Budget 2025: Bangladesh sets tough target of tamping inflation down to 6.5%

Keeping prices down amid a strain on reserves and world economic instability is likely to be a challenging task

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Finance Minister AH Mahmood Ali has presented a budget proposing to keep general inflation within 6.5 percent to parliament even as the government raises power prices and withdraws subsidies per the IMF loan agreement, with forex reserves under strain and instability looming over the world market.

Regarding the optimistic target set forward in his speech for the 2024-25 budget, the finance minister said that the main goal is to limit inflation within 4-5 percent in a Smart Economy.

But even after tackling the adverse effects of the coronavirus pandemic, global geopolitical instability has created fresh risks for Bangladesh.

The Russia-Ukraine war that began in 2022 pushed the price of crude oil up to $120 per barrel in the world market in June that year.

As a result, the prices of essential goods, including wheat and fertiliser, sky-rocketed, the finance minister said.

This instability in the commodity market of the world pushed up inflation in all countries, including Bangladesh, where the inflation rate remains stubbornly above 9 percent, he said.

The Awami League’s former finance minister AHM Mustafa Kamal had attempted to restrict inflation to 6 percent in the outgoing 2023-24 fiscal year. It was later revised up substantially to 7.5 percent. However, even that goal could not be achieved.

According to data from the Bangladesh Bureau of Statistics, the 11-month average of inflation in the current fiscal year till May stood at 9.73 percent, the highest in many years. Naturally, this has placed immense pressure on lower and middle-class families trying to afford their day-to-day necessities.

In his budget speech, the finance minister did not explain in detail how the average price inflation could be held at 6.5 percent.

He identified disruption in the supply chain in the domestic market as the main reason for spiralling inflation, while the other reason is the devaluation of taka against foreign currency.

Widening trade deficit essentially created pressure on the foreign exchange reserves and the exchange rate, forcing the Bangladesh Bank to sell off approximately $22 billion from the reserves, which led to the devaluation of taka approximately by 25.5 percent against the dollar.

This devaluation increased the price of imported goods which had an impact on the overall inflation of the country, Mahmood Ali said.

In his budget speech, the finance minister said that taming inflation is at the heart of Bangladesh’s medium-term policy strategy and sector wise strategies.

So, Bangladesh has already undertaken contractionary monetary policy in line with steps taken by other countries in the world to control inflation. The interest rate has been increased “significantly” while policy interest rate increased to 8.5 percent.

“To control inflation, various steps are being taken to make the monetary policy a successful one. At the same time, supportive policies are being implemented in the fiscal sector as well.

“Government support like Family Card and OMS Programs are being strengthened to protect the common people from adversities arising from high inflation,” the finance minister said.

“We are expecting that the inflation rate will come down to 6.5 percent in the next fiscal year as an outcome of the policy strategies that we have adopted,” he added.

POWER PRICE HIKE

Bangladesh applied to the International Monetary Fund for a loan in 2022 to stabilise the economy in the face of pressure on foreign exchange reserves. So far, the government has received $1.15 billion of the $4.7 billion loan agreement with the IMF in two tranches as they try to meet various conditions, including reducing subsidies.

Before and after the IMF agreement, Bangladesh started taking several steps to reform the structure and policies at play in the financial sector, raising power and gas prices and reducing subsidies at their recommendation.

On Jan 18, 2023, the government issued an executive order increasing gas prices for industrial, power generation and commercial sectors amid talks with the IMF. Since then, power prices were hiked three times between Jan 31 and Feb 28, each time by an average of 5 percent at the customer level. This has had a direct impact on market prices.

As part of the subsidy adjustment policy, the government has increased electricity prices by 8.5 percent at retail and 5 percent at wholesale from March. The new schedule sets the price of electricity for residential customers up to 50 units at Tk 4.63 per unit and for customers using more than 600 units at Tk 14.61 per unit.

According to the Ministry of Power, the average wholesale price per unit has increased from Tk 6.70 to Tk 7.04 and the average retail price has increased from Tk 8.25 to Tk 8.95.

Previously, the BBS would calculate inflation based on the prices of ‘a basket’ of 422 commodities. It added around 300 more products to the 'basket' in May last year according to the advice of the IMF.

Inflation has been hovering close to double digits for most of the current fiscal year. State Minister for Finance Waseqa Ayesha Khan expressed the hope that it would come down closer to the government’s target by the end of the year. But that has not happened.

In the budget speech, the finance minister said, “