What does inflation have in store for businesses?

Today, as one opens the newspaper in the morning to read, they will have to go through articles which have been more or less similar in the last few months. Governance issues of the banking sector, falling reserves, interest rate for deposits and borrowing, slowdown of export orders, rising energy bills etc. will more likely than not be featured. So the question which needs to be asked is: where are we heading? 

With the successful policies undertaken by the present government, Bangladesh came out of the Covid-19 days relatively in a better shape than other countries. A lot of policy support in terms of finance and subsidies were given out which kept the economy gaining momentum. Also, during that time, Bangladesh went through two floods and also a devastating cyclone which damaged crops waiting to be cultivated. 

Everything was looking promising in spite of the shocking rise in cost of logistics. We were breaking all previous export figures. And then the war between Russia and Ukraine started. This had a knock on effect once again on the supply chain as Ukraine is one of the world's largest grain exporters and a source of a lot of the raw materials needed for a cross section of sectors.

Today, one of the most talked about issues in Bangladesh is inflation. Since the interest rate is capped which has been lifted in case of consumer loans in the new monetary policy, the restriction for lending to businesses has not been lifted. Also, recently the news media has been reporting that Bangladesh Bank has been printing money for circulation and the government is now borrowing from the central bank to meet the expenses.

We all know there are certain measures which are usually taken to tame inflation. One of them is raising interest rates. In the just announced Monetary Policy, we have seen that also the percentage for public sector expenditure has been raised while the private sector growth rate is not changing accordingly.

So, what does this mean for us who are engaged in business? 

We will have to compete with the government to inject working capital or finance to start new businesses. We have noticed the call money rate touching the capped interest rate for businesses set by the central bank. 

Now, if we look into the economies who went for printing money after the Covid-19 pandemic to kickstart their economy, all of them are going through an all-time high inflation. So, with this in mind, the just announced monetary policy is self-contradictory as it will further create inflationary pressure on Bangladesh's economy. And that will sooner or later have an effect on the interest cap. 

When we are talking about creating new jobs, this will have an adverse effect. Banks also have had their capital flow somewhat disrupted by the moratorium on loan repayments. This also is having an effect on the overall financial sector.

Different exchange rates for the greenback is another issue we really need to look into. As an exporter of ready-made garments (RMG) products, why should I be given less when converting to Taka? Why should businesses who mainly deal with the internal economy and service sector – which are mainly SMEs, be paying a different higher rate of exchange when importing their raw materials who contribute more than 60% to the GDP of the country and employ over 85% of the workforce? 

Recently, the Central Bank has said that they will be going for a market based exchange rate by the end of the year. But this brings forth another long term problem on the horizon. 

With the graduation of Bangladesh from a least developed country (LDC) to a developing country, we still have seen no tangible long-term policy from the government to prioritise industries who will be engaged in manufacturing of import substitutes. With the Ministry of Commerce moving ahead with FTAs and PTAs, we need these industries to be up and running very soon. These industries in the consumer goods, light engineering, medical, telecoms needs to be in place as soon as possible to reduce future import dependency. 

As for the energy prices we have seen the government going towards a market price based electricity tariff in the long run. With a fast growing country like Bangladesh this is inevitable. But as a businessman I would like to see a long term energy roadmap, so we can react accordingly and have a plan to overcome the rising costs. We don't want to see a 15% price hike followed by a 25% increase. Instead, gradually over a period of time it should be spelled out how much it will be increasing over time. 

Overall, this year will be tough for everyone. On one hand there will be inflationary pressure which will decrease the consumption of the section of people with fixed income. This forecast is applicable not only in Bangladesh, but across the world. We already have seen decreasing order volumes of RMG in certain export destinations because of the rising costs. 

Higher energy costs, stagnant projection for private sector credit growth along with pressure on the foreign reserves, looming inflationary effects on the horizon coupled with no initiatives taken to support SMEs and governance issues in the financial sector will make this year an interesting one to see. 

Prime Minister Sheikh Hasina, throughout her term in office since 2008, has always undertaken proactive inclusive policies which have been favorable for the business environment. We have seen record growth throughout the years. With successful management of the economy during Covid-19 pandemic, we have seen how she had navigated the Country out into greener pastures. 

Since we have seen the stability that the Prime Minister has ensured for Bangladesh and continued growth, it sometimes gets frustrating for us businessmen to see mishandling of certain issues by the concerned departments and agencies of the government. 

Within 14 years of the HPM coming to power we have seen the RMG export numbers from Bangladesh grow by over 300%. So, we know when the symbiotic relationship between different stakeholders pays dividends, especially when the HPM is involved in the policy framework. 

I sincerely hope that 2023 will not end on a sour note, but see Bangladesh come out stronger into calmer waters navigating through the rough seas.

Shams Mahmud is the managing director of Shasha Denims