sluggish domestic and international demands and an inhospitable investment climate marred by the instances of wanton criminality across the country. Both public and private investments must improve as should savings.

Back to recession?

The world economy has been experiencing an US-centric recession for over two years now. We'd feigned seclusion from the global wave so blatantly that, talks of recession are being whispered only now, despite the US being our main investor and importer.

A text book definition of recession means reduced growth for three consecutive quarters. Based on macro indicators, the World Bank and the Asian Development Bank reported in May 2003 a growth of 5.2 per cent. The same report showed inflation as having increased by 1.6 per cent from the previous year. One must admit that a lot has changed in the economy since May to dampen our expectations further. The rising inflation is the proof of certain deterioration of our economic heath.

And, irrespective of the views expressed by our economists, we're indeed passing through an era of uncertainty characterised by lack of focus. The uncertainty springs from unsolved issues in the World Trade Organization and from the fear of being crowded out in garment trading following the expiration of the Multi Fibre Agreement (MFA) in 2004.

The lack of focus stems from our indecisiveness to identify a range of products that would make us competitive in a global market dominated by the 'shock effects' of free trading among the LDCs. Free trading can result in a free fall of the economy if the focus is misplaced. East Asia, particularly Thailand, went through such a fatalistic spell in the late 1990s.

Free trading will impact upon our employment structure due to the seasonal nature of employment of over 100 million of our farmers. As well, the demand for Taka among the 3.4 million expatriate workers nearly equaling the earnings of the 50 million strong labour force employed within, the value of our currency deserves more appreciation. But Taka is so undervalued that its value vis a vis the US dollar had fallen from Taka 16 to one US dollar in 1974 to over Taka 60 today.

Besides, the value of Taka is determined, under the floating regime, on its international demand, which is measured by the volume of export / import transactions, flow of remittance from abroad and the growth in indigenous demand.

Sluggish productivity and export

Contrary to conventional perceptions, our export performance is far below the level of the 1990s. Exports in the 90s grew by an average of 15 per cent. It has registered a growth of only 10 percent between May 2001- 2003. In the manufacturing sector, growth reduced from 8 to 5 per cent while negative growth was observed in agriculture and in industrial credit.

Available data on labour force employment patterns shows farming, raising livestock and fishing as the primary occupations of 61 per cent of working men and 56 per cent of working women. Robust investment in agriculture is hence more urgent to stimulate demand in the rural economy. A tight monetary policy can hardly play that trick.

Economic competitiveness is also measured by trade statistics. Our trade deficit ascended to a whopping $4.52 billion, over $2 billion of which with China and India. With regards to the performance of industries, as is viewed from the performance of the capital market, the picture is even bleaker.

Up to March 2003, total market capitalisation at the DSE stood at Taka 61025 million, which is 1.7 per cent less than the corresponding period of the previous year. And, up to February 2003, only Taka 146 million came as new investment through Initial Public Offering (IPO). If companies fail to raise equity through stocks as well as from credit from scheduled banks, their competitiveness is bound to falter.

That notwithstanding, export grew by 12.4 per cent between January-May 2003(from the previous year's level of $2715.25 million). The increase was measured in money terms, not in terms of quantity of goods demanded.

The reduced demand for RMG (which accounted for 74.7 per cent of total export as opposed to 76.5 per cent in the preceding year) is indicative of sluggish demands abroad. Meanwhile, the import payment rose to $3948.16 million in January-May 2003 from $3351.15 million of the corresponding period of 2002. This has further appreciated the value of dollar against Taka. If cheaper Taka doesn't stimulate export, why not appreciate it?

Credit crunch

Demand for credit creates enormous pressure on the quantity of money in circulation. As a rule of thumb, central bank reduces prime lending rates to spur borrowing among consumers to stimulate demand if the economy shows signs of illness. This particular monetary dose kicks in when the economy is seen moving towards recession.

The sluggishness in demand and productivity reduced the volume of domestic credit from 11.7 per cent in 2002 to 8.7 per cent by July 2003. In the private sector, credit growth plummeted to 13 per cent from the previous year's level of 14.3 per cent.

Thus, by July 2003, the volume of public and private credit registered a decline of 1.7 per cent both in percentage and absolute terms (from the previous year's expansion of 4.9 per cent). The central bank, instead of encouraging borrowing for investment, added further restrictions on project loans and held its tentacle on monetary policy by keeping lending rates high. This is what the Nobel laureate economist, Joseph Stiglitz, called a 'cyclical approach' taken by LDCs under IMF's prodding.

This occurred at a time when the volume of public investment stalled and the flow of Foreign Direct Investment (FDI) reduced to $16 million only during December 2002-July 2003 (which is 55.6 per cent less than the corresponding period of the previous year). Interestingly, Taka 8,000 crore is reportedly lying in banks while project loans are tightened further by finance ministry directives.

Measuring inflation to tackle it

It's a truism that increases in money supply spur inflation. Yet, due to the reduction in the rate of unemployment that accompanies enhanced investment, the trade off between inflation and unemployment is accepted as the lesser of the two evils. But, run-away inflation and recession can combine to create an explosive mix to generate deflation, or outright stagnation.

Exorbitant lending rates and social instability had already deterred entrepreneurs from undertaking new ventures. Prevailing lending rate hovers between 11 and 13.5 per cent, which is almost parallel to the rates in Sri Lanka. But, unlike us, inflation in Sri Lanka runs between 11 and 13 per cent at times.

One thus becomes cynical about the methodology we use in assessing available data to ascertain the rate of inflation. Is our assessment of inflation a correct one, or it too is measured the same way the rate of employment is measured? How come the inflation is still below 5 per cent when prices of almost every essential have increased by 15-25 per cent across the board in recent months?

Of the many methods used to cure inflation, price and wage controls are sometimes considered as immediate palliatives. But such measures can be counterproductive due to the fiscal restraint they introduce while the problem remains, quintessentially, a monetary one. Besides, price hike can occur for other reasons too: due to artificial shortage, sudden surge in demand, degradation of quality of goods produced, change of expectations, etc. Ours is not a demand-pull inflation.

Despite inflation and recession being, virtually, mutually exclusive, the prolonged US recession has a lot to do with the stymied demand elsewhere in the world. To spur global demand, Europe and Japan need to pick the US's tab.

Meanwhile, we should lower our rate of interest to stimulate indigenous borrowing and investment. Once the demand is restored to its optimum level, FDI will follow automatically. But, if the economy inflates further, monetary policy too is likely to be tightened, pushing the lending rates even higher. This could spell disaster for the economy. To avoid such dangers, we must learn to balance out productivity with the quantity of money in circulation.

Author and columnist M. Shahidul Islam is a Senior Assistant Editor of this paper.