Fighting Inflation in Bangladesh | New Monetary Policy Fails to Meet Expectations

A new monetary policy will not be enough to help Bangladesh tame higher inflation as the central bank has failed to take sufficient action to meet huge expectations, economists and experts said yesterday.

They also said monetary policy alone would not be enough to stem the rise in consumer prices, and supportive fiscal policy and appropriate market management were crucial.

They made the remarks at a public lecture on “Can the new monetary policy help our economy?” organised by The Daily Star at its office in Dhaka.

“The central bank is trying to achieve too much through monetary policy, which is a problem,” said MA Taslim, professor of economics at the Independent University of Bangladesh.

“The central bank takes a sledgehammer approach, saying you have to accept this interest rate and you have to trade at this rate even if you don’t want to. When you do something like that, the outcome is not as good as it could be if markets were relatively free.”

He said the core policy of Bangladesh Bank is to manage inflationary pressures and stabilize the exchange rate.

“But all it does is fix it by forcing people to sell at that rate.”

The exchange rate has never been fully flexible, and the introduction of a crawling exchange rate, which the central bank is planning, is unlikely to solve the problem.

“It has never solved any problem. By definition, creep means you are not in equilibrium. As you get closer to equilibrium, the equilibrium shifts,” Prof. Taslim said.

Ashikur Rahman, senior economist at the Policy Research Institute, said the new MPS was a lukewarm response to current inflationary pressures, raising the interest rate to 8 percent, lower than inflation of 9.4 percent.

“If you look at how central banks have responded in India or the US, they have been much more aggressive in raising interest rates because they have been happy with interest rates that are higher than their inflation rate. Unfortunately, you don’t see such bold measures in the new MPS.”

He said the governance crisis in the banking sector had become a binding constraint on effective inflation management as the BB was printing money to bail out troubled Islamic banks.

“Without correcting this fundamental governance deficit in the banking sector, we cannot tame the current inflationary pressures. Unfortunately, the MPS is not taking this problem seriously.”

Rahman praised the central bank for its decision to move away from interest rate constraints and adopt a target-setting system.

“It would be even better if the Bangladesh Bank opted for a framework targeting the inflation rate, as is done in advanced economies.”

He added that the decision to begin transitioning to a market-based exchange rate is also a step in the right direction.

The PRI economist asked the BB to abandon its cool response and set the interest rate at least at the level of the inflation rate, and to closely monitor whether this will stop the depletion of reserves and reduce inflationary pressure.

“If not, then we need to go even further.”

While presenting his keynote address, Mamun Rashid, Managing Partner, PwC Bangladesh, said the central bank announces monetary policy by allowing interest rates and exchange rates to rise and the market plays a role in this.

“But in emerging economies, monetary policy alone cannot help contain inflation. Market management is key. But we have failed in this area.”

Rashed Al Mahmud Titumir, professor of economics at the Department of Development Studies at the University of Dhaka, said the central bank is working to maintain interest rates but that it will not help bring down inflation.

“The authorities need to identify the causes of higher inflation. Why aren’t retail prices of goods falling even after they have fallen on the wholesale market?”

He added that uneven supply and such devaluation are the cause of uncontrolled inflation.

Titumir, citing a 33 per cent increase in imports in fiscal 2021-22, said, “Has the central bank taken the initiative to find out the reasons behind this phenomenal growth?”

Similarly, he questioned the discrepancy in export earnings data maintained by the Bangladesh Bank and the Export Promotion Bureau. “Where did the money go?”

AK Enamul Haque, professor of economics at East-West University, said disruptions in supply chains, corruption and poor governance were also responsible for the unprecedented inflation.

“So interest rates alone won’t be enough to control this.”

Bangladesh’s foreign reserves have halved to about $20 billion in just two years. And Prof. Haque said the reserves will not grow in the traditional way.

“Market and product diversification is necessary to give much-needed support to exports and thus reserves.”

Reserve levels could also increase through foreign direct investment, he said. “However, investors will not invest if there is uncertainty.”

Masud Khan, president of Unilever Consumer Care Ltd, said that in Bangladesh, higher inflation is mainly due to two factors: rising costs and monetary expansion.

“Can the cost-rise factor be addressed through higher interest rates, or will the situation worsen?”

He said food inflation was driven by dollar appreciation on imported goods. For local goods, higher diesel prices, transport and higher wages led to higher costs.

He added that lower production due to unfavourable weather, artificial shortages and supply chain disruptions also contributed to the price increase.

He said the investment climate was already bleak and there was almost no funding from local and external investors.

“The rise in interest costs will worsen the situation, which could undermine future economic growth.”

Khan said the surge in interest could be the final nail in the coffin for the struggling but promising SME sector. “The SME sector needs to evolve to ensure sustainable growth.”

Mohammad Muslim Chowdhury, a former comptroller and auditor general, said monetary policy is just an instrument and will not by itself help the economy.

He believes that focusing solely on fighting inflation by keeping GDP growth stagnant is not a wise policy move.

TIM Nurul Kabir, executive director of the Foreign Investors Chamber of Commerce and Industry, said the government should come up with strategies to attract significant amounts of foreign direct investment to ease the current foreign exchange shortage.

“The drastic depreciation of the domestic currency against the US dollar has caused a serious deficit of business confidence among foreign investors who are having difficulty repatriating dividends and profits due to the liquidity problem in the foreign exchange market.”

Mohammad Ali Khokon, president of Bangladesh Textile Mills Association, said the unstable exchange rate, nearly 40 per cent increase in the prices of capital machinery and rising bank interest rates have discouraged fresh investments in the primary textile sector.

“As a result, exports of some goods, such as home textiles, are declining.”

For example, exports of home textiles fell to $600 million last fiscal year from a record $1.6 billion.

He added that although the official US dollar rate quoted when opening letters of credit is 110 taka, importers buy the currency from banks at a price of 123 taka per dollar.

The BTMA chief called the deliberately defaulted loans looted loans.