Two major economic issues Bangladesh needs to tackle now

Policy responses in Bangladesh to the current economic challenges will need to be swift and pragmatic. VISUAL: BIPLOB CHAKROBORTY


Policy responses in Bangladesh to the current economic challenges will need to be swift and pragmatic. VISUAL: BIPLOB CHAKROBORTY

Bangladesh experienced a sharp rise in inflation in August 2022 – 9.5% – which fell slightly – 9.1% – in September, according to the Bangladesh Bureau of Statistics (BBS). Earlier in July 2022, the inflation rate was 7.48%, compared to 5.36% in July 2021. This increase is due to food inflation in the domestic market, since food accounts for about 60% of the consumer price index in the country.

Low-income and fixed-income households are particularly affected by inflationary pressures. For a country like Bangladesh, the inflationary pressure is quite significant since we are not a rich country. Even though our per capita income is $2,824 (projected) for FY2022, lower-middle and fixed-income groups earn significantly less because salaries do not increase in line with inflation. According to the Trading Corporation Bangladesh (TCB), commodity prices have increased by 50% compared to last year.

For all the latest news, follow the Daily Star’s Google News channel.

High inflation is now a global phenomenon. But if we look at the prices of essential commodities in other countries, we will find that several commodities are more expensive in Bangladesh than even in advanced countries – whether produced locally or imported. This is largely due to market distortion and mismanagement, where only a few players dominate the market. We often claim that if imports become more expensive, domestic prices will follow. However, some products are produced locally. Of course, the cost of transport has increased and it adds to the price on the consumer side, but by how much? In the case of imported goods, the imports are done in bulk, and it is not as if they are imported every other day.

Monetary policy plays an important role in controlling inflationary pressures. Within the monetary policy mechanism, the interest rate is used as an effective tool in such circumstances. Many countries apply this tool where the interest rate on bank loans is increased to control the money supply in their economies. In Bangladesh, the interest rate regime is controlled by the central bank despite the fact that our economy is largely guided by the philosophy of market economy. The logic often used by policy makers in developing economies is that a high interest rate on credit would discourage private investment. But credit growth in our private sector has been on the rise this fiscal year. Part of this loan is for the import of capital goods for investment purposes, but not all of it. In addition, if we look at the trend of private investment in the country, it hovers around 24% of GDP. It is unlikely that in times of crisis this trend will be broken. Thus, the logic that private investment is discouraged, manufacturing process disrupted and hence job creation reduced due to high interest rate on loans is not well founded.

What we need now is an increase in the supply of essential products, both through imports and local production, for which more funding is needed. Creating such fiscal space means stopping unnecessary costs and wasting resources. There should also be targeted support for small and medium-sized enterprises (SMEs). They should benefit from loans at a rate lower than that of large companies for their survival and job creation.

Apart from inflation, there has also been a decline in export earnings and remittances in recent months. This is of concern as exports and remittances are important sources of our foreign exchange reserves, which are used for our imports since we depend on imports for many commodities. Bangladesh mainly exports ready-to-wear (RMG) products. As the whole world faces an economic downturn and inflationary pressures, people in the middle and lower income categories will prioritize their spending on food, education, health care, housing and other necessities, and reduce their spending on clothes. Weaker growth and the fear that many economies are slipping into recession are alarming signs for our export sector.

Regarding low remittances, there is a lack of interest among senders to send money through the banking channel, despite the 2.5% incentive offered by the government. Although the number of workers going abroad is increasing, the flow of remittances is decreasing due to their preference to send money through informal channels which offer much better exchange rates. Moreover, due to the exchange rate regime administered for a long time, there was a significant difference between the official exchange rate and the curb market and informal hundi transactions. The central bank’s recent decision to operationalize the floating exchange rate has yet to have a significant impact, as the taka has continued to depreciate. Of course, the devaluation of the taka against the US dollar was only late since the real effective exchange rate (REER) in Bangladesh was higher than in other competing economies. The REER indicates whether a country’s currency is overvalued, undervalued or correctly valued. While this helped keep import costs lower, it hurt exports and remittances.

Contrary to declining export earnings, import costs rise, leading to a large trade deficit. The negative trade balance exceeded (-) USD 30 billion in fiscal year 2022, due to the increase in imports and the relatively lower increase in exports. Additionally, due to the negative growth in remittances, the negative current account balance increased sharply from (-) USD 4.6 billion in FY 2021 to (-) USD 18.7 billion in fiscal year 2022, which is unprecedented in recent history.

The challenge of the external sector is also reflected in the decline in foreign exchange reserves. High import costs are rapidly depleting our foreign exchange reserves. In June 2021, our foreign exchange reserves were sufficient to cover 10 months of imports. Due to the recent decline, reserves can cover about five months of import bills. While this should not be of concern to us under normal circumstances, the depletion rate and reduced possibility of replenishing reserves under current circumstances are of concern.

The ongoing challenges are expected to continue for many months and the scenario is uncertain. This is frequently reflected in changes in projections from various international organizations. Consequently, the political responses of the competent authorities will have to be quick and pragmatic. Now is not the time to obsess over GDP growth. Instead, our policymakers should focus on strengthening macroeconomic fundamentals so that our economy is strong enough to weather these uncertain and difficult times.

Dr Fahmida Khatun is executive director of the Center for Policy Dialogue (CPD). The opinions expressed in this article are those of the author.

Previous Capital returns at ADNOC Drilling Company PJSC (ADX: ADNOCDRILL) held back
Next Is Titan Machinery (NASDAQ:TITN) using too much debt?