What needs to be done now?

Zahid Hussain/TBS Sketch

The biggest problem the economy of Bangladesh is now faced with is soaring commodity prices.

Volatile global commodity prices coupled with increasing prices of the US dollar are currently fuelling inflation in the country. An increase in aggregate demand in the domestic market following the start of the recovery from Covid-19 fallouts also has contributed to the rising inflation.

In order to be successful in taming inflation, we have to address the root of the problem.

We do not have the capacity to control the world market situation. Both monetary policy and fiscal policy can do a lot to restrain domestic demand, even though the monetary expansion is not so far the main reason for the domestic demand. So far, monetary growth has been in a single digit.

The first thing we need to look at is what the various central banks around the world usually do to control inflation and what they are doing at the moment. Policy rates are rising sharply in different countries. It has been done in India too, and more will be done there. All countries, including America, are doing the same more or less.

A hike in the policy rate would influence aggregate demand if the interest rate is a market determinant. But, rate hikes would have little reflection on the market because of caps on all types of lending rates.

As such, if the policy rate changes, it will have an effect on interbank transactions even if interest rates do not fall in the market. Other than that, it has a signaling value. The signal is that if everyone thinks commodity prices will go up a lot in the future, then the demand will go up right away.

The central bank by changing the policy rate now can give the signal that they are monitoring the situation and that strict measures may be taken if necessary to control it.

Adjustment of lending rates will yield the fastest and most effective result in controlling domestic demand. It would not be right to lift the interest rate cap altogether, but it is possible to make the cap flexible. In this case, a range of interest rates can be fixed.

One last thing to keep in mind is that there is absolutely no room for expansionary monetary policy until inflationary pressures subside. The difference between the growth of the monetary expansion and the growth of the gross domestic product (GDP) should not be more than the rate of inflation fixed in the budget.

If GDP growth estimate plus inflation surpasses the monetary expansion rate, it might further stoke inflation.

Even in fiscal policy, the budget deficit cannot be allowed to be more than the actual deficit this time under any circumstances. This is because the tolerable limit of domestic demand has already been exceeded. In this case, a new deficit will provoke this demand as well as increase inflation.

Nevertheless, I am not recommending a contractionary monetary policy by reducing the budget deficit.

We may not have the capacity to take advantage of the opportunity to control inflation through tax structure in revenue policy. Generally, if tax rates are increased, the disposable income of the people comes down. As a result, as demand declines, so does inflation. If we want to raise disposable income, we have to increase income tax. But, here we see people asking for reducing tax rates.

The government has said it will reduce project expenditures to minimize the budget deficit. This will reduce pressure on the foreign exchange market, but will not reduce the internal demand. Expenditures on many projects cause a rise in domestic demand. In this case, the cost of the projects funded internally under the ADP will have to be re-evaluated.

Dr Debpriya Bhattacharya. Illustration: TBS

Debpriya Bhattacharya, distinguished fellow at the Centre for Policy Dialogue (CPD)

The government has to mobilise resources as much as possible from all possible sources. This is necessary to underwrite the biggest possible subsidy package in our history. To deal with rising prices of daily necessities, the government needs to further reduce the tariff and tax structure. This also entails harmonisation of the subsidy structure where food and energy need to get priority.

However, it will also be necessary to expand the sales network of TCB. To this end, family cards need to be made operational as soon as possible in Dhaka and beyond. The current discrepancy between official and kerb market rates of foreign exchange needs to be addressed immediately. Importers are buying foreign currency at higher than the official rate, and obviously the additional amount would be passed on to consumers. It is also time to rethink relaxing the band on interest rates, particularly the deposit rate.

For sustainably mitigating the current macroeconomic risks, the path lies through fiscal consolidation. In this case, the emphasis has to be on expanding the tax net without harassing the existing taxpayers.

On the other hand, there are adequate reasons to increase the taxable income level from Tk3 lakh to Tk3.5 lakh. The other side of the fiscal consideration would be pruning and sequencing the public expenditure kitty, particularly the annual development programme. Direct food support and fiscal assistance to the disadvantaged families should be expanded further.

The government has already given some signals, such as imposing a ban on foreign travels of government officials, in this regard. But the issue demands fundamental review of both revenue expenditure and development expenditure.

Dr Monzur Hossain is the research director at BIDS

There are many challenges that the economy has been facing in the post-Covid recovery. How well the economy will recover in the future would be determined by how well the challenges, such as inflation, exchange rate pressure and forex reserves are being dealt with. 

In order to contain inflation, it is necessary to take both supply and demand side measures, including the reduction of the money flow. Tight monetary policy is desirable that warrants an upward revision of the interest rates. Steps are also needed to protect the value of taka from too much depreciation. 

For countries like Bangladesh, a freely floating exchange rate determined by the demand and supply of dollars in the market is not desirable. 

I do not think that the market rate would solve the current depreciating trend. Rather, for the time being, the Bangladesh Bank may opt for introducing a crawling band exchange rate system. Further, bilateral currency arrangement with big trading partners, such as India, China, Russia etc. is desirable for taking respite from any future conundrum in the dollar market. 

The Russia-Ukraine war is setting a tone for new economic order with various currency blocks. 

Therefore, pragmatic exchange rate policy is necessary to pursue to address upcoming global challenges.  However, such initiatives might put pressure on investment, which would likely slow down GDP growth. As a result, we may have to compromise on the resurgence of growth that has begun in post-Covid-19 times. Imports have also risen exponentially recently, which should be controlled to save forex reserves to manage any currency crisis. 

Reduction of imports will however lower the growth as capital machinery and raw materials have a lion's share of imports. So, economic growth may fall below our target and expectation. This is a global phenomenon arising out of the Ukraine-Russia war and various measures and adverse consequences taken during the pandemic. 

The world may face a food deficit as some countries have imposed restrictions on food exports. India banned wheat exports and Indonesia banned palm oil exports though it has now been lifted. 

We may see such types of restrictions on other commodities, such as onion and rice. Ukraine and Russia are the major suppliers of food items. They export edible oil, fuel and gas as well. 

We have to take careful initiatives to manage the pressure on inflation. Productivity needs to be increased to boost domestic production to meet demand. New products and markets should be explored to diversify the export basket. If exports do not increase, it will be difficult to pay import bills. 

At this moment, it would not be wise to prepare an expansionary budget for the next fiscal year. The government rightly is preparing a balanced budget, which might provide a safeguard against macroeconomic instability. However, it would cause a reduction in growth ‍and employment and income.

No doubt, the world is going through a transition period. It will be difficult to sustain growth at this time for other countries too. I prefer proper macroeconomic management over higher growth, to check the risks of any instability. 

As the lower growth restrained income and employment, the government should create some additional employment under social protection activities to protect the livelihood of the poor.

Dr Mustafa K Mujeri, former DG, BIDS

The government has no control over most factors that are pushing up commodity prices in recent times and it also does not have financial capacity to rein in the prices by giving subsidies. In this situation, we have to be ready to accept that prices will go up further in the future.

Now, the question is how many people will see their income keep up with increasing prices?

A large number of people in the country are living below the poverty line and their income is not enough to meet their daily needs. If goods prices shoot up, the poor will become poorer. Again, more people will plunge into poverty.

The onus now is on the government to keep all people's purchasing intact. The government has to take special initiatives to support the poor grappling with rising commodity prices. The expansion of cash and food support under the social safety net will play the biggest role to this end.

The central bank has taken several initiatives, such as increasing LC margins for non-essential and luxury items and devaluing taka against dollar. The National Board of Revenue has reduced import duty and value added tax on some essential commodities, but the trend of price rises in the country's market has not abated. As a result, the most-affected are low-income people. 

The government is trying to supply goods at lower prices through TCB truck sales as it is not possible to control prices of products through market management.

Earlier, TCB's sales of goods at subsidised prices did not yield much result, with a large population outside cities having been deprived of the facility. Collecting goods from trucks is time consuming for beneficiaries. And, proper targeting cannot be ensured this way too.

Now, the initiative to sell products through ration cards in fair price shops is also very challenging. Earlier, the government was forced to cancel the rationing system in the 1980s because of massive corruption.

Moreover, no initiative of the social safety programme becomes successful owing to massive irregularities. On many occasions, the deserving people lose out on government support, but many non-poor people get into the list of beneficiaries.

The biggest problem in providing income support to the poor is the lack of up-to-date data. No Household Income and Expenditure Survey has been conducted since 2016. If we cannot create a database of poor people, anomalies in selecting beneficiaries will continue. We cannot include public representatives in determining beneficiaries under the social safety net owing to a lack of capacity of our local government.

Such a list of beneficiaries is maintained by local governments and local administrations in all countries, including neighbouring ones. But in our case, party workers at the grassroots level get priority in selecting the recipients. Such problems will not be resolved if local government is not strengthened. 

I will suggest giving cash rather than goods under social security programmes so beneficiaries can buy products of their choice.

On the other hand, chances of corruption go up during food distribution. For example, on many occasions, we witnessed weight manipulation and distribution of low-quality food products. Besides, there are additional expenses on transportation, storage and distribution of goods.

The government gave poor families Tk2500 each in cash aid through mobile financial services to help them cope up with the coronavirus crisis in two phases in the aftermath of Covid-19. But there was massive corruption over the distribution of food relief during the time.