Chart 1: Prices in Dhaka Stock Exchange

Chart 2: Growth in broad money

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Volume 10 !ssue 05 February 04, 2011
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J!T" #$HM$%
!n the three years ending in .anuary 2//01 share (rices in Dhaka Stock Exchange 2DSE3 rose by
about 4/ (ercent5 $#er the course o% the %ollowing year1 it doubled5 !nitially1 this was taken as a
sign o% 6usti%ied o(timism in &angladesh7s strong economic %undamentals and (erha(s not8so8
6usti%ied con%idence in (olitical stability5
&ut as early as the %irst 9uarter o% 2/1/1 a %ew #oices were wondering whether DSE was in the
bubble territory51 ,hese Cassandras were1 howe#er1 generally ignored5 &etween .anuary and
:o#ember o% last year1 share (rices rose by 4/ (ercent5 ,hen in December1 the market started
wobbling5 ;nd in the %irst %ew weeks o% 2/111 it has seen un(recedented #olatility52 Chart 1 shows
the DSE (rices o#er the (ast %i#e year5
,hat we witnessed a ma6or bubble is now beyond dis(ute5< !ncredulous in#estors and an
irres(onsible Securities and Exchange Commission (layed ma6or roles in blowing the bubble5 &ut
the market (artici(ants and their regulators didn7t o(erate in a #acuum5 ,he bubble was (ossible
because we were in an 7easy money7 en#ironment = &angladesh &ank had been (ursuing an
ex(ansionary monetary (olicy1 and there were too much money chasing too %ew shares5 ;nd the
(olitical realities im(eded a 7so%t landing7 = e#en a%ter the bubble became clearly identi%iable1
(olicymakers lacked the will(ower to act lest 1004 was re(eated5
Easy money
"et7s take the easy money %irst5
,here is a general consensus amongst the
business sector1 the go#ernment and
inde(endent analysts that an in#estment boom
is needed i% &angladesh7s economy is to grow by
>8? (ercent a year5 ,hat7s why1 e#en during the
(eriods o% high in%lation1 the &angladesh &ank
has sought to su((ort in#estment through an
accommodati#e monetary (olicy5 )owe#er1 in
recent years1 broad money has been constantly
growing %aster than the &angladesh &ank7s
accommodati#e targets 2Chart 235
,his has ha((ened because o% an unintended
conse9uence o% the &ank7s exchange rate
(olicy5 !n addition to su((orting in#estment
through loose money su((ly1 the &ank has
(egged taka against the dollar to su((ort
ex(orts5 ;s the dollar has de(reciated in the
(ast cou(le o% years1 taka has seen a((reciation
(ressures5 ;ccording to one analyst1 had it not
been %or the &ank7s inter#ention1 taka would
ha#e a((reciated to 4/ (er dollar5@ ,he cost o%
kee(ing the taka under#alued has been the
excess growth in money su((ly5
Did the bank achie#e its ob6ecti#e o% su((orting
in#estment and ex(ortA ;ccording to
international agencies such as the -orld &ank and the ;sian De#elo(ment &ank1 both ex(ort and
in#estment are ex(ected to grow strongly in the coming years5
)owe#er1 it7s not clear whether monetary or exchange rate (olicies ha#e anything to do with the
outlook5 E#en though the nominal exchange rate remains under#alued1 taka has seen a real
a((reciation against ma6or trading (artners because &angladesh has ex(erienced %aster in%lation
::: Star Weekend Magazine ::: http://archive.thedailystar.net/magazine/2011/02/01/economy.htm
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Photo: Bahedul ! Chan
2itsel% a conse9uence o% the loose monetary (olicy35 'eanwhile1 how much o% the monetary
ex(ansion has ended u( in (roducti#e in#estment remains an o(en 9uestion5 !n %act1 there is no
reason to belie#e that in#estment has been constrained by a lack o% %inance = one could argue that
in%rastructure bottleneck1 energy shortage1 and (oor economic go#ernance are im(ortant
im(ediments to in#estment that monetary (olicy is unable to sol#e5
*ather1 what seems to be reasonably clear is that the excess
money su((ly ended u( in the stock market5 ;s the a((reciation
(ressure mounted on taka1 money growth exceeded the target
rate by e#er8%aster (ace since late 2//05 ; large (ro(ortion o%
that extra money %ound its way to the stock market5 -ith no
commensurate rise in the su((ly o% shares1 increased turno#er
meant ra(idly increased share (rices5
,hus1 in a misguided e%%ort to boost in#estment and ex(orts1 the
&angladesh &ank ended u( blowing the mother o% all bubbles5
,he central bank is as cul(able %or the current mess as any
myo(ic in#estor or irregular regulator5
,he monetary authority was not alone in the well8intentioned1
but ultimately %utile1 attem(t to boost in#estment5 ,he %iscal
authority = that is1 the go#ernment = through tax breaks and
schemes allowing whitening o% black money1 also %uelled the
stock market bubble5 ;nd in addition1 i% not %or the
go#ernment7s dithering1 the bubble could ha#e ni((ed much
earlier5
$nce bitten
Dnderlying the macro and microeconomic (olicy mistakes ha#e been the (olitical economic reality
o% the ;wami "eague go#ernment7s bitter memory o% the 1004 crash5
!n the second hal% o% that year1 the DSE increased three8%olds as non8(ro%essional retail in#estors
and a huge in%lux o% %unds chased a hand%ul o% stocks5 ,hen the bubble burst1 with the (rices
colla(sing by about >/ (ercent in the %irst %our months o% 100>5 ,he boom and bust enriched a %ew
traders and market mani(ulators who had knowledge and inside in%ormation1 while general
in#estors (aid hea#ily5
;nd most im(ortantly1 that ex(erience seems to ha#e made the current go#ernment determined
to a#oid a re(etition o% 10045
$ne might ha#e thought that the best way o% a#oiding the re(etition o% 1004 would ha#e been to
(re#ent the ra(id run u( in stock (rices that were witnessed in the monsoon and autumn o% 2/1/5
)ad the SEC or the &angladesh &ank stood %irm then1 (erha(s a 7so%t landing7 = a moderate %all in
stock (rices %ollowed by a (eriod o% market stability = could ha#e been achie#ed5
&ut any %all in (rices would ha#e le%t some (eo(le worse o%%5 ;nd the go#ernment1 it a((ears1 was
not ready to acce(t that5 E#ery session o% %all in share (rice was %ollowed by thuggish beha#iour in
'oti6heel1 and ca#ing in by the SEC5 &ut without the ex(ressed su((ort o% the to( econocrats1 it7s
not sur(rising that the micro regulators o% the SEC lacked the stomach to allow market correction5
Dn%ortunately1 6ust as in (olitics so in economics1 where moderate re%orms are im(ossible1 #iolent
re#olutions are all but ine#itable5 &y the beginning o% the year1 as &angladesh &ank realised that it
could no longer a#oid monetary tightening1 stock (rices begun to tumble5 *emarkably1 e#en at
this late stage1 our economic (olicymakers remained determined to a#oid the much needed
market correction5 Possibly dri#en by the go#ernment7s (olitical im(erati#es1 &angladesh &ank
directly inter#ened in the stock market while state owned banks were allegedly (ressured to
(ro#ide arti%icial su((ort = the result was the 1E (ercent rebound in the market on 11 .anuary5E
!t is said that (eo(le don7t learn %rom history5 ,hat7s not always correct5 Peo(le do learn %rom
history1 it7s 6ust that o%ten they learn the wrong lesson5 +rom 10041 ;wami "eague7s econocrats
learnt that a stock market crash is something to be a#oided5 !ronically1 they didn7t learn how it
can be a#oided5 :ow that the bubble has burst1 how the country7s economic managers steer the
country7s economy remains to be seen5
Jyoti Rahman is an applied macroeconomist and a member of Drishtipat Writers' Collective.
1. Articles expressing concerns abot a bbble in the D!" inclde# Ahsan $ansr and %rl
&o'e( !toc) $ar)et# A tic)ing bomb( *inancial "xpress( 1+ *ebrary ,-1-. and Jyoti Rahman(
/he !hare $ar)et 0bble( *orm( April ,-1-.
,. *or a good smmary of recent developments( please see# Raisa Aanta)i( 0ehind the !cenes the
!toc) $ar)et !aga( /he !tar $aga1ine( ,1 Janary ,-11.
2. !ee here# Jyoti Rahman and !haheen 3slam( $yopic 3nvestors and 3rreglar Reglators( /he
!tar $aga1ine( ,1 Janary ,-11.
4. !ee# $A /aslim( 3ntervention( $issing $oney and 3nflation( 0Dne5s,4( 1, %ovember ,-1-.
6. !ee# 3nam Ahmed( $agic game( once again( 1, Janary ,-11.

::: Star Weekend Magazine ::: http://archive.thedailystar.net/magazine/2011/02/01/economy.htm
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&o'yright (#) the*ai+y,tar-net 2010

::: Star Weekend Magazine ::: http://archive.thedailystar.net/magazine/2011/02/01/economy.htm
3 of 3 03!ct1" 10:#" $M