Photo : Messenger
In a time when controlling inflation has become a paramount concern for policymakers in the country, Dr. Atiur Rahman, an esteemed economist and former Governor of Bangladesh Bank, discusses the inflationary pressures that have been on the rise over the past one and a half years, necessitating a critical need for effective coordination between fiscal policy and inflation management.
Controlling inflation has become a paramount concern for policymakers in Bangladesh. Inflationary pressures have been on the rise over the past one and half years, necessitating a critical need for effective coordination between fiscal policy and inflation management. In both cases, a contractionary approach is indispensable.
What's remarkable is that, even though there is no apparent food shortage, food prices have surged, with food inflation currently standing at 12 percent. This raises the question: could the soaring food prices be attributed to disruptions in the supply chain? It's worth noting that the current average inflation rate exceeds 9.5 percent. In September, it registered at 9.63 percent, showing a gradual decrease from the 9.92 percent recorded in August.
International fuel prices are poised to rise once more due to the ongoing conflict in the Middle East, which presents a substantial challenge to sustaining the current downward trajectory of average inflation. A noteworthy concern lies in the fact that the rate of food inflation in rural areas stands at a staggering 12.71 percent, surpassing that in urban areas.
It's possible that the recent heavy monsoon rainfall has severely impacted vegetable yields, contributing to this imbalance. There's hope that the consequences of this natural disaster will be relatively short-lived. In addition to these domestic factors, the Russia-Ukraine war has disrupted global supply chains, further exacerbating the situation. Furthermore, extortion-related violence in streets and markets has added to the prevailing woes.
Compounding these challenges is the devaluation of the Taka against the dollar, which has also played a role in driving up the prices of essential commodities. Collectively, these factors have pushed inflation to intolerable levels.
Given the current economic realities, it appears necessary for the Taka to undergo further depreciation against the dollar. Over recent years, the Taka has already depreciated by approximately 28 percent. Nonetheless, a substantial disparity persists between the official exchange rate and the open market exchange rate, suggesting that the value of the Taka against the dollar has not yet fully aligned with market forces.
However, when contemplating currency devaluation, it is imperative to closely monitor and address the speculative behavior of remitters and entrepreneurs. Various stakeholders, including exporters, may be inclined to hold more dollars in anticipation of further depreciation, potentially affecting the expected income from exports. This could mean that despite devaluing the currency, the expected benefits might not materialise as anticipated.
In such a scenario, it might be necessary to cautiously dip into reserves to facilitate the import of essential daily commodities and fuel, albeit with prudence, in order to maintain stability in public life. Simultaneously, the transition towards a market-based exchange rate system should be pursued. Countries like Sri Lanka, Nepal, India, and Thailand have demonstrated positive outcomes by adopting this approach.
The income of emigrants represents a significant source of hope for Bangladesh, and it is crucial to understand why many of these emigrants are not utilizing official channels for remittances, opting for informal methods such as "hundi" instead. It is imperative to streamline and encourage emigrants to send their remittances through more formal and secure means, such as e-wallets or Mobile Financial Services (MFS).
A key priority should be to ensure that those using these informal channels are not subjected to any form of harassment or undue difficulties. It is essential to make the formal remittance channels as accessible and user-friendly as possible.
Many emigrants who use informal channels may not be aware of the disadvantages of these methods or the benefits of using formal channels. Hence, there is a need for focused policy efforts aimed at increasing their financial literacy without imposing strict regulations on them. By educating emigrants about the advantages of formal remittance channels and simplifying the process, it is possible to shift more remittances from informal to formal channels, benefiting both the senders and the country's economy.
Indeed, it's crucial to bear in mind that the primary driver of inflation is an excessive supply of money in the market. Therefore, the immediate focus should be on curtailing this money supply. Stabilizing the exchange rate of the currency is paramount, and concurrently, reducing government spending plays an equally vital role. The issue of budget deficit is intimately related to these concerns. In this context, we can propose specific policy measures that can contribute to a sustainable resolution of the current crisis:
Support for Small and Medium Enterprises (SMEs): Promote and support SMEs, as they can be vital for job creation and economic stability.
In summary, a combination of prudent monetary and fiscal policies, coupled with structural reforms and financial education, can help address the root causes of inflation and lead to a sustainable solution for the current economic crisis in Bangladesh.
1. Maintaining both fiscal and monetary policies in a contractionary stance is indeed a reasonable approach to address the issues of excess money supply in the market and the national budget deficit.
2. The central bank should maintain high policy rates to continually convey to the market that our top policy priority is inflation control.
3. Both interest rates and foreign exchange rates should predominantly adhere to market-based solutions. There should be no room for doubt in this matter.
4. Every conceivable effort must be exerted to diminish the excess money supply in the market.
5. The foremost objective should be the reduction of the substantial disparity between official and unofficial Taka-Dollar exchange rates.
6. Greater focus should be directed towards facilitating the supply side of emigrants' income. Simplifying dollar and other foreign currency transactions through mobile financial services should be a priority. Enhancing digital monitoring of these transactions is essential, with a commitment to ensuring that customers using this service are not subjected to harassment or undue inconvenience.
7. Likewise, it is important to streamline small foreign currency transactions associated with studying abroad, healthcare, and purchasing/importing digital products and services. By facilitating these transactions, the demand for dollars in the informal or shadow market can be effectively curtailed.
8. A comprehensive digital media campaign should be launched, specifically targeting Bangladeshi emigrants, to encourage them to consider investing in Wage Earners Bonds and Premium Investment Bonds.
9. The requirement to send free remittances exclusively through a state-owned bank should be eliminated. This practice results in unfair competition and discrimination against other commercial banks.
10. Addressing the volatility of the foreign exchange market cannot be effectively resolved by simply blaming responsible bankers or resorting to punitive measures. It is more desirable to engage in a constructive dialogue with all relevant stakeholders, including market participants, in order to identify the actual sources of the crisis and collaboratively find solutions.
11. To expedite commercial transactions with India in rupees, an initial initiative for a 'Currency Swap' worth two billion dollars could be considered. This would alleviate the strain on dollar reserves resulting from imports.
12. Essential reforms should be initiated to secure the second installment of credit support from the International Monetary Fund (IMF). This step will bolster the confidence of other international development partners.
13. In order to remove the shortcomings or 'imperfections' prevailing in supply chain of the country’s commodity market, it can be thought of taking a public social initiative of market supervision with the coordination of all stakeholders including the directorate of consumer rights protection, competition commission, city corporation, public administration, law enforcement forces.
14. The government’s budget must be curtailed. It would be better if the current year's budget deficit can be kept around 3percent .
15. Boosting the speed and efficiency of tax collection is paramount, and this can be achieved through full digitisation of the tax collection process. Digitisation is imperative for elevating the tax-GDP ratio to the desired level. While the latest IMF report estimates Bangladesh's current-year growth rate at 6percent , it is evident that our current focus is not primarily on growth. However, if the overall situation improves in the future, there will be room for discussions on how to accelerate economic growth.
Undoubtedly, policymakers have valid concerns regarding inflation, the fluctuation of the dollar-denominated exchange rate, and the rapid depletion of reserves. Nonetheless, it's disheartening to witness the extent of panic being stirred. Bangladesh's economy has thrived even with much lower reserves than the current level. Nevertheless, it would be unwise to dismiss these concerns entirely.
The writer is Professor Emeritus of Dhaka University and former Governor of Bangladesh Bank
Messenger/Disha
