Will comfort in global markets help reduce inflation?

Inflation

Challenges

• Depletion of foreign exchange reserves
• Pressure on exchange rate
• Adjustment of prices of electricity, gas, and fuel 
• Absence of proper monitoring

Prospects

• Prices of food, fertiliser, and fuel returning to normal in the global market
• Good yields are expected in the agriculture

Initiatives to increase inflation

• Bank borrowing worth Tk1.32 lakh crore
• Tk2,000 tax for individuals having income lower than the tax-free threshold 
• Increase indirect tax on essential products

Initiatives to tackle inflation

• Increase in tax-free income limit
• 16.58% rise in SNP allocation
• Continuation of subsidies in agriculture

Finance Minister AHM Mustafa Kamal has announced a target of lowering the average annual inflation rate to 6% in the upcoming fiscal year from a point-to-point inflation rate of 9.24% recorded this April. He cited the decreasing trend in global market prices and the cooling down of global inflation as sources of inspiration for drastically reducing inflation. 

However, attaining the FY23 target of reducing the average annual inflation rate to 5.6% cannot be met due to around 16% devaluation of the Taka following pressures on foreign exchange reserves, despite the reduction in global product prices, the minister said in his budget speech for FY24.

He mentioned that the prices of fuel, food, and fertiliser in the global market have decreased, and the government has implemented measures to stabilise the domestic fuel market and ensure normal food and supply systems. As a result, he expects inflation to be well-controlled in the next fiscal year, with an annual average of around 6%.

However, experts and economists have expressed their scepticism regarding the significant influence of the international market on inflation in Bangladesh. 

They argue that the inflation challenges faced by the economy primarily originate from domestic sources. 

They further emphasised the absence of significant initiatives in the proposed budget to alleviate inflationary pressures and support the poor, urging the government to implement appropriate measures to boost domestic production.

Dr Ahsan H Mansur, executive director of the Policy Research Institute (PRI), stated that the finance minister did not announce any specific policy responses to reduce inflation and warned that the implementation of the proposed budget may exacerbate inflationary pressures. 

He highlighted that the finance minister announced a large budget relying on borrowing from domestic sources, which could increase the money supply and create a cash crunch for the private sector, leading to adverse effects on investment, employment, production, and income. 

He emphasised that reducing the size of the budget through austerity measures is the only viable solution to alleviate inflationary pressures.

The noted economists believe that the primary challenge in controlling inflation lies in supply-side disruptions, particularly in production. 

The shortage of foreign currency poses a significant constraint on boosting inflation, he observed, adding that unless the government addresses this problem and eases supply-related issues, production will not keep up with demand, resulting in increased inflation.

The finance minister in his budget speech highlighted the government's successful track record in keeping inflation in check despite intermittent global economic recessions and rising food and fuel prices in world markets over the past 14 years. 

The average inflation rate has remained within 6.75%, he mentioned, adding that however, due to increased import costs resulting from post-war global inflation and the depreciation of the country's foreign exchange rate, the average inflation surged to 9.5% in August 2022. Consequently, it will not be possible to achieve the target of keeping the annual average inflation within 5.6% in the current fiscal year.

Additionally, the finance minister revealed that the foreign exchange reserves decreased from $46.39 billion in June 2021 to $29.97 billion currently. The Taka has devalued by 15.61% from Tk93.5 per US dollar in July of last year to Tk108.1 per US dollar.

Bangladesh Bank's initial attempt to stabilise the foreign exchange rate by increasing the supply of dollars in the market caused a temporary liquidity crisis. This, in turn, led to an increase in the government's interest expenditure on deficit financing from bank sources.

The finance minister assured that the government is implementing austerity measures in various areas in the current fiscal year while continuing to prioritise spending on projects related to public welfare and supply sectors. 

To ensure uninterrupted production in the agricultural sector, the government has taken swift and effective steps to ensure the supply of affordable fertilisers. The finance minister also announced that subsidies for agriculture will continue to be provided to enhance food production.

Furthermore, the finance minister acknowledged that the prices of electricity, gas, and fuel have been increased to reduce subsidy expenditures. He hinted at the possibility of further increases in fuel and electricity prices, which may contribute to additional inflationary pressures.

Dr Fahmida Khatun, executive director of the Centre for Policy Dialogue, expressed her concern regarding the impact of policies on power, energy, and fuel prices, stating that they will contribute to an increase in commodity prices. 

She also mentioned that the National Board of Revenue (NBR) aims to raise tax collection by Tk60,000 crore in accordance with the IMF's recommendations. However, she warned that the increased taxes on various items such as ballpoint pens, mobile phones, plastic products, and kitchen materials, including VAT rates and import taxes, pose a risk of future inflation.

Fahmida emphasised the need for making the market system more efficient by addressing issues like extortion, hoarding, and rent-seeking activities in order to alleviate future inflationary pressures. She pointed out that while the prices of many products in the global market are decreasing, they are increasing in the domestic market. 

She criticised the NBR for not taking advantage of opportunities to reduce prices through tax exemptions at the import level, noting that even when import taxes are reduced, it does not have a significant impact on the market. 

She suggested that greater emphasis should be placed on market monitoring, and the efficiency of government agencies such as the Tariff Commission, Competition Commission, and Directorate of Consumer Rights Protection should be enhanced to address these issues.

Furthermore, she highlighted that the finance ministry has not provided an adequate compensation package for the poor to cope with the forthcoming inflationary pressure. While an increase in the tax-free income limit by Tk50,000 may offer some relief for individuals with lower incomes, the imposition of a minimum tax of Tk2,000 for e-TIN holders will create an additional financial burden, Fahmida observed.

Dr Selim Raihan, executive director of the South Asian Network on Economic Modeling (Sanem), commented on the historically lower safety net programmes in Bangladesh. 

He pointed out that the government has failed to increase the allocation for such programmes in line with inflation in recent years. However, he welcomed the initiatives to increase the programmes for the next fiscal year and suggested that the per capita allocation should be at least Tk1,000 for each recipient.