Inflation remains uncontrolled since long starting from 2022 and the rate has been increasing constantly leaving marginal people at a serious stake. Very recently, of course, in a recent meeting Bangladesh Bank Governor assured that in the early months of the coming year inflation will start to be reducing and in the end of the coming fiscal it will be stabled at 4-5%. But for this we need stability in the exchange rate, supply side discipline, un-interrupted production process and many other supporting instruments.
In the meantime, global inflation has come under control, and the global average suggests that disinflation is taking place. According to the IMF's World Economic Outlook for October 2024, the global average inflation in 2024 dropped to 5.8% from 6.7% in 2023 (based on the data of 174 countries). In 2025, it is projected to come down further to 4.3%. In Bangladesh since the first 11 months of FY 2024, inflation averaged 10.27%, as per the report, the inflation rate of Bangladesh in 2025 is expected to be 10.7% compared to the predicted global average of 4.3% being significantly higher than the global average inflation rate.
Experts believes that the mesures for containing inflation taken by Bangladesh is too late, markets goes beyond control. The government during the fiscal year 2022-23, printed BDT 98,000 crore to meet the rising expenses of the government. This high-powered money has fuelled inflation in Bangladesh. From June 2022 to June 2023, the currency in circulation increased by 23.5% from BDT 2364.5 billion to BDT 2919.1 billion. Such an increase in money at hand might be a factor for inflation.
Economists and relevant news paper reports revealed that a huge amount of money has been diverted to different countries earned through corruption, the money remained at home while the foreign currency has been transferred, meaning money supply within the country increased. A huge amount of NPL has also been referred. However, the Interim Government has given maximum priority to control inflation and has announced several strategies.
Policy rates have hiked for three times in the last three months to raise it to a double-digit figure. On 27 November 2024, the central bank introduced treasury bills for duration of 90 and 180 days along with the existing T-Bills of 7,14 and 30 days. BDT 22,500 crore have been provided to the six ailing banks, it was believed that by increasing the duration of the T-Bills could give a relief in that respect by reducing the excess liquidity in the money market and seeks to reduce persisting inflation.
The newly introduced crawling peg, has to play a role for stabilizing the exchange rate. However, despite stabilization, the exchange rate has been depreciated by more than 35% in the last two years. Recently the exchange rate hiked further. The private sector have been forced to buy foreign currency at a high rate, leaving no option for them to attain some benefits from export.
The interim government has relaxed and eliminated duties on the imports of essentials for some essentials. However, this measure has not increased the imports of essentials within a short span of time. The Ministry of Commerce has formed a task force consisting of 10 members of different officials of the district administration to monitor the market and other processes in the supply chain.
Sri Lanka experienced heavy inflation during 2022-23 where in September 2022, it reached an all-time high rate at 67.40% and now in October 2024 it was negative 0.8%. That is from hyperinflation, the country is now experiencing deflation. The country grappling with an economic crisis successfully brought economic stability within the two years. Sri Lanks relied on increasing policy rate, within a year the hike was from 5.5% to 18.5%.The lending rate reached18.7% aligning with the policy rate. This rising lending rate cooled down inflation. i.e. it implies that the lending rate must align with the policy rate.
The Sri Lankan Rupee was allowed to depreciate drastically from Rupees 160 to 360 from February to May 2022. Currently, $1 is equivalent to 300 SL Rupees. They have cut unnecessary government expenditures by adopting austerity measures. In Sri Lanka nearly 90% of the people have financial access which is much less in our country. In 2023, Sri Lanka cut its budget deficit to 8.3% of GDP from 10.2% in 2022, despite unpopular tax hikes. There are good examples before us, but for Bangladesh it is taking much time for containing inflation and discipline in the money market while a competent governor is in the chair and can work independently.
The financial inclusion of Bangladesh is very low, and it might make the monetary tightening by the central bank malfunctional. Borrowing and deposit gaps have been increased, for SMEs it is 6%+ found from analyzing the data of BB, we found that the interest rate has risen significantly. For the SMEs, it has crossed 14-16%. Are the banks reaping any profits by taking advantage of increased interest rates, Bangladesh Bank should take any measures to cushion the SMEs from the impact of interest rate rise.
Once Bangladesh Bank wanted to make consumers loan costly by increasing its interest rate. The amount of consumer credit is very low, which was about 1.52% as on 31-12-2023, increased to 1.74% in November 30, 2024, however reduced to 0.82% in December 2024 for Janata Bank. Banks do not encourage consumers to loan because of its small amount and Banks have to invest high to run after the small loans. So increasing interest rate for consumers loan may not contribute further to reduce money supply.
Private sector thinks that trying to curb inflation only by raising the policy rate may backfire on the economy in the long run, particularly in investment, job creation and the banking sector. Rise in interest rate coupled with a depreciation in the exchange rate has increased the cost of production.
With the rise in policy rates, the interest rate has started to rise that will shrink the investment and ultimately impact employment negatively. Policy rate hikes result in increased interest rates that shrink credit flow. From June 2023 to June 2024, the growth of credit flow to the private sector decreased from 10.58% to 9.84%. Non Performing Loan( NPL) amount has increased from BDT 1,45,633 crore in June 2023 to BDT 2,84,977 crore in September 2024 which is a 95.7% rise.
Increased interest rates will particularly harm the SMEs by hampering their growth and it will also create unemployment. Due to cost overruns stemming from interest rate hikes, some SMEs might shrink operation resulting in laying off workers. The SMEs rely on banks' credit to maintain their operation costs. This cost will rise due to a rise in interest rates. Moreover, the rise in interest rates will hinder banks from disbursing credit to the SMEs. Furthermore, rising policy rates involve the risk of increased NPLs.
Supply-side constraints that occurred due to flood and import problems area cause of inflation, controlling demand and ensuring supply is one of the priorities. Despite raising the interest rate, the deposit is slowing due to cost escalation. The Crawling Peg mechanism in the exchange rate failed due to a lack of competitors in the forex market, which is bit oligopolistic in nature. Remittance in Bangladesh is controlled by a few aggregators in the international money exchange organizations.
We are aware of the policy tools taken by the government, which may take some more time to work in the market, however, if it takes too much time private sector sustenance will be challenging. The employment situation has become very critical because of failure of a number of big corporate. Strong monitoring and follow-up should be in practice so that proper medicine can be prescribed on time.
The writer chief executive officer, Business Initiative Leading Development (BUILD)
