Inflation for a longer time is not at all expected for an economy. However in Bangladesh despite continuous efforts inflation can not be controlled. Inflation stands at double digit in October, 2024 at 10.87% while for food inflation it is 12.66% as per BBS data, which is unaffordable for not only the marginal people but also for the medium income people.
Inflation means an overall rise in price level that wears away the purchasing power of the currency. It may be considered as an indirect tax on the poor who maintain their life through a fixed income. Generally, inflation at4-5% is consideredaffordable for an economy. Recently some special measures such as single borrower limit has been withdrawn, while import duties on most of the food items have been made zero. Foreign exchange reserves have shown an upward trend, all these indicators gives us a hope that inflation will come under control in the near future.
Examples of goods which usually cater to the needs of the mass people and whose demand is inelastic such as rice, onion, salt, potatoes, egg, oil etc, price rise are mostly seen in these categories. In the past, it was easy to refersyndicate by the people close to the government through a nexus with the political partners to contribute price enhancement, however present non-political government cannot be blamed for that, then why inflation cannot be controlled is a question from all quarters.Sometimes experts dubbed it as the syndicate driven who usually store good for good days.
Marginal consumers who mostly spentlion's share of their daily income for buying necessary goods for consumption, they do not have any surplus to buy other products , such as medicine, books for the children, paying house rent, electricity and other utility bills etc. Sothe only alternative for them is to reduce food intakes. Economists termed the present long-standing as supply side driven and not demand driven. However, in the market there is no dearth of supply of goods, there is an abundant supply of food items and other essentials. Bangladesh Bank (BB) enhanced policy rates continuously which is one of the way to control money supply. Policy rates are those rates which have been used by the commercial banks to borrow money from the central bank, by raising policy rates central banks discouragecommercial banks from borrowing money from the central bank. As likeas other countries who have been able to control inflation by utilizing different economic tools, such as policy rate, is not working in Bangladesh.
According to experts, our policymakers is not responding because of not given the medicine timely, or we are already late in using policy rate as a tool to control inflation.However, there are several other reasons why policy rate as a tool is not working yet to tame inflation in Bangladesh.
A significant amount of the economy is informal, a good number of businesses are going on without any banking support, but the money supply remains in the economy. In that respect the increase of policy rate alone may not reduce inflation. Rather a good number of SMEs who are formally doing business will be included in the defaulter list because of not for their reason but because of monetary policies.
Now the increasing policy rate is impacting the economy negatively. With the increase of policy rate interest rates have increased. In one hand, businesses are sluggish, import is controlled, entrepreneurs cannot open L/C because of foreign exchange shortages, on the other high interest rate have become a heavy burden to them. If this situation continues for long non-performing loans(NPL) from genuine businesses will increase.
Along with interest rate, for getting finance from the banks and financial institutions, a number of other miscellaneous charges added with the loan money. These rates vary from bank to bank, in some calculations from BUILD, it is found that the amount is close to 2-3%, so in fact adding all these amounts real interest rate is much higher than that of the announced rate.
Moreover, our consumption loan amount is very low, making consumption loan costly as per monetary policy will not create any benefit. Furthermore, the supply-side issues require appropriate consideration of whether any market force disruption causes inflation.
Historical analysis reveals that the average interest rate in Bangladesh did not correlate with the inflation rate. Meaning when the inflation rate was low,but the interest rate remains higher. Accumulated NPL, the policy of provisioning could be another reason for increased money supply. Some people believe that since the COVID time a huge amount of stimulus package could be another cause for encouraging inflation.
The adoption of the crawling peg system is not working properly in the forex market. Commercial banks with good foreign currency stock are reluctant to trade on the par value of BDT 120 set by the crawling peg mechanism. The commercial banks are sourcing USD at a higher value than this i.e. more than BDT 120.
The commercial banks trade dollars either through interbank swapping or throughcross-currency transactions with foreign banks which take place with the Euro. Banks' transactions of USD in the spot market declined over time from July. However, an increasing trend has been observed in the case of interbank swap transactions and cross-currency trade. The commercial banks are reluctant to trade USD in the interbank spot market and rather find swapping arrangements more lucrative and suitable. Trading in the spot market under the crawling peg mechanism is not viable for the banks. At the same time, some of the exporters developed a nexus with the importers and sold the CM (contribution margin) portion of their export receivables to the importers which prompted the banks to pay over Tk 120 to the exporters instead of Tk 119 a dollar.
The reports appeared in the media informed that the commercial banks violating the instructions of the central bank are exchanging Euro at more than BDT 122 where they have been asked to exchange Euro at BDT 121. After purchasing the Euro currency, the banks convert it into USD again and sell at the local market at the rate between BDT 130 to 133. Thus, they are making a profit, and the crawling peg system is malfunctioning. Hence the crawling peg system requires upward adjustment, and it will require strong monitoring over interbank transactions. The exchange rate should be made market-based completely.
It is pertinent to mention that the present government is trying its best to make the market system operates at its own way and ease of doing business is ensured. The very recent steps of withdrawing single borrower limit and easingforeign exchange can contribute further and inflation controlled in the near future.
The writer is Chief Executive Officer, Business Initiative Leading Development (BUILD)
