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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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!n the three years ending in .anuary 2//0 share (rices in Dhaka Stock Exchange DSE3 rose byabout 4/ (ercent5 $#er the course o% the %ollowing year it doubled5 !nitially this was taken as asign 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/ a %ew #oices were wondering whether DSE was in thebubble territory51 ,hese Cassandras were howe#er generally ignored5 &etween .anuary ando#ember o% last year share (rices rose by 4/ (ercent5 ,hen in December the market startedwobbling5 ;nd in the %irst %ew weeks o% 2/11 it has seen un(recedented #olatility52 Chart 1 showsthe DSE (rices o#er the (ast %i#e year5

,hat we witnessed a ma6or bubble is now beyond dis(ute5< !ncredulous in#estors and anirres(onsible Securities and Exchange Commission (layed ma6or roles in blowing the bubble5 &utthe market (artici(ants and their regulators didn7t o(erate in a #acuum5 ,he bubble was (ossiblebecause we were in an 7easy money7 en#ironment = &angladesh &ank had been (ursuing anex(ansionary monetary (olicy 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%iable(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 thebusiness sector the go#ernment andinde(endent analysts that an in#estment boomis needed i% &angladesh7s economy is to grow by>8? (ercent a year5 ,hat7s why e#en during the(eriods o% high in%lation the &angladesh &ankhas sought to su((ort in#estment through anaccommodati#e monetary (olicy5 )owe#er inrecent years broad money has been constantlygrowing %aster than the &angladesh &ank7saccommodati#e targets Chart 235

,his has ha((ened because o% an unintendedconse9uence o% the &ank7s exchange rate(olicy5 !n addition to su((orting in#estmentthrough loose money su((ly the &ank has(egged taka against the dollar to su((ortex(orts5 ;s the dollar has de(reciated in the(ast cou(le o% years taka has seen a((reciation(ressures5 ;ccording to one analyst had it notbeen %or the &ank7s inter#ention taka wouldha#e a((reciated to 4/ (er dollar5@ ,he cost o% kee(ing the taka under#alued has been theexcess growth in money su((ly5

Did the bank achie#e its ob6ecti#e o% su((ortingin#estment and ex(ortA ;ccording tointernational agencies such as the -orld &ank and the ;sian De#elo(ment &ank both ex(ort andin#estment are ex(ected to grow strongly in the coming years5

)owe#er it7s not clear whether monetary or exchange rate (olicies ha#e anything to do with theoutlook5 E#en though the nominal exchange rate remains under#alued taka has seen a reala((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 ! han

itsel% a conse9uence o% the loose monetary (olicy35 'eanwhile how much o% the monetaryex(ansion has ended u( in (roducti#e in#estment remains an o(en 9uestion5 !n %act there is noreason to belie#e that in#estment has been constrained by a lack o% %inance = one could argue thatin%rastructure bottleneck energy shortage and (oor economic go#ernance are im(ortantim(ediments to in#estment that monetary (olicy is unable to sol#e5

*ather what seems to be reasonably clear is that the excessmoney su((ly ended u( in the stock market5 ;s the a((reciation(ressure mounted on taka money growth exceeded the targetrate by e#er8%aster (ace since late 2//05 ; large (ro(ortion o% that extra money %ound its way to the stock market5 -ith nocommensurate rise in the su((ly o% shares increased turno#ermeant ra(idly increased share (rices5

,hus in a misguided e%%ort to boost in#estment and ex(orts the&angladesh &ank ended u( blowing the mother o% all bubbles5,he central bank is as cul(able %or the current mess as anymyo(ic in#estor or irregular regulator5

,he monetary authority was not alone in the well8intentionedbut ultimately %utile attem(t to boost in#estment5 ,he %iscalauthority = that is the go#ernment = through tax breaks andschemes allowing whitening o% black money also %uelled thestock market bubble5 ;nd in addition i% not %or thego#ernment7s dithering the bubble could ha#e ni((ed muchearlier5

$nce bittennderlying the macro and microeconomic (olicy mistakes ha#e been the (olitical economic realityo% the ;wami "eague go#ernment7s bitter memory o% the 1004 crash5

!n the second hal% o% that year the DSE increased three8%olds as non8(ro%essional retail in#estorsand a huge in%lux o% %unds chased a hand%ul o% stocks5 ,hen the bubble burst with the (ricescolla(sing by about >/ (ercent in the %irst %our months o% 100>5 ,he boom and bust enriched a %ewtraders and market mani(ulators who had knowledge and inside in%ormation while generalin#estors (aid hea#ily5

;nd most im(ortantly that ex(erience seems to ha#e made the current go#ernment determinedto 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 then (erha(s a 7so%t landing7 = a moderate %all instock (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#ernment it a((ears wasnot ready to acce(t that5 E#ery session o% %all in share (rice was %ollowed by thuggish beha#iour in'oti6heel and ca#ing in by the SEC5 &ut without the ex(ressed su((ort o% the to( econocrats it7snot sur(rising that the micro regulators o% the SEC lacked the stomach to allow market correction5

n%ortunately 6ust as in (olitics so in economics where moderate re%orms are im(ossible #iolentre#olutions are all but ine#itable5 &y the beginning o% the year as &angladesh &ank realised that itcould no longer a#oid monetary tightening stock (rices begun to tumble5 *emarkably e#en atthis late stage our economic (olicymakers remained determined to a#oid the much neededmarket correction5 Possibly dri#en by the go#ernment7s (olitical im(erati#es &angladesh &ankdirectly inter#ened in the stock market while state owned banks were allegedly (ressured to

(ro#ide arti%icial su((ort = the result was the 1 (ercent rebound in the market on 11 .anuary5

!t is said that (eo(le don7t learn %rom history5 ,hat7s not always correct5 Peo(le do learn %romhistory it7s 6ust that o%ten they learn the wrong lesson5 +rom 1004 ;wami "eague7s econocratslearnt that a stock market crash is something to be a#oided5 !ronically they didn7t learn how itcan be a#oided5 ow that the bubble has burst how the country7s economic managers steer thecountry7s economy remains to be seen5

Jyoti Rahman is an applied macroeconomist and a member of Drishtipat Writers' Collective.

1. Articles expressing concerns abo t a b bble in the D!" incl de# Ahsan $ans r and % r l &o e( !toc) $ar)et# A tic)ing bomb( *inancial "xpress( 1+ *ebr ary ,-1- and Jyoti Rahman(/he !hare $ar)et 0 bble( *or m( April ,-1-.,. *or a good s mmary of recent developments( please see# Raisa Aanta)i( 0ehind the !cenes the

!toc) $ar)et !aga( /he !tar $aga ine( ,1 Jan ary ,-11.2. !ee here# Jyoti Rahman and !haheen 3slam( $yopic 3nvestors and 3rreg lar Reg lators( /he!tar $aga ine( ,1 Jan ary ,-11.4. !ee# $A /aslim( 3ntervention( $issing $oney and 3nflation( 0Dne5s,4( 1, %ovember ,-1-.6. !ee# 3nam Ahmed( $agic game( once again( 1, Jan ary ,-11.


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