Letter of Transmission

December 5, 2011 name Course Instructor: Fin-220 (Macro-economic) Department of Finance University of Jagannath Dhaka Dear sir, It is an honor and great pleasure for us to present our Report on The Macro-economic situation in Bangladesh and ways to solution. This report was assigned to us as a partial requirement of the Macro-economics (Fin-220) course in the fourth semester.

The program was an experience of rediscovering our potentials and full of excitements. This report has given us an opportunity to apply our theoretical expertise, sharpen our views, ideas, and communication skills, and bridge them with the real world of practical experience, which will be a good head start for our future professional career. During the preparation of the report we faced some problems that have been erased out with your propound lecture and assistance. Without your cooperation and guideline this report would have been an incomplete one. Finally thank you for your supportive thought and kind consideration for formulating an idea. Lastly we would be thankful once again if you please give your judicious advice on our effort.

Sincerely yours On behalf of the member of the group No # 10

Shamimshahidur
Roll:

Acknowledgement
We would like to pay our gratitude to all of the people who helped us a lot for the completion of this report before, during, and after the working period. At first we would like to acknowledge the Almighty, who helped us every time and was with us and gave us moral support and strength every moment. We are especially grateful to our honorable course teacher Assistant Professor _________for giving us valuable suggestions and support to prepare this report. Without her advice and support, it would not be possible for us to prepare this report. We are also grateful to all the officials of for their support and cooperation. We are giving thanks from our hearts to whom, that are helping us in our report by answering our questions about their thoughts and ideas. They are chosen by our group members randomly from various professionals. Last but not least we express our gratitude to all the individuals who have helped us directly or indirectly.

Table of Content

1. Macroeconomic mismanagement of Bangladesh 2. Set of critical issues 2.1 Bangladesh GDP Growth rate...... 2.2 Inflation rate.. 2.3 Unemployment rate.. 2.4 Capital market 2.5 Monetary policy 2.6 Fiscal Policy... 2.7 Fiscal sector 2.8 Remittances 2.9 Foreign investment 2.10 Exports 2.11 Imports.............. 2.12 Impact on investment 2.13 Inflow of foreign investment. 2.14 Interest rate and investment relationship.. 2.15 Public debt management... 2.16 Global financial crisis 3. Ways to solve these problems. 4. Conclusion...

6 6 8 10 10 11 11 12 12 13 13 14 14 16 16 17 18 19 20

Executive summary

Macro-economic Mismanagement in Bangladesh

Bangladesh, small state of South-East Asia, cant still shake off the ill-reputation of being one of the least developed countries, shadowed by miserable poverty, high illiteracy rate and a gigantic population of 1.6 billion (estimated). Moreover natural disasters such as seasonal inundation, cyclones, draughts etc. constantly pursue its lot every year, which break the backbone of the economy and frustrate future planning. Economy is sick with high inflation rate. Inflation rate is rising; food prices are increasing at rates above 10% while non-food price increases are stable at about 4%.

The GDP, chief indicator of an economy, shows that for a long time, Bangladesh economy was backward. The years after independence, the size of Real GDP, Per Capita GDP and their growth rates was small. The condition improved from 1990. Yet, still the growth trend and the structural changes of GDP in Bangladesh are not satisfactory. Many problems are responsible for this unsatisfactory GDP. These are the shortage of domestic food production, narrow structure of exports, increasing growth rate of imports, failure in the invocation of much Foreign Direct Investment (FDI), a defective banking system with cumulative interest of loans, continuous loss in the public enterprises, poor infrastructure, inefficient taxation, high inflation rate, political instability and the serious deterioration of law and order situation. If these problems are solved, dynamic changes will come in the percentages of GDP.

Bangladesh GDP Growth Rate

The Gross Domestic Product (GDP) in Bangladesh expanded 6.3% in the current year, 2011. Historically, from 2002 until 2011, Bangladesh's average GDP Growth was 5.99 percent reaching an historical high of 6.5 percent in 2006 and a record low of 4.8 percent 2002. Bangladesh is considered as a developing economy which has recorded GDP growth above 5% during the last few years. Microcredit has been a major driver of economic development in Bangladesh and although three fifths of Bangladeshis are employed in the agriculture sector, three quarters of exports revenues come from garment industry. The biggest obstacles to sustainable development in Bangladesh are overpopulation, poor infrastructure, corruption, political instability and a slow implementation of economic reforms.

Real GDP growth in Bangladesh

Year 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 GDP growt rate in % 4.8 5.8 6.1 6.3 6.5 6.3 6 5.8 6 6.3

GDP growth rate

7 6 5 4 3 2 1 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 GDP growth rate

Constraints to Growth:
Bangladeshs growth challenges are two-fold; 1) how to ensure sustainability of the 5%-6% growth over the long-term 2) how to raise growth to the 7-8% range, which is desirable and needed to meet the governments poverty reduction goals.

Key constraints to improve growth performance include: Inadequate infrastructure, especially power and ports Weak governance Largely imbalanced and rapid Urbanization Export competitiveness Low range financial sector Weak education quality World Bank assistance in support of Governments Growth initiative etc.

Inflation in Bangladesh:
The relationship between inflation and economic growth is a controversial one in economic literature as two schools of thought, namely, the monetarist and the structuralisms, have opposite views on inflation-growth link. Nevertheless, based on existing literature and central bankers growing affair with inflation targeting policies, it can be stated that a low to -moderateinflationary regime is a sine qua non for the pursuit of economic growth with stability.
year inflation 2005 7 2006 7.2 2007 9.1 2008 8.9 2009 5.4 2010 8.1

Graphical view of Inflation:

inflation
10 9 8 7 6 5 4 3 2 1 0 2005 2006 2007 2008 2009 2010 5.4 inflation 7 7.2 9.1 8.9 8.1

Bangladesh needs to adopt both long-term and short-term strategies to cope with the global commodity boom. Long-term policies are beyond the scope of this paper. The authorities in Bangladesh can consider some medium to short-run strategies to tame the reign of current inflation. First, the supplyside constraints in the commodity markets in Bangladesh have to be addressed so that international market prices can converge with its domestic prices.

Secondly, the BBs credit, interest rate and exchange rate policies are crucial to check inflation. The BDT is undervalued and the country is buying some degree of inflation from abroad, however, a large appreciation of the BDT might not be a feasible option at this stage as such a move might disrupt the countrys export sector and labor market. Nevertheless, the BB should allow modest appreciation of the BDT so that it plays at least a small part in mitigating the currency-induced inflation. The BB should adopt restraint monetary policies to control money supply and the policies should be formulated carefully so that there is a reasonably stable linkage between interest rate, money supply and prices. Thirdly, to keep the economys fiscal balance in a comfortable zone, the concerned authorities should take prudent decisions on petroleum subsidies. The direct pass-through of the oil prices at this stage poses high political risk, as the economy is in the midst of sky-rocketing inflation. There is a need for fuel cost economization. Energy prices should be fixed based on the user categories where subsidies from high-end energy should be phased out gradually. However, the exchequer should continue to absorb substantial, if not full, the price hike of poor peoples energy such as kerosene. Last but not least, the current inflation in Bangladesh can not be explained solely on the macroeconomic variables and numbers. To maintain price stability, the government must work on both the economic and non-economic factors that have instigated the ongoing inflation. Unemployment Involuntary idleness due to lack of work. Unemployed refers to persons belonging to the labor force, seeking but not doing any work during a specified period. The 1995-96 Labor Force Survey (LFS) of Bangladesh considered a person of age 10 years and over as unemployed if he/she did not work at all during the preceding week of the survey but was actively looking for work or was available for work. This concept of unemployment in Bangladesh is supplemented by the concepts of visible and invisible underemployment. The total civilian labor force of the country in 2010 was estimated at 72,350,000, of which 4.8% were unemployed. Year 2005 2006 2.5 2007 2.5 2008 2.5 2009 5.1 2010 4.8

Unemployment 40 rate

Capital market:
Bangladesh's stock market performance, measured in terms of the stock price index, has been one of the best globally for a number of years. Its upward surge defied global and regional market developments. When almost all markets across the globe collapsed during the global economic crisis, DGEN was perhaps one of the very few which defied the global trend and maintained its upward progression fueled by local developments/conditions. When it started its upward trend in 2007, the market was certainly undervalued, and there were fundamental economic reasons for it to go up. At that time the average Price/Earning (P/E) ratio was in single digit and the market capitalization was less than 10 per cent of gross domestic product (GDP). The sustained upward surge, however, went beyond what could be justified by economic fundamentals by early 2010. Since mid-2010, as the index crossed the 5000 mark, the market has clearly been driven by speculative forces. During the last two-month period leading up to the peak, the index increased by more than 2000 points before crossing the 8900 level on December 5. To put it in proper perspective, the index level was at about 1500 until this recent surge started in 2007. Daily market turnover increased 30 fold about Tk. 1.0 billion to Tk. 33 billion over the three-year period. Clearly, economic fundamentals cannot support this level of valuation gain and turnover, and the market is bound to correct itself once it runs out of steam. The recent drop in the stock market index needs to be evaluated in this context. Even after a more than 2500 point decline, the index is still well above its mid-2010 levels. The corrections and volatility in the price index that we have experienced in recent days is nothing uncommon, and fully in line with what has been observed in many other important, and much larger stock markets across the globe. For the market to start consolidating, it needs to shed itself of speculative elements, and that can only happen once market valuations come back to their fundamental levels.

Monetary policy:
Through March 2011 the monetary policy has become more expansionary as compared to the previous year. Bangladesh Banks monetary program cannot be met. The money supply (broad money) increased from June 2010 to March 2011 by 14.8% compared to 13.9% for the same period of the eight months of the earlier fiscal year domestic credit growth has increased from 8.8% in 2010/2011 in the eight months of 2009/2010 to 16.3% in 2010/2011. Credit to the private sector has expanded 19.7% in the current financial year compared to 15.2% in the previous year. All the three key indicators show accelerator growth when their growth rate was expected to decline. This expansionary monetary policy is currently contributing to the inflation and to the land and stock market bubbles. The expansion of the monetary aggregates has been more rapid this year than in any of the past five years! For those who wish to examine the
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increases these are given below. Certainly there is growing pain in the private sector facing higher lending rates. I must admit there are lot uncertainties as to the effectiveness of monetary policy. But clearly tightening monetary policy through March 2011 has not been effective. Perhaps there will be some progress made in April and afterwards. However the intent of the policy was to hold the growth of the money supply to 15%. The results of an unsuccessful monetary policy will be a much higher inflation rate and at first an enhanced economic growth rate. But that condition cannot be long maintained and soon there will be slower growth and higher inflation. As the next budget is likely to be much more expansionary than the present budget it will contribute to increasing the inflation rate and a slowing of economic growth as the private sector is crowded out.

Fiscal policy:
Fiscal policy has become much more expansionary this financial year than in the previous one. In the eight months of 2009/10 total financing was Tk 62.1 billion. This has increased to Tk 98.8 billion in 2010/11. During the next year we will see more and more pressure on the fiscal side resulting in rising pressure on the banking system. Unfortunately the Ministry of Finance has permitted rapid increases in subsidies and rapid increases in development expenditures. Given these policies the result of a successful tightening of monetary policy will be to reduce private sector investment and slow the economic growth rate.

Fiscal Sector
Sound fiscal policy is fundamental to maintaining macroeconomic stability and fostering economic growth. During FY 2007-08, various steps were taken to rationalise direct and indirect taxes. These were aimed at achieving accelerated pro-poor economic growth, infusing more dynamism in the agriculture sector, expanding export-oriented industries and exports, developing domestic industries, enhancing industrial productivity and creating employment opportunities. The target for total revenue collection for FY 2007-08 was Tk. 57301 crore. The total tax revenue from the various sources of National Board of Revenue (NBR) for FY 2007-08 amounted to Tk. 47289.12 crore which was 27.06 percent higher than the previous fiscal year and 98.5 percent of the target for the fiscal year. The total tax-GDP ratio stood at 10.58 percent according to the revised budget of 2006-07. In FY 2007-08, this ratio stood at 11.17 percent. According to the revised budget of 2006-07, total public expenditure amounted to 12.79 percent of GDP and this is estimated at 17.27 percent in FY 2007-08. Total ADP utilisation against the revised ADP for FY2006-07 was Tk. 17917 crore which was 83% percent of the allocation. The revised ADP for FY 2007-08 was Tk.22500 crore of which Tk. 18450 crore has been spent in FY 2007-08 which is 82 percent of the revised allocation.
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In FY 2006-07, the overall budget deficit without foreign grants stood at 3.7 percent of GDP which was 3.3 percent with foreign grants. In FY 2007-08, it was 6.1 percent and 5.3 percent respectively. Due to assumption of the liabilities of Bangladesh Petroleum Corporation (BPC) the budget deficit increased. In financing the budget deficit in FY 2006-07, net borrowing from foreign and domestic sources stood at 1.8 percent and 1.9 percent of GDP respectively. In FY 2007-08, net foreign and domestic borrowing was 2.4 percent and 3.7 percent of GDP respectively.

Remittances:
Remittance growth is currently very slow. The future level of remittances remains the great uncertainty for the economy. If remittance growth returns to 10%+ per annum then the economy will rapidly correct. But will it? A lot is written on this but actually it is difficult to grasp all of the factors at work. The most worrisome concern is that the turmoil in the Middle East will increase, spreading throughout the region. Just look at how much things have changed in a few weeks and there is no reason to see things calming down. For better or worse a Middle East in political revolt does not promise a strong demand for Bangladeshi workers or the implementation of large investments that would generate such demand. Wisdom suggests one be conservative and assume very slow growth of remittances, certainly not a return to 20% and higher growth rates of the recent past.

Foreign investment:
Bangladesh today is a country with a thriving economy in primary, manufacturing and tertiary sectors. As a developing country, which gained independence a few decades ago, in 1971, it has come a long way from a predominantly agrarian and a labour intensive manufacturing economy to its present state of a diversified economy and now has industries, many of which effectively compete with regional and worldwide players. In this process, the defining role of foreign investors has been a key element. The following facts deserve attention in relation to assessment of Bangladesh as an investment destination: i) Bangladesh has never defaulted in its debt-service liabilities to multi-lateral and bilateral donors. ii) Bangladesh grow over 21 million metric tons of food grains, basically rice and some wheat and potatoes which is enough to feed the population of the country, and for building reserve stocks. iii) Bangladesh never experienced negative growth during last 27 years of it's independence. iv) Bangladesh exports readymade garments, knitwear, brand name wind cheaters, walking shoes, leather goods, shoes and other products, urea fertilizer,
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pharmaceutical, shrimps and prawn, vegetables, jute and jute products etc. to sophisticated markets of EU, USA, Japan and many other countries. Garments and related export account for more than US $4 billion. v) The frequency and intensity of natural disasters are far less in Bangladesh than those in the Philippines, Japan and even the USA, Bangladesh is located outside the major earthquake zone.

Exports:
Export performance, largely concentrated in the RMG sector, is excellent. In the first ten months of 2010/11 exports have increased almost 41% valued in US dollars. Demand is strong, the RMG sector is competitive and the reputation and performance of the industry is exceptional. The factories want to expand capacity but the power situation makes this uncertain in the near term. It is a tragic lost opportunity. The export picture is straightforward to describe: Most exports are from the RMG sector; the share remains at about 75% of total exports. (less if valued by domestic contribution). Major sectors such as jute, frozen food (shrimp) and leather have increased sharply over the past year but their potentials for future expansion are uncertain. (Prospects are excellent but the policies governing the sectors are all rather negative so I am not very optimistic that expansion will continue at a rapid pace.) Exports of agricultural products show a strong increase but the amounts are very small and do not influence the overall situation. In other words, the key to the future of exports in the next few years again rests upon the RMG sector. I believe we can be optimistic that this sector will continue to perform well.

Imports:
The most telling number is the amount of L/Cs outstanding at the end of February. In 2011 this came to almost $22 billion compared to $7 billion at the end of February 2010! (These numbers omit the imports of industrial raw materials most of which are inputs to the RMG exports.) This is a scary number signaling a large increase in the inflow of imports in the next year. The exact numbers are not so important as the change that is suggested. If we do not correct for the industrial raw materials, the value of L/C outstanding at the end of April 2011 is $29.1 billion compared to $12.04 billion in April, 2010. The overhang of L/Cs to be serviced has expanded almost 240%! It suggests the prospect of a large jump in imports.

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Inflows of Foreign Direct Investment

There was an inflow of $666m foreign direct investment in 2007 which raised significantly in 2008 to $1086m. As of 2010, inflows of foreign direct investment recorded to $571m.
Year Proposed Investment Project 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011* 1754 1930 1615 1336 1470 1298 BDT 18370 19658 19553 17117 27414 39976 Local Proposed Investment Project 135 191 143 132 160 148 Foreign Total Proposed Growth % Investment BDT 24986 11925 5433 14749 6261 26935 Project 1889 2121 1758 1468 1630 1446 BDT 43356 31583 24986 31867 33678 66912 124.62 -27.15 -20.89 27.54 5.67 98.71

Total Export Import and Trade balance Relationship in Bangladesh from 2007 to 2010
Fiscal year 2007-2008 2008-2009 2009-2010 Total export Total import Trade balance in crore in crore in crore 98160 106999.7 112305.1 133794.3 139588.5 148550.8 -35634.3 -32588.8 -36245.7

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200000

150000

133794.3

139588.5 106999.7

148550.8

112305.1 total export total import

100000

98160

50000

trade balance

0 2007-2008 -35634.3 2008-2009 -32588.8 2009-2010 -36245.7

-50000

Source: Bangladesh Bank During FY 2007-2008 the total export was BDT 98160.0 core (taka) and the total import was 133794.3 crore Taka while the trade deficit was 35634.3 core. In the FY 2008-2009 the total export was BDT 106999.7 crore and the total import cost was BDT 139588.5 core whereas the trade deficit stood at BDT 32588.8 core. During the period of FY 2009-2010, the value of total export was112305.1 crore taka and the total import was BDT 148550.8 crore where the trade deficit was BDT 36245.7 crore in the mentioned period.

Impact on investment:
There is negative relationship between interest rate and investments means that as interest rate falls investment rises.And the opposite is true when interest rate rises. Real interest rate helps to determine the trend of investment in an economy. When the interest rates are high, borrowing becomes quite expensive for the investors so they make less real investment. The high interest rates make it difficult to cover their expenditure because their products becomes less competitive in both the domestic and international market. On the other hand, if the interest rate is low, more and more investment take place in the economy which result in more production, more employment opportunities and increase in the

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potential GDP. Thus the real interest rate through their effect on investment improves growth and future living standards of a nation.

Interest rate and investment relationship in Bangladesh

Year 2006 2007 2008 2009 2010 Lending interest rate Deposite interest rate Total investment percentage of GDP 11.06 5.77 24.65 12.28 12.63 13.36 12.75 6.51 7.23 7.97 7.34 24.46 24.21 24.37 24.96 as a

Interest rate and investment relationship in Bangladesh

30 25 20 interest rate 15 10 5 0 2006 2007 2008 2009 2010 investment as a percentage of GDP

Public Debt Management

The Government borrows both from domestic and foreign sources for financing budget deficit arising from the need for meeting social welfare expenditure, unexpected expenditure in emergencies and investment expenditure. In FY 2007-08, net government borrowing from domestic sources stood at Tk. 14103.65 crore which is 55 percent higher than that of the
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previous year. Of these total government borrowing, Tk.10959.60 crore came from the banking system and Tk.3144.05 crore from the non-bank borrowing source.
Public debt in 2004-2010 (in % GDP): Year Public debt in % 2004 43 2005 44.5 2006 46.7 2007 37.4 2008 34.5 2009 39.7 2010 39.3

Public debt in %
50 45 40 35 30 25 20 15 10 5 0 2004 2005 2006 2007 2008 2009 2010 public debt in % 37.4 34.5 43 44.5 46.7 39.7 39.3

Source: CIA World Fact book

Private Sector Development

Private sector's contribution to the total investment in Bangladesh economy is remarkable. Of the total 24.16 percent investment in the provisionally estimated GDP of FY 2007-08, the share of private investment has been computed to be 19.15 percent. Government has brought reforms in the privatisation scheme to strengthen, galvanise and modernise the privatisation process. Government has put in place necessary institutions and infrastructure to create a private investment-friendly environment. Government has formulated Bangladesh Private Sector Infrastructure Guidelines to foster private sector participation in the projects for the development of infrastructure of the country. Detailed description of procedures for

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undertaking infrastructure projects in various sub-sectors on private initiative has been provided in the guidelines.
Global Financial Crisis The global financial crisis, brewing for a while, really started to show its effects in the middle of 2007 and into 2008. Around the world stock markets have fallen, large financial institutions have collapsed or been bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems. On the one hand many people are concerned that those responsible for the financial problems are the ones being bailed out, while on the other hand, a global financial meltdown will affect the livelihoods of almost everyone in an increasingly inter-connected world.

Ways to solution:
What should the authorities do now? This is not the time to panic and bring about short sighted regulatory changes. The experience of the last few weeks clearly indicates that whatever sensible move the SEC and Bangladesh Bank may consider would act against them and trigger a negative development for which the regulators will be blamed. This is a perfect example where you intend to do good things, you will be blamed, and if you don't do anything, you will still be blamed (for inaction). The policy makers and regulators would, however, need to prepare themselves for two initiatives: 1) assess the impact of a major stock market correction on the domestic economy and determine what kind of policy response the government may have to undertake to mitigate the dampening effect on the real economy through various transmission channels; and 2) the SEC and other policymakers should prepare a comprehensive set of reform measures which can be initiated once the market settles down at the proper level. Nothing major should be done now, when the market is in a correction mode. The market will find its floor when stock prices would become attractive for the institutional investors, who are probably waiting in the side lines with lots of cash and other liquid assets for future investment at attractive prices. The critical issue is should we call the prices attractive at the average price/earning (P/E) ratio of 23? This reported P/E ratio of 23 should also be taken with a grain of salt since much of the record profit gains recorded by the financial institutions would certainly disappear in 2011 and the adjusted or prospective P/E ratio will be much higher than the reported level. It is normally believed that an average P/E ratio of 12-15 would be attractive for long-term investors. Thus it would be irrational to expect institutional investors to jump into the market and provide a floor for the index at the current level. It would be a serious mistake to force or pressure the financial institutions to enter the stock market prematurely. Bad assets (in terms of valuation) to be accumulated by these institutions in this process would only weaken their balance sheet and may lead to collapse of weak
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financial institutions, thereby transmitting the impact of the stock market collapse to the real economy on a bigger scale. As a matter of fact, Bangladesh Bank may have to be ready to inject liquidity to the financial system in the event some banks are hit seriously by their direct and indirect exposures to the stock market. The emergence of liquidity crisis in the financial system in recent weeks may be an early manifestation of that problem. One cannot really tell what is going to happen due to the uncertainties of the foreign exchange earnings. If export growth is moderately strong, remittances grow only slowly, and an expansionary fiscal policy is undertaken then the next financial year will be dangerous with potentially much higher inflation and reduced private sector investments. To avoid serious balance of payment and economic growth difficulties in the next three year five steps are suggested

a) Aim at achieving a government deficit of not more than 4.0% of GDP b) Reduce subsidies in the energy sector rapidly by raising prices to users c) Curtail expansion of government expenditures and focus on key infrastructure d) Maintain a strong, restrictive monetary policy e) Work to remove bottlenecks to export expansion. Ideally the next financial year should be a period of restructuring, limited new starts in government projects, a tightening of monetary policy, and increased efforts to support export growth. Otherwise there is a high probability of a dangerous increase in price levels which will persist for several years. Much attention is given in economic discussions to long run growth problems, but the short run concerns are, in mid-2011, much more important. The economic growth is quite satisfactory, but that import requirements to support such growth cannot be paid for with the stagnation of remittance flows. Depreciation of the currency which will encourage make imports more expensive [measured in Taka]. Such depreciation should improve the current account. Tightening monetary policy so as to reduce the demand for goods and services and indirectly encouraging domestic resources to be used for exports. The reduction of import demand may come rapidly, but the shift of resources into export industries will occur slowly.

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We suggest two other policies that could ease the pressure but would not be implemented. a)
b)

A tighter fiscal policy with reduced government deficits Increased use of foreign resources, FDI or foreign borrowing.

Conclusion:
The conclusion is that the economy has to adjust to a slower GDP growth rate unless earnings of foreign exchange can be increased. If government is not prepared to make the adjustment of its fiscal and monetary policies to accept this slower growth, then the economy will face continuing currency depreciation and inflation. If the government policies will not reduce the demand for foreign exchange then the reduction will be achieved by devaluation and inflation. I now believe that in the absence of more restrictive monetary and fiscal policies there will be steady depreciation of the currency of the older of 5%-8% per annum and the inflation rate will increase and remain in the range of 8%13% per annum. In effect these changes will take place to reduce the use of foreign the use of foreign exchange by the private sector. This will inevitably slow down the growth of the economy. There are some positive signs: Interest rates are rising rapidly which will slow the pace of private sector investment. (While the central bank talks about the quality of investment this is essentially meaningless both conceptually and in its ability to regulate. So the idea that the GDP growth rate can be sustained or increased by reduced investment but of better quality sounds nice, but is unrealistic. It is an idea that is trumpeted from time to time when countries face balance of payments problems that force them to curtail growth; but it never actually works). Excess liquidity has declined due to Bangladesh Banks policies. Loan demand remains strong but many firms are not receiving the funding that they want. All of these are good signs of a successful impact of a tighter monetary policy.

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