Runaway prices exacerbate unease in Bangladesh economy before national budget

Economists suggest ensuring strict monitoring of markets, increasing employment and investment and immediately raising the foreign reserve while curbing runaway inflation

People with limited earnings in Bangladesh are losing their ability to manage the everyday cost of living. Increasingly, their monthly income is becoming insufficient to pay bills, forcing some to dip into their savings.

Economists believe this situation reflects the broader economy. When it becomes difficult for ordinary people to maintain their regular lives, it indicates that the national economy is struggling. With various economic indicators trending downward, the economy is losing its capacity to rebound, they say.

Policy issues such as adopting a market-based exchange rate, uncapping lending rates, and implementing contractionary monetary policy have significantly impacted the economy in a short time, affecting its recovery from the pandemic and global conflicts, analysts say.

Economists observed that high inflation rates, driven by weak macroeconomic management, have spiraled out of control, dragging down key economic indicators and creating a major crisis.

They suggest ensuring strict market monitoring, increasing employment and investment, and immediately boosting foreign currency reserves while curbing runaway inflation.

As the national economy was recovering from the adverse effects of the COVID-19 pandemic, the Russia-Ukraine war, which began in 2022, delivered another blow.

The prices of the dollar, fuel, and food grains skyrocketed, while operational costs for businesses soared.

To stave off a full-blown crisis, Bangladesh undertook a $4.7 loan programme of the International Monetary Fund a year ago along with its own efforts.

Reforms under the prorgramme have mounted pressure on the general public as the government increased the prices of electricity and gas in a bid to reduce subsidies in the energy sector.

It is also trying to establish a market-based dollar rate – efforts that have sent the price of the greenback to Tk 117.

The withdrawal of a ceiling on interest rates for bank loans pushed up the cost of business and made people from the lower income group suffer for price rises.

Former Bangladesh Bank governor Saleh Uddin Ahmed blames “weak policy implementation” for the current economic situation.

‘‘Economic challenges have been there for a long time. The policies adopted by the government concerning the interest rate, exchange rate and market management have all failed. The financial sector is facing more pressure. The banks couldn’t overcome their liquidity crisis as the number of defaulters soared,” he said in an interview with bdnews24.com.

Economic indicators such as remittance, revenue and export reached a comfortable niche through ups and downs.

As the trade deficit was reduced through curbs on imports, the foreign trade balance and financial accounts are in better shape now.

The Annual Development Plan, however, still has a slow implementation rate while foreign investment has become slow.

INFLATION, INTEREST AND EXCHANGE RATE

After four years, the Bangladesh Bank removed the ceiling on interest rates. It also introduced a crawling peg in the exchange rate that increased the price of the dollar. Businessmen in the country are worried about increasing costs due to the decisions.

Bangladesh's economy, which was already under pressure, has been facing more after some of the new policies began to be implemented, believes Zahid Hussain, former lead economist at the World Bank’s Dhaka office.

‘‘National economy was expected to rebound but it has yet to be evident. Bangladesh Bank has issued a circular removing the interest rates. On the other hand, the governor told businessmen that the rates will be within 14 percent. Then two different messages are given,” he said.

‘‘The policy is in black and white but you can’t trust it. Then where is the protection for businesses? The businessmen lost their capacity to take risks. One can’t control inflation when a statement against the policy is given.”

Inflation has remained near the double digit threshold for the last two years and rose to the highest 9.94 percent in August last year. It was 9.89 percent in May this year.

Salehuddin emphasised effective market monitoring by the food and commerce ministries, along with the consumer rights agency to control inflation.

“Products are available in the shops, which means supply doesn’t have much problem, but still, prices are rising,” he pointed out.

He thinks prices will become tolerable if duty on import of commodities is reduced.

The former governor also suggested incentives for poultry and livestock sectors, while continuing subsidies for fertilisers and agriculture.

REMITTANCE, REVENUE AND INVESTMENT

Economist Zahid said, "The remittances, exports and revenue are somewhat in a comfortable position. No other indicators are in a good position. But the remittance flow could have been increased. This will require the government’s political will.”

Salehuddin Ahmed suggested that the government should urgently see why remittances are coming through illegal channels

He believes the illegal channels are becoming a means of money laundering.

Fahmida Khatun, executive director of the Centre for Policy Dialogue or CPD, said

tax exemptions and tax benefits should be stopped or rationalised as the tax-GDP ratio is still at 7.6 percent.

"In the current structure of NBR, only giving targets won’t work. They need more strength,” she said.

She advised to reduce the foreign debt as much as possible in such a context.

"It’ll be a huge pressure to repay the foreign debt in the coming days. As the financial account is still in deficit, foreign borrowing should be reduced. Otherwise there will be more pressure on the value of money.”

Salehuddin blamed the rapid change in economic policy decisions and fuel prices for a decline in investment when it is needed the most.

"Our competitor Vietnam receives $7-8 billion. In India too, foreign investment has now crossed $1 trillion in the past year.”

But in Bangladesh's case, the investors cannot make any decision if the policy changes frequently on interest rates and the dollar, Salehuddin observed.

“The country's credit ratings fell. They [investors] will look at the credit ratings, whether they can take the money or not. These areas should be improved.”

Zahid Hussain said the depleting dollar reserves do not bode well for the economy. “The decisions we are making are not being realistic.''

Policy Exchange Chairman M Mashroor Riaz told bdnews24.com that the economy is going through a “very challenging situation” as the reserves are not at the desired level.

“Despite several decisions taken over the past few years, the reserves have not stabilised. If there is no improvement here, it is not possible to maintain the value of the taka, and inflation will increase further.”