Strategies for economic stability

Inflation has emerged as a pressing concern in recent times, casting a harsh and burdensome shadow on the lives of individuals with limited and unchanging incomes. It is becoming increasingly challenging to make ends meet, particularly for those with meagre financial resources, and food security has become a source of significant apprehension. Dr. Atiur Rahman, an esteemed economist and former Governor of Bangladesh Bank, discusses inflation, which plays a crucial role in our daily lives.

Inflation has emerged as a pressing concern in recent times, casting a harsh and burdensome shadow on the lives of individuals with limited and unchanging incomes. It is becoming increasingly challenging to make ends meet, particularly for those with meagre financial resources, and food security has become a source of significant apprehension.

In the preceding month of October, the inflation rate soared to 9.93 percent with a hike of 0.3 percent, marking the highest level observed in the past five months. By way of comparison, in October 2022, the inflation rate stood at 8.91 percent. In other words, over the course of the last year, the average inflation rate has surged by 1.02 percent.

Rural inflation experienced a notable increase this month, reaching 9.99 percent, which represents a 4.8 percent surge compared to the previous month. Consequently, the average inflation rate for October 2023 reached 9.5 percent, significantly surpassing the budgeted projection of 6 percent for the current fiscal year. The central bank governor himself has candidly acknowledged the formidable challenges of attaining this target.

Food inflation is presenting an even more dire scenario than the overall inflation rate. According to reports from the Bangladesh Bureau of Statistics (BBS), the average food price inflation exceeded 12 percent over the course of September and October. Interestingly, during this period, food inflation was actually higher in rural areas compared to urban areas. In October, food price inflation stood at 12.11 percent in urban areas but escalated to 12.54 percent in rural regions. Consequently, the rate of food price increase in rural areas exceeded that in urban areas by 0.43 percentage points. This disparity was even more pronounced in the preceding month of September, with food inflation reaching 12.51 percent in urban areas compared to 12.01 percent in rural areas, resulting in a 0.50 percentage point gap between the two.

There is indeed a significant correlation between overall inflation and food inflation, and the latter has a profound impact on the well-being of individuals with modest and moderate incomes. It is commonly assumed that food inflation would be relatively lower in rural areas, given that food grains are predominantly produced there. However, reality shows that food inflation is on the rise in rural regions as well. The underlying reasons for this phenomenon have not been thoroughly investigated, but it appears that the escalation in rural and overall inflation can be attributed to factors emanating from both the supply and demand sides.
 
On the demand side, there is an influx of funds circulating in the market, with rural areas experiencing a notable increase in the supply of currency. This upsurge can be primarily attributed to remittances from expatriates, injecting a substantial amount of money into rural economies. This financial inflow has led to increased demand for goods and services, which in turn has driven up prices, including those of food items, contributing to the ongoing food inflation challenges.

While many countries around the world are taking aggressive measures to combat inflation, it appears that our country's central bank is showing some degree of hesitation in raising policy interest rates. For instance, the United States Federal Reserve (Fed) has increased interest rates a dozen times in the past year. Meanwhile, the central bank of Sri Lanka, a South Asian country, has not shied away from raising its policy interest rate by a substantial 9% over the last three months. In contrast, our country has raised rates by a more modest 1.93 percent. As a result, Sri Lanka's inflation has now stabilised around one percent. This decisiveness from Sri Lanka's central bank demonstrates its capacity to independently tighten monetary policy, even if it has led to a decrease in its growth rate and, in some cases, negative growth. Their primary aim, in this context, has been to achieve macroeconomic stability rather than prioritising growth.

Going forward, a potential strategy could involve gradually reducing interest rates to stimulate the flow of loans and boost economic growth, as Sri Lanka may contemplate in the future. Balancing inflation control with economic growth is a delicate task, and it requires a thoughtful and comprehensive approach to macroeconomic policy.

Recently, efforts have been made to make the exchange rate of money with the dollar much more flexible. Exchange houses could buy dollars at whatever price they wanted. Banks certainly couldn't buy dollars from them for less than that. But the bank was still obliged to sell the dollar at 111 taka to the importers, which is still in effect. Then the difference between buying and selling was about twelve-thirteen taka, which now stands at four taka. How is this difference being met? In cash? Clean banks will certainly not walk this opaque path. If so, how do they do the big import business? Due to these ambiguities and opacity, it can be assumed that the foreign exchange market has become so 'tumultuous' or volatile. It is in this context that BAFEDA and ABB have changed their decision and said that from now on, banks will not be able to buy dollars for more than 115 taka as an incentive from exchange houses. But they cannot charge more than 111 taka while selling to importers. Even if we assume that the banks accept the new decision properly, how can the manipulation of four taka be reconciled? Do they have so much CSR funding?

But why would a bank trade dollars with a loss of four taka per dollar (actually, maybe more) like a charity? All in all, there has been a major hindrance to the import of goods from abroad. Due to this, the prices of these products have increased. Supply is also shrinking. This is how the product supply crisis has developed. To begin with, international supply chains have been affected by the impact of the Ukraine war. Along with that, the impact of the current dollar crisis has also hit the cost of transportation. Therefore, the rate of inflation related to imports is increasing. And the impact of the increasing price of the dollar is impacting the market. This state of the supply chain has come as a blow to the ongoing political unrest.

Blockade after hartal is going on. The bad culture of blocking the wheels of the economy is back. The movement of people and goods is being disrupted. People now often worry about leaving the house. Businesses in the informal sector have also largely collapsed due to this blocking culture. As a result, there has been a major disruption in the supply chain at the local level as well. And I am seeing the disaster in the transport sector with my own eyes. However, it does not seem possible to fully control inflation by relying only on the central bank.

The government should also come forward. Especially as an emergency measure, the sale of rice, pulses, and edible oil at low prices in OMS or the open market can be increased. The number of associated trucks and locations may be increased. Apart from this, the coverage of social safety net programmes for the ultra-poor can be extended to protect them from the pressure of food inflation. Care should be taken so that farmers do not reduce agricultural production due to the fear of buying fertiliser and seeds at high prices. If necessary, the related subsidy should be increased to purchase these materials at affordable prices.

The central bank has moved away from lending to the government by printing money. This will reduce price inflation a little bit. But still, the central bank is giving cheap loans to the banks. Due to this, inflation is increasing due to demand. The policy interest rate may be raised further to reduce this money supply. At the same time, the extent of credit control and monitoring can be increased to ensure that banks (especially bad banks) do not lend excessively. In fact, the central bank should refrain from providing money easily to the government or the private sector.

Along with the coordination of monetary policy and fiscal policy, social and administrative monitoring of the market system can be strengthened to bring inflation down. As part of this, reducing the duty on imported essential goods by 15-20 percent will definitely have an impact on inflation. It should be noted that, due to the devaluation of money, about thirty percent more revenue is being collected on these products. So NBR can give this discount.

Addressing market monopolies and the dearth of competition should be a primary focus in the endeavour to establish a fair and equitable competitive market system.

Dr. Atiur Rahman: Emeritus Professor of Dhaka University and former Governor of Bangladesh Bank