Is current inflation really under control?
The dollar price hike is interconnected to inflation. And there are many factors that should be addressed to resolve this cause of inflation
On 25 October, the dollar exchange rate crossed Tk90 for the first time ever in Bangladesh's kerb market. Prior to this, the dollar price hike has been on an exponential rise for a couple of months; taka lost its value by Tk0.85 per dollar between July and October this year.
Simply put, this is nothing more than a demand and supply issue. The excess demand in dollars stems from an increase in demand for imported goods such as crude oil, raw materials, etc. Another source for this demand of US dollars is the movement of people from one country to another for medical, tourism or academic purposes.
On top of that, the remittance flow went down.
For three months, remittance growth oscillated in the negative territory. While exports are going up, it is not outdoing the growth of imports in terms of value. So, there is pressure on the dollar from the demand side. That is, the demand for dollars is going up but supply is lagging. Consequently, 25 October happened.
One might think that only the price of imported goods will go up due to the rise of the dollar price. However, commodity prices are interconnected in the sense that if the price of imported goods rises, the price of other goods rises as well. The price of dollars has risen beyond what can be considered normal at this point.
In the coming days, I would say that the main problem is whether the Bangladeshi taka will remain stable against the dollar. This issue must be addressed internally. Bangladesh must see that its rate of inflation does not exceed the global rate. If that happens, we will lose purchasing power as we will have to pay more in terms of units of the local currency against the dollar.
The prime task of Bangladeshi policymakers should be to keep this inflationary phase under control. Even in comparison to last year, this year's inflation is higher. I believe it will slowly go up in the coming days as our cost of production and import is rising with the price hike of the dollar.
Bangladesh is purchasing raw materials and other materials at higher costs from abroad, causing an increase in the cost of production (naturally) and the inflationary pressure.
I believe, in the future, the price of dollars is likely to rise more. The general people who have a fixed income are more likely to be affected by it.
It is not practically possible to neutralise it up to a 100 percent. But if they want to do so to a reasonable extent, the government must curtail establishment costs, travel costs, entertainment costs, and so on in the public sector along with the amount of increment it is giving to employees. If they stay lenient with these costs, inflation will definitely go up as more money will be in the hands of the upper-class consumers.
In the last 10-15 years, one of the key strengths of our economy was that we were able to control inflation and also that our foreign reserve was building up constantly. As a result, the foreign lenders were interested in giving us more loans.
Another factor to take into consideration in the dollar price hike in our country is money laundering. Our government should address this in two ways.
Firstly, they must find out why rich people are taking money outside of the economy. These people shouldn't be castigated. But we have to realise that no economy in the world has been able to keep money by putting boundaries and restrictions. Instead, the government should create ample opportunities to invest and ensure the security of the income earners. Secondly, capital accounts should be made a bit more flexible so that people can take their legitimate income abroad easily.
Unfortunately, we haven't yet been able to develop a gold market. If we could build one then the investors would be attracted to trade in gold leaving US dollars. In our country, what we have is low-quality gold in small shops which can not be used for any investment purposes. Even in Indian exports, more than $40 billion dollars consist of jewellery per year.
Another aspect that we lack is the commodity market. India and Pakistan have been able to create it but we have failed to do so. So, we must open our assets market.
There are two factors we must consider here. First, how we can develop our stock market, this can be done by bringing in a lot of the big companies, who are yet to engage in the stock market.
Another problem is that we haven't been able to take membership of any free-trade agreement, regional or international. So, investors feel discouraged to invest in our economy. This is also one of the reasons why our dollar price is on the rise.
If we want to keep our economy stable, we need to address these issues - capital accounts must be made more flexible, make our infrastructure more investor-friendly, create an internal asset market that includes gold and commodity markets, and finally, tie our economy with the global system. Our internal monetary policy and budget management should also be reformed.
We are progressing in terms of GDP. But had these steps been implemented properly, it could have increased by at least 2% more. Then, the inflow of dollars would have increased as well.
I believe, in the future, the price of dollars is likely to rise more. The general people who have a fixed income are more likely to be affected by it. Considering that a lot of people have become poor due to Covid-19, we cannot allow the price of dollars to rise anymore as it will also result in the price of necessary commodities going up.
Abu Ahmed is a former economics professor at the University of Dhaka.