Expansionary vs Precautionary

Bangladesh Bank in the last few weeks, rejected IMF's advise on following a conservative economic policy. But as with most issues in Bangladesh, people say one thing and does another.

Why IMF wants a conservative policy

• High inflation
• Investor lack of confidence
• Liquidity crisis amongst banks
• Food crisis
• Natural gas crisis
• Political crisis
• Power crisis
• Global economic slowdown
• ACC witch hunt against the corrupt
• Exodus of the business community
• Labor unrest/strikes
• Call rate is too high and fluctuates too often

Why Bangladesh Bank wants expansionary policy

• Bangladesh is smart enough to deal with themselves (micro lending is enough to show the world)
• A stunt to show its power
• To convince the banks (and people) that there isn't any liquidity crisis

Why Call Rate is important
Call Rate reflects the rate which banks lend to each other. Although it hasn't been high consistently there are some points to note. It is limited to 20% by Bangladesh Bank, so if it hits 20% we will never know the seriousness of the issue. The call rate also reflects the amount of deposits and money that banks have between themselves to work with and to distribute. This depends on multiple factors such as deposits, cash, successful loan payments, and interest rates. It is sufficient to say when the call rates fluctuate the way they are doing now something is terribly wrong.

This means that Bangladesh Bank is not clear to its goals. It may want an expansionary policy (which causes the call rate to lower) but when its actions doesn't suggest what it is saying, the call rate spikes. This also means that the commercial banks don't know what is going on or what to expect. So it means they are also less reluctant to give out loans and stay conservative at times of uncertainly. This also leads to more conservative economy. So do you get my drift? No one is sure what to do and aren't doing what they are supposed to do.

Reality vs Desirability
On one hand Bangladesh Bank does not want to startle everyone by taking a conservative path. It doesn't want to make a bad situation worse by taking a skeptical view. But then again can it afford not to?