Inflation cause and effect
Despite the Great Recession and the Covid pandemic, Bangladesh’s economy has been able to maintain high GDP growth rates. Having crossed the troubled path from a predominantly agricultural economy, under the dynamic leadership of the current government, the country today stands on the verge of becoming a service and industrial developing country. But more recently persistently high inflation has emerged as a bit of a challenge to our macroeconomic balance.
World wide inflation
The jump in global inflation in 2022 was not just due to an increase in the money supply. In addition to the decline in global production due to the corona pandemic, the post-corona global demand surge, the trade conflict between the US and China, and the Russia-Ukraine war have led to high inflation worldwide.
Inflation in subcontinent
However, most of the countries in the world, especially the neighboring countries of India and Sri Lanka, have significantly reduced the inflation rate, but in our country, it has not yet come down to the expected level, although there is hope that the trend of inflation is being observed recently. It should be noted that in Sri Lanka in October 2022, the highest record inflation rate of about 73 percent was brought down to the desired level by the central bank of that country. India’s July 2022 peak inflation of 7.44 percent was followed by an increase in policy interest rates by the central bank, as well as a ban on exports of several commodities to keep domestic supplies adequate, which remain largely in place.
War and inflation are friendly relation
On the one hand, the disruption of the global supply system as a result of the Russia-Ukraine war and on the other hand, the ban on the export of some products in the source countries of our near imports, has become an obstacle to ensuring the adequate supply of many daily necessities including wheat, sugar, onions in the Bangladesh market. Besides, in the recent past, an important part of our daily food and agricultural products came from the neighboring country Myanmar. But recently, the bloody conflict between the military junta government and the rebel organizations of that country has spread to our border area, as well as the imposition of US trade sanctions on China and Myanmar, the import trade of Bangladesh has been extremely disrupted, which has also become an obstacle to ensure the adequacy of the supply of many products in the country.
IMF assessment in Bangladesh inflation
Various recently published studies have shown that most of the inflation that has occurred in the past months has been mainly due to depreciation or devaluation of the rupee against the dollar. Even the IMF delegation that visited Bangladesh at the end of 2022 in their assessment noted that 50 percent of the total inflation in our country was caused by exchange rate depreciation.
dollar reserved educing due to inflation
In August 2021, after the country’s total foreign exchange reserves reached a record high of 48.06 billion USD, global currency devaluation pressure began to intensify. To cope with this pressure, there has been a reduction in reserves of about 22 to 23 billion dollars and a depreciation of the rupee against the dollar by roughly more than 33 percent, which has fueled inflation through an increase in the prices of directly imported goods as well as import-dependent fuel and other raw materials used in domestic production. However, if there is not enough foreign currency reserves in the country, or if dollars are not released from the reserves to the foreign exchange market during turbulent times through the prudent policy of Bangladesh Bank, the depreciation and inflation in the country could have been more like Sri Lanka and Pakistan.
Government policy for inflation
The government and Bangladesh Bank have already taken various steps under the revenue and monetary policy respectively to reduce the pressure on the exchange rate and prevent the declining trend of foreign exchange reserves. Among these measures taken, withdrawal of upper limit of interest rate of loan and lower limit of interest rate of deposit, increase of policy interest rate, cash incentive of 2.5 percent announced by the government of expatriate Bangladeshis with the aim of encouraging remittances through banking channels, etc. are particularly significant. Besides, from October 22, 2023, banks also introduced the provision of 2.5 percent incentives on remittances from their own sources to meet the urgent demand for foreign exchange. Incentives on remittances were considered useful by the government and banks to temporarily deal with the turbulent situation at that time, but in the foreign exchange market it was considered to be the origin of multiple exchange rates. In addition, a review of the data shows that the cash incentive on remittances has abnormally increased the difference in the exchange rate between the formal market and the informal market of taka-dollar exchange in the foreign exchange market.
In fact, as much as attractive insurance rates are important in encouraging expatriates to send remittances through formal channels, it is more important that it reaches the right recipient seamlessly in a highly secure and speedy manner. Needless to say, Bangladesh Bank has been providing various policy support including permission to set up drawing system of remittances abroad to domestic banks and permission to use agent banking, mobile apps based digital platform and NGO linkage to ensure the collected remittances reach the country at the fastest time. But it is regrettable that the scheduled banks of the country have not yet made the desired progress in reaching the remittance money to the beneficiaries instantly in the remote rural areas of the country. In order to make proper progress in this regard, there is still a lot of room for comprehensive plans to be adopted and implemented by the scheduled banks of the country and from all government and private levels.
