Why can't Bangladesh tame inflation?
While food inflation has eased a bit, inflationary pressure has persisted. Why can’t Bangladesh tame its inflation?
After a brief respite, inflation in Bangladesh has crept up once more. While food inflation eased slightly to 8.93% in March (down from 9.24% in February), general inflation rose to 9.35%, breaking a three-month downward trend.
Despite the marginal decline in food inflation, non-food inflation spiked significantly—climbing to 9.70% from 9.38% the previous month—driven by increased costs in clothing, healthcare, and transportation. Global concerns such as the threat of recession and higher tariffs proposed by Donald Trump are only exacerbating the situation.
In October last year, the International Monetary Fund (IMF) revised its inflation forecast for Bangladesh upwards. Just yesterday, it projected that average annual inflation will hover around 11% in FY25, before easing to 5% in FY26, owing to tighter policies and improved supply conditions.
This projection demands closer scrutiny, particularly in light of findings from the Bangladesh Bank's latest Inflation Dynamics report. In December last year, domestic products accounted for 84% of inflation, while imports made up just 16%. Comparatively, in September, local goods were responsible for 74% of inflation, and imports for 26%.
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These figures clearly indicate that domestic products are playing an increasingly significant role in driving inflation. This challenges the prevailing narrative that costly imports are the primary culprit. Instead, the data suggest that domestic inefficiencies—such as supply chain bottlenecks and rising production costs—have become the key inflationary drivers. And so, the inflationary cycle continues.
Supply-side constraints in domestic production
One of the principal causes behind the rising contribution of local goods to inflation lies in disruptions on the supply side, especially in agriculture and essential commodities.
Following last year's floods, Bangladesh enjoyed a bumper harvest of vegetables, which led to a temporary dip in prices during Ramadan. However, this seasonal relief is unlikely to last. Once the supply cycle normalises, prices may rebound, renewing inflationary pressures.
"In a few months, we will run out of winter crops. Then we may again see a price hike. This highlights the cyclical nature of agricultural inflation, where supply-side constraints can create sharp fluctuations in price levels," said agricultural economist Dr Jahangir Alam.
"The market intermediaries need to be reined in. Otherwise, we cannot capitalise on seasonal gains. Extortionists and hoarders must be curbed. Otherwise, inflation will rise again once the season ends," he added.
Weak supply chains and rising raw material costs
Beyond agriculture, supply chain inefficiencies have worsened inflation. Even with healthy production levels, distortions in distribution prevent price reductions from reaching consumers.
These inefficiencies were particularly evident in Q2 FY25. Bangladesh's supply chain remains highly fragmented and overly reliant on intermediaries, leading to artificial price hikes—especially for perishables. The Bangladesh Competition Commission (BCC) has pointed to monopolistic and cartel-like behaviours as key contributors to this dysfunction.
Retail and wholesale price margins widened significantly in late 2024. According to the central bank, while prices paid to farmers remained relatively stable, the final consumer prices for staples such as lentils, edible oil, and cereals stayed high. This suggests that market inefficiencies, rather than supply shortages, are behind the elevated consumer prices.
When you need to import your raw materials for a higher cost, you will increase the price of your products to offset the cost. Also, the rapid depreciation of taka against the dollar has pushed the production cost further. This cost-push inflation cannot be solved by monetary policy measures. We need fiscal policy measures to mitigate it as well.
Meanwhile, global commodity prices—including fuel and essential food imports—stabilised during Q2 FY25, lessening the impact of imported inflation. A more favourable exchange rate also helped mitigate the cost of externally sourced goods.
Nonetheless, global inflationary pressures and the depreciating taka have increased production costs domestically. Around 70% of Bangladesh's total imports consist of raw materials, making the country particularly vulnerable to these effects.
"When you import raw materials at higher costs, you have to raise product prices to offset them. Moreover, the sharp depreciation of the taka against the dollar has further pushed up production expenses. This cost-push inflation cannot be addressed by monetary policy alone—we need fiscal policy measures as well," said Dr Zaidi Sattar, chairman of the Policy Research Institute (PRI).
He added that as imported consumer goods become more expensive, demand shifts to local substitutes—raising their prices and contributing further to inflation.
The role of monetary policy
An often-overlooked aspect of Bangladesh's inflationary woes is that they predate the Russia-Ukraine war.
"Bangladesh was already a relatively high-inflation country before Covid-19," said Jyoti Rahman, Director - International at the Sydney Policy Analysis Centre. "In the late 2010s, while global inflation was low, Bangladesh was experiencing around 6% inflation—higher than most of our neighbours, except perhaps Pakistan. This reflected the loose macroeconomic policies of the former regime."
Rahman noted that after Covid-19 and the onset of the Ukraine war, inflation spiked globally. The correct response should have been monetary and fiscal tightening, along with stabilising the exchange rate. "But the previous regime chose parallel exchange rates, import controls, and interest rate caps. These policies backfired—the taka depreciated, reserves dwindled, and inflation persisted."
"Only recently has conventional policy tightening begun to stabilise the currency and ease inflation," he added.
Dr Sattar echoed this sentiment, saying Bangladesh's failure to act quickly as the taka depreciated added to inflationary pressures. "When the currency weakens and no corrective measures are taken, production costs rise—resulting in inflation."
Learning from Sri Lanka: A tale of two recoveries
In the early 2020s, both Sri Lanka and Bangladesh faced severe inflation. However, their policy responses—and outcomes—differed drastically. By 2023, Sri Lanka had managed to curb its runaway inflation from 73.7% to under 1% in just one year. Bangladesh, by contrast, continues to struggle with persistent inflation in 2025.
So how did Sri Lanka do it?
In March 2022, Sri Lanka's central bank took decisive action by hiking its policy rate by a staggering 700 basis points in one go, eventually raising it to 18.5% within a year. This aggressive monetary tightening, coupled with fiscal austerity and currency devaluation, cooled the overheated economy.
"Sri Lanka raised its policy rate substantially, and crucially, it did not impose lending rate caps like we did," explained Dr Zahid Hussain, former lead economist at the World Bank's Dhaka office. As a result, lending rates rose from 10% to 18.7% in a year—curbing demand and bringing inflation under control. By September 2023, inflation in Sri Lanka had dropped to just 0.8%.
In contrast, Bangladesh retained lending rate caps, making policy rate hikes largely ineffective. The adoption of the SMART rate formula—a six-month moving average of treasury bill rates plus 3.5%—delayed transmission of policy changes to actual lending rates. "By the time higher rates kicked in, the economy had already absorbed the inflationary shock," noted Zahid.
Currency management was another critical difference. Sri Lanka allowed a sharp devaluation, letting the dollar surge from 200 to 360 rupees in just four months—sending clear market signals, reviving remittance inflows, and easing speculation.
Bangladesh, however, attempted to artificially manage the exchange rate. "Even when informal rates hit Tk126, the central bank instructed banks to buy remittances at no more than Tk116," said Jyoti Rahman. This dual-rate system discouraged formal remittance inflows and undermined the central bank's credibility.
Sri Lanka also adopted painful but necessary austerity measures to curb its budget deficit. Bangladesh, in contrast, continued with monetary financing—essentially printing money—and expanded refinancing schemes during an inflationary period.
"Increasing refinancing during inflation means injecting more money into the economy," said Zahid. "It may have targeted small exporters, but it didn't help inflation."
Meanwhile, wage growth in Bangladesh has lagged behind inflation. In December 2024, nominal wages grew by 8.1%, while inflation stood at 10.9%. This gap has eroded real incomes and weakened household purchasing power, contributing to stagnation in economic activity.
Yet, despite falling real incomes, demand remains robust in certain segments—especially for essential goods—sustaining inflationary pressure.
The way forward
While food inflation may have eased, structural inefficiencies in the domestic economy continue to drive overall inflation. Addressing this challenge requires a comprehensive approach: supply chain reform, stronger regulatory oversight, and targeted fiscal interventions to enhance production efficiency. Without these, Bangladesh risks remaining trapped in a cycle of persistent inflation.
