Govt has a role to play in demand management

It is generally said that inflation is rising in the country because of increased import costs fuelled by commodity price hikes in the global market. 

But, there has been a rising trend in economic growth alongside inflation over the past two years. GDP growth might have slowed, had inflation increased only because of supply chain disruptions.

Rising inflation besides economic growth affirms that domestic demand is also playing a key role in the rise in inflation.

Commodity prices have gone up in the domestic market owing to the depreciation of the local currency against the US dollar alongside volatility in the international market. At the same time, prices of goods increased from the supply side due to an increase in import duty by the government to save foreign exchanges.

On the other hand, Covid-induced pent-up demand was released during the recovery phase of the economy. Many of the incentives announced by the government during the Covid period were implemented later. 

Considering all this, it can be said that inflation has risen because of an increase in demand. And if inflation increases due to aggregate demand, the government should play a role in demand management. 

The monetary policy of the central bank, the fiscal policy of the finance ministry, and the overall structural policy of the government play an important role in controlling inflation. Among these, fiscal policy and monetary policy are more important in the short term.

Even though the monetary policy statement suggested a slight contraction, the government's updated data have no reflection of this. The government has borrowed about Tk30,000 crore from domestic sources so far this fiscal year and all of it has been taken from the Bangladesh Bank by printing money.

Again, the Bangladesh Bank has outstanding repo of Tk26,000 crore till mid-December. The central bank is also injecting money in this sector.

Moreover, refinancing schemes have been opened in various sectors, where some Tk35,000 crore is going to be injected, including Tk25,000 crore in the SME sector. 

Although there is an increased demand for money in all these sectors, the risk of inflation is also increasing due to an increase in the money supply.

Inflation is not a problem for everyone. It is a savings crisis for the middle class and a livelihood crisis for the poor. Therefore, in order to avoid the crisis of livelihood, we must attach additional importance to the protection of the poor. To this end, the government should increase the expenditure on the social safety net. Attention should also be paid to making sure the benefits reach out to those who need them most.

It is not yet clear what reforms the IMF programme will entail. Things like abolishing multiple exchange rates, and lending rate caps may not be in the original terms of this loan.

If we think we need reform in important sectors such as interest rates, banking governance, and fiscal management, then why should we wait for the IMF or any other party? Why are we not doing it now?

Dr Zahid Hussain is the former lead economist of World Bank Dhaka office 

Disclaimer: Dr Zahid Hussain shared his thoughts at the Centre for Policy Dialogue's (CPD) Independent Review of Bangladesh's Development (IRBD) programme