Bangladesh economy now faces two critical challenges stemming from rising inflation and exchange-rate pressure, the central bank says to show the combat line against the twin-headwinds to maintain growth.
In its latest publication on state of the country's economy the Bangladesh Bank, however, raises hope that the economy may maintain growth momentum in a pandemic-free environment on grounds of stabilized global commodity prices.
Recognizing the urgency of grappling with the challenges, the central bank sets the priorities in action in the light of its Monetary Policy Statement (MPS) for H1FY24, unveiled on June 18.
"Bangladesh Bank has introduced several key measures to stabilize prices and exchange rates. These include implementing an interest-rate-corridor system, withdrawing lending rate caps, and adopting a market-driven single exchange-rate regime," reads the Bangladesh Bank quarterly.
An official of the BB told the FE that policy initiatives were undertaken aiming to contain inflation and stabilize the exchange rate of the local currency, taka, against the US dollar.
He says adopting the market-oriented framework BB seeks to maintain a delicate balance between promoting economic growth and maintaining price stability.
It acknowledges the importance of managing inflation expectations and safeguarding the export sector's competitiveness as the government looks up to US$ 72 billion in export earnings in the current financial year (FY) 2023-24.
Regarding wayward inflation--which hits hard fixed-income groups through price spirals-it show the headline Consumer Price Index (CPI) has followed an upward trajectory, rising to 9.33 per cent in Q3FY23 from 8.71 per cent in Q2FY23. The inflation surged to 9.74 per cent in June, says the BB findings report.
The central bank has spotted the triggers for inflation upswing. It says inflation rises as import costs have surged primarily due to the pass-through effect of significant currency depreciation and upward adjustments to domestic electricity and fuel prices.
It has found the current-account balance having experienced a notable turnaround as its deficit declined to $4.5 billion at the end of May last from $17.3-billion deficit in the same period a year before.
This positive development can be attributed to a decline in import payments and increased export earnings and remittance inflows, supported by various policy initiatives to limit imports and encourage forex inflows.
However, despite the improvement in the current-account balance during the first nine months of FY23, the balance-of-payments (BoP) deficit widened to $8.17 billion, primarily due to an increase in the financial-account deficit.
In response to the demand-supply gap on the foreign-exchange market, Bangladesh Bank addressed the situation by selling foreign currencies and allowing depreciation, resulting in a decline in foreign-exchange reserves to $31.14 billion in March 2023.
The overall fiscal developments in Q3FY23 exhibited a slower pace than the previous quarter, as reflected in sluggish revenue mobilization and government-expenditure growth.
Despite a reduction in government-expenditure growth, the budget deficit increased due to relatively lower revenue collection. Most of the widened budget deficit was financed through domestic borrowing, as foreign funding decreased noticeably.
Meanwhile, inflation in many countries is on a downturn-sinking into deflation in some cases, including in China where the rate is reported near sub-zero level.
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