USD crisis may ignite an inflationary spiral

The ongoing shortage of foreign exchange reserves has made it increasingly difficult for banks to open Letters of Credits (LCs), which is a crucial process for importing essential commodities such as milk, pulses, sugar and spices.

Recently released central bank data show that milk and cream import payments declined 23.4 per cent to $85.6 million during the first quarter of FY23, compared to $111.8 million in the same period of previous year.

Pulses import payment declined 29.3 per cent to $129 million and sugar import payment declined 36.6 per cent to $129 million in the same quarter of this FY, compared year-on-year. Similarly, import payments for spices declined by 36.6 per cent in the same period.

An analysis of the international market data shows that the prices of such essential commodities have not dropped that much, so the central bank data indicates that the imports of such goods are being severely impacted by the USD shortage, experts told The Business Post.

They warn that a dip in the domestic supply of essential commodities will trigger further price hikes, and this in turn may result in an inflationary spiral in Bangladesh, causing income and consumption inequality to intensify in the coming days.

Soleman Badsha – a trader at port city’s Khatungonj, the largest trading hub in Bangladesh – said, “We are unable to open LCs for importing essential products because of the USD crisis in banks. The ongoing situation will reduce our stock and further raise prices of these goods.

‘The spiral effect’

Mohammad Abdur Razzaque, chairman at the Research and Policy Integration for Development (RAPID), said, “As a result of various initiatives, imports are decreasing.

However, a drop in the imports of consumer and capital goods cannot end well.

“The price of consumer goods in the country has increased due to the devaluation of taka against the USD. Now, due to decrease in imports, the stock of these goods will decrease and the price will increase further. This is called the spiral effect.”

Razzaque added, “This will force the poor and marginalised to reduce consumption of essential commodities, which can pose serious health risks in the long run. The overall inequality, which has been already on the rise for the last few years, will climb further.”

What about capital goods imports?

Overall import payments for capital goods import declined 2.6 per cent to $3.59 billion in the July-September period of FY23, compared year-on-year.

Under the capital goods category, imports of capital machinery increased by 11.5 per cent to $1.3 billion during the same period. However, the imports of other capital goods declined by 9.1 per cent to $2.29 billion.

RAPID Chairman Razzaque said, “If the import payments of capital goods decrease, domestic production will decline as well. This will result in a growth disruption. So the government should not keep the growth rate high for the current FY, and should revise it.

“Then the economic management can be better.”

Experts said when inflation hits an economy, growth almost always slows down. In the budget for FY23, GDP growth was set at 7.5 per cent and inflation rate at 5.6 per cent. But in August and September this year, the inflation rate crossed 9 per cent, which is the highest in a decade.

Explaining the growth in capital machinery import payments, former lead economist of World Bank Dhaka Office Zahid Hussain said, “This figure has increased due to the price hike of the USD against taka.

“Not much new investments came during the period. However, new machines have been imported to replace old ones. So, the growth is not very substantial.”

Import payments for pharmaceutical products declined drastically by 65.5 per cent to $89.4 million in the July-September period compared year-on-year.

Pharma industry insiders pointed out that during the Covid-19 pandemic, the demand for hygiene products and health safety equipment skyrocketed, and imports soared. After the pandemic restrictions eased, such demands nosedived, so the imports fell as well.