Rethinking ways to tackle inflation

The annual inflation rate last month was 9.72 per cent, a welcome decline from seven-month high at 9.89 per cent in the previous month of May. Despite this temporary easing in comparative terms, there is nothing reassuring for the common consumers in this small numerical fluctuation of the figures that represent price levels of consumer goods in the market. In fact, there is hardly any substantial change in the prices of essentials in the kitchen market. Even so, those tasked with calculating the inflation rate at the Bangladesh Bureau of Statistics (BBS) may find some solace in seeing the changes, however small that might be in real terms. But the figures representing the inflation rate have remained close to 10 per cent during the past two fiscal years belying the government's effort to bring it down to 7.5 per cent.
True, last month witnessed a slight decline in the inflation rates of food and non-food items from 10.76 per cent and 9.19 per cent respectively to 9.42 to 9.15 per cent. Obviously, the changes contributed to the slight improvement in the inflation figure. One wonders, if the BB's move (as part of its contractionary monetary policy) that raised the rate of interest against the credit it extends to the commercial banks (policy rate), which increased borrowing cost of money from banks, has finally worked to lower the inflation rate! However, experts are not convinced if it has anything to do with the BB's monetary policy as the inflation rates in the past months did not demonstrate any consistency. The IMF, on the other hand, held the constantly depreciating Bangladesh Taka (BDT) against US dollar (USD) as an important driver of the rising inflation rate. Notably, in the last two years, BDT lost its value against USD by 35 per cent. Considering that in three months ending in December last year (2023), Bangladesh's imports in goods and services on an average cost Tk888.18 billion, while the exports during the same period were worth Tk613.84 billion, it is not hard to understand why the country is constantly under pressure to foot its import bill and why USD is getting costlier against BDT by the day.
Costlier dollar means rising cost of import. So, until the volatility of the forex market is tamed, the cost of imported fossil fuels will continue to rise, leaving its knock-on effect on everything from domestically produced industrial to agricultural commodities, let alone other imported commodities. In that case, any impact that tightening of money supply may have on inflation rate is offset by further drop in BDT's purchasing power. In that event, the poor, the fixed-and-low-income people find that their real incomes have eroded further. In fact, it is a vicious circle that only tightening of money supply cannot address. On the other hand, costlier credit discourages investment leaving its dampening effect on business in general.
When business is in the doldrums, unemployment situation in the economy worsens. It is, again, the poor who are engaged mostly in the informal economy, either as employers or employees, are the worst hit. Consider that between 35 and 88 per cent of the country's workforce is employed in the informal economy, mostly in the agriculture sector, which contributes from 49 to 64 per cent to the Gross Domestic Product (GDP). The large variations in the percentages of the actual size of the informal economy and that of the workforce are due to the fact that there is a lack of appropriate data on the subject. The fact remains that the livelihood of a substantial segment of the population is linked to the informal sector. So, the policymakers need also to assess how tightened money supply is affecting this sector. Any economic shock hurts the poor more than the rich.
In this connection, the BB in its report for the just ended fiscal year (FY2023-24)'s monetary policy review has hinted at going for further tightening of money supply in the market. Interestingly, though the contractionary monetary policy has yet to demonstrate its efficacy in cooling down inflation, the banking regulator wants to extend it for another term. Understandably, its aim is to push down the inflation rate sustainably to the targeted 7.5 per cent in the medium term.
But in case inflation refuses to calm down, the central bank would see to it that the contractionary monetary policy is further intensified and remains in force far longer. If the contractionary monetary policy has failed to produce its intended result so far, what is the guarantee that it would work in the future? With increased government borrowing, what amount of liquidity would be left with banks to support business and others in need of credit?
No doubt, the contractionary policy is the best tool so far in practice to rein in inflation in the advanced economies in the northern hemisphere. Indeed, it worked successfully in that part of the world. Even Sri Lanka, according to the World Bank, has been showing signs of stabilisation and is projected to grow by 2.2 per cent this year (2024) defying the serious downturn it suffered in 2022.
But going by previous experience, Bangladesh has thus far proved to be an exception when it comes to combating inflation by using tested monetary tools.
So, it is time policymakers took stock of the situation before they embark on a more ambitious target of achieving 6.5 per cent inflation rate in this fiscal year (2024-25).
Though, in theory, Bangladesh's economy is market-driven, here, in practice, non-market forces are the dominant players in controlling the movement of goods and services. That would require the policymakers to go for a mix of measures, rather than going exactly by the book, to control the recalcitrant inflation.

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