Home ›› 16 Jun 2023 ›› Front
Bangladesh has been witnessing rising inflation for nearly a year. Economists and industry leaders say there are effective tools and measures to slow down inflation, but the globally practiced methods for remedying such a crisis are not being implemented in the country.
Even the proposed budget for FY24, placed this month, lacks concrete steps to rein in skyrocketing inflation. Experts have recommended four steps to the government for navigating the troubled waters, so that Bangladesh can maintain economic stability for the years to come.
The measures are – reducing the market money flow by increasing interest rate, reducing loans taken from the Bangladesh Bank to meet budget deficit, ensuring fair market competition by breaking up syndicates, and firm monitoring of the supply chain.
The government has three tools to control inflation – effective monetary and fiscal policies, and ensuring market competitiveness, former lead economist of World Bank Dhaka Officer Zahid Hussain told The Business Post.
Meanwhile, former chairman of the National Board of Revenue (NBR) Mohammad Abdul Mozid said, “The proposed budget for FY24 includes no direct or indirect steps for reducing essential goods prices. Inflation must be tamed through appropriate use of monetary and fiscal policies.”
Due to the ongoing Russia-Ukraine war that began last year, prices of goods in the international market rose significantly. So Bangladesh’s import payments jumped, and a USD crisis was created.
These two factors cause steady increase in the prices of daily essential commodities. Moreover, the fuel prices almost doubled last year, which in turn caused the prices of gas and electricity to rise as well.
Under such circumstances, inflation rose to 9.94 per cent this May, highest in the last eleven years.
Effective monetary policy
Imports have been curbed in a bid to overcome the ongoing USD crisis. Though the crisis is far from over, the move to curb imports has hit domestic production.
This is evident by the fact that during July-April of FY23, imports of intermediate goods dropped by 17.7 per cent to $37.48 billion, and at the same time, import payments on capital goods also declined by 18.8 per cent to $11.27 billion.
These measures had little to no impacts of stemming the declining forex reserves, which dropped by around $12 billion during the same period.
Economist Zahid Hussain said, “The government should have increased the interest rate to rein in inflation, but there is still a 9 per cent cap. Besides, the loans taken from the Bangladesh Bank to meet the budget deficit is fuelling inflation, because it is like printing money.
“The decline in import payments of capital goods clearly indicates that investment is also declining.”
Government borrowed Tk 92,289 crore from the banking sector in the first eleven months (July-May) of FY23 to cover the budget deficit, of which, Tk 71,610 crore came from the central bank, show latest data from the regulator.
Former president of Dhaka Chamber of Commerce & Industry (DCCI) Abul Kasem Khan said, “Businesses now favour raising interest rates. The central bank should play a key role in curbing inflation, and policy decisions must be taken immediately considering current circumstances.”
Khan, also a director of Federation of Bangladesh Chambers of Commerce & Industries (FBCCI), pointed out, “We, the businessmen, were in favour of a 9 per cent interest rate cap. But now we agree that the interest rate should be increased.”
Focus on fiscal policy
Analysts say the government has two ways under its fiscal policy to reduce inflation – tax reduction on daily commodities and reducing government spending. The proposed budget for FY24 does not feature any such policy.
Zahid Hussain said, “What did India do to curb inflation? They reduced import duty and VAT on essential items in their budget. But our budget has done the opposite. Some indirect taxes have been imposed, which in turn caused the goods prices to rise further.
The government has exempted VAT on import stage for 13 petroleum and its by-product items. Research institute Center for Policy Dialogue (CPD) thinks the move would help reduce fuel prices by Tk 5 – Tk 6 per litre.
Analysts however doubt about the decision’s impact on the market, adding that as the syndicates are now in control of the market, the price of goods cannot be impacted through tax measures.
Ex-chairman of NBR Abdul Mozid said, “Usually, raising or cutting duties cause goods prices to go up or down respectively. But this measure is no longer effective because of the syndicates. Even if VAT is reduced on fuel imports, only importers will reap the benefits.”
Government spending is supposed to go down as part of the austerity measures, but there is no sign of this in FY23. When the proposed and revised budgets for FY23 are compared, it can be seen that the government’s operating expenditure is up by Tk 2,877 crore to Tk 4,14,283 crore.
Zahid Hussain said, “When government expenditure is reduced, it affects the aggregate demand as well. Although the government said austerity measures will continue, the budgets for FY23 and FY24 does not reflect this notion.
Ensure market competition
According to a recent commerce ministry report, the rate at which the prices of some daily commodities have increased in the local market is higher than the increase in the global market.
The price of some products gradually decreased in the global market, but it has not decreased in Bangladesh’s market. This fact can be verified by analysing the prices of eight imported products, such as flour, onions and sugar.
In this context, Zahid Hussain said, “The price of imported goods, which are cheaper in the global market, should drop in Bangladesh too. But this is not the case. Prices are decreasing in India and other nations, but why are they not decreasing in our country?”
Voicing the same question, business leaders pointed out that alongside the prices of imported goods, the prices of locally produced goods are remaining high despite global market conditions.
On the issue, FBCCI Director Abul Kasem said, “We need to find out why locally produced essential commodities are facing price pressure. The supply chain should be closely monitored as well.
Abdul Mozid said, “One of the major problems of the country is market manipulation. It is happening right before our eyes. The government sometimes says that businessmen are not listening. Why would this situation persist?”
Analysts say the government has tried to set the prices of essential commodities – such as for sugar and edible oil – without breaking up the syndicates.
Commenting on the syndicates, Zahid Hussain said, “We have to track down the people who are in control of the market. After identifying them, we must investigate whether they conduct business in accordance with the competition policy.
“The market should be managed through policies, not directives.”
Business leader Abul Kasem Khan thinks that the price pressure triggered by inflation is going up, even though production is being interrupted due to gas and electricity shortages.
And Abdul Mozid said, “As part of a long term strategy, the country’s economy should reduce its dependence on imports. To overcome the USD crisis in the short term, initiatives should be taken to increase exports and remittance inflow.”
