On 21 September, Thursday, the Bangladesh Bank spokesperson Md Mezbaul Haque announced a rather significant decision taken by the central monetary authority of the country. The Bangladesh Bank will no longer provide direct loans to the government, for such loans come from printing new money, and at such a critical time for the inflation-ridden Bangladesh economy, such policy is only exacerbating the inflationary pressure.
The decision forebears good tidings for the common people, albeit late. Regardless, as the inflation rate hit 9.92% in August, inching close to an eleven year high of 9.94% which was registered in May, things look bleak enough for the time being. But as it goes - better late than never.
The government intended to borrow Tk1,32,395 crore from the banking industry in FY 2023-24. The data shows that at the end of February this year, the government's debt from the Central Bank's Devolvement Fund stood at Tk1,05,929 crore, which is almost 100% more than in July of the current fiscal year.
So, the message to the government is clear: you have to take loans from the banking sector, and you will get only what the sector can provide you. No more printing of new cash. And this had to be done to prevent the inflation from rising any further.
But, will this policy be adequate? It will certainly go a long way to cap the inflation rate, but sadly, it will not be enough. And this is the most important thing in understanding the inflation situation of the country.
Government borrowing from the Central Bank is certainly a big reason for the current inflation; but it is only one part of the story. One of the primary reasons for such high inflation is the acute supply shortage of commodities in local markets due to the import restrictions and LC restrictions.
Bangladesh is heavily reliant on commodity imports, and when the global economic crisis hit the country in 2022, the first thing the government did was impose restrictions on import. And such supply shortage pushed the price level much, much higher than it should be.
Dr Selim Raihan, professor of Economics of the University of Dhaka and executive director of the South Asian Network on Economic Modeling (SANEM) is of the same opinion regarding this matter.
"We need a comprehensive approach to contain inflation, and the new Central Bank decision to stop lending to the government is but one part of it. The interest rate needs to be adjusted. The government needs to adjust the domestic market, which they should have done long ago," he said.
"Market management failure has led to price manipulation and commodity shortage, and even when the government tried to intervene by fixing the prices of some commodities, due to the lack of oversight, it did not work. All of it adds fuel to the inflation," he added.
And this shortage is mostly due to the mismanagement of policy, as when the crisis first hit Bangladesh, the Central Bank first tried to fix the exchange rate, and failed conclusively.
Since there was such a gap between the dollar fixed exchange rate and the local market exchange rate, people inadvertently went for the informal line - hundi.
Whenever the fixed exchange rate policy failed, the Central Bank should have left the taka to the market, it would have surely fallen, but then the authorities would have had one less important thing to worry about. And not being able to manage the exchange rate took its toll on the reserve.
The government has put import restrictions to save the precious foreign reserve. But when the fixed exchange rate is not matching its market value, expatriate workers have begun choosing hundi. Hundi gives a bonus of Tk20-25 per dollar and it means a lot to them.
So, the local economy is getting cash injection, but it is only increasing the supply of taka, and this fresh supply of taka is not putting dollars in the reserve. The supply of taka in the economy is increasing, but since the dollar shortage persists, the government can not lift the import restrictions. As a result, the supply shortage is not coming down but the cash injection is pushing the price level upwards.
How much has this exchange rate fiasco affected inflation? Dr Jyoti Rahman, the macro-fiscal expert at IMF, thinks that it is one of the more important reasons for the inflation.
"What we have here is a supply-side push inflation, mostly. If the exchange rate was managed according to the IMF prescription, then the government would not have lost such valuable remittance. The countries that employ expat workers are booming now, and they are making good money. Do you think the expats are not sending money to Bangladesh? They are, but the government is missing it," he said.
Dr Selim Raihan disagrees with the common narrative that blames the migrant workers for pursuing hundi. He thinks that it is just one part of the story.
"You can not just say that the migrant workers are not sending money through the official channel. Unless money laundering can be stopped, the problem can not be solved. The reason the hundi cartel can offer such a high rate is because they are connected to money launderers; and the ones laundering money overseas are happy with the higher exchange rate. It is a vicious cycle of hundi, and it has to be stopped for our dollar reserves to increase," he said.
The second major reason for inflation is the government's expansionary fiscal policy. It is the election year, and the government will not cut back its spending now.
In order to prevent inflation from rising, austere measures must be enforced. But right before the election, it is probably not happening. When asked about his opinion on this matter, Dr Selim Raihan also agreed.
He said, "The government is highly unlikely to pull its spending down at this moment for obvious populist reasons. And for this, I do not see the inflation rate coming down from 8%-9% before December or January next year. And if the first six months of a fiscal year see inflation rates around 8%-9%, the government is not going to keep the rate at 6%, as per their projection in the FY 2023-24 Budget. It is not realistic."
Dr Jyoti Rahman is also of the same opinion, "Bangladesh has a cash-flow management problem. There is a definite plan for its revenue stream, and when the government takes populist decisions and increases spending, it throws a wrench to the plan. That is when the central bank has to give them the loan, and this creates inflationary pressure."
"The unwise government spending that is going to occur in the election year is certainly going to push the price level up, because they inject the demand in the economy. But the import restriction does not allow supply to rise the same way," he added.
So, it is highly unlikely that inflation rate is going to come down soon only because the Central Bank is not printing any more money to cover for fiscal deficits. However, it will surely relieve some of the inflationary pressure. And it certainly is a step towards the right direction.