Rising inflation straining economy

Rising inflation is posing a serious threat to the Bangladesh economy. It is the number one problem, and can create social and political instability. Economists believe it is approaching a danger zone where it becomes self-propelling and increasingly difficult to contain. It can no more be attributed to global inflation or to the market situation of specific items like food grains. The rate of inflation on a point-to-point basis has already hit 11.29 per cent in August before the upward adjustment of prices of fuel oils and compressed natural gas (CNG). The import bill on account of fuel-oil has increased ten-fold within the past few years, now standing at US $ 6.0 billion which was $ 600 million ten years ago. Declining remittances and falling foreign exchange reserves coupled with increasing government borrowing have put country's macro-economic stability under severe strains. The country's overall BoP is in deficit, for the first time in a decade, leading to losses in foreign exchange reserves, notwithstanding positive valuation efforts in the fiscal year (FY)11. The International Monetary Fund (IMF) recently observed that double-digit inflation in Bangladesh would hurt the poor and erode their purchasing power, and affect the external competitiveness of the country's economy. It said non-food inflation is a real concern as it has also moved upward, given second-round of effects, and the outcome of, pro-cyclical policies. The Bangladeshi taka has come under pressure, with a moderate depreciation vis-à-vis the US dollar, allowed to facilitate external adjustment. High government borrowing also poses a serious threat to the overall situation, as in the first two months of the current fiscal, it borrowed over Tk. 75 billion, while for the entire year the government had targeted to borrow only Tk. 185 billion from the domestic sector. The gap between actual flow of remittance and the government's target, articulated in the medium-term macroeconomic framework (MTMF), is on the rise and might grow sharply in the upcoming years. In FY 2010-11, the actual receipt of remittance totalled USD 11,650.30 million, compared to MTMF projection of USD 14 billion, a shortfall of USD 2,349.70 million. The percentage of labour migration has dropped in recent years, due to the recent economic recession, Middle East political unrest, and depressed demand in overseas labour markets. Data from the Bureau of Manpower Employment and Training (BMET) reveals that manpower exports, over the years, have been showing diminishing growth. Workers' remittances, a driver of growth for the economy of Bangladesh, has become a cause of concern, particularly against the backdrop of dwindling current account balance and volatility of exchange rates, having serious implications for macroeconomic stability and prospects of growth. In fiscal year 2010-11, average exchange rate of the taka (BDT), against the USD, was 70.48, over that of 69.19 in FY2009-10. The percentage change of depreciation of BDT against USD was 1.63. Considering a basket of eight currencies, the real exchange rate has depreciated from 97.78, in FY 2009-10, to 94.18 in FY 2010-11. Many believed that owing to spikes in prices of food products, fuel oil, imported machinery for new electricity plants, the demand for foreign currency has increased. As a result, the value of the taka has tumbled against the US dollar. The growth of credit should have been more disciplined and the subsidies for power and agriculture sectors should be targeted and realistic. Borrowing from the central bank is fueling inflation. Monetary expansion is taking place inefficiently and improperly. Policy implementation of the government is becoming a big challenge for the economy. A double-digit growth rate of the GDP is possible if the physical infrastructural facilities like roads, railways and power are developed, in tandem with efforts for the pursuit of a healthy political culture in the country. China generates 81 per cent of its electricity power from coal-based power plants while India generates 64 per cent, South Africa 94 per cent, Australia 76 per cent and the United States of America (USA) 49 per cent. Many years have passed but Bangladesh is yet to see a coal policy in place. The country requires 40,000 megawatts (mw) of power by 2025. The country should have a coal policy for generating power from coal-based plants. There is a need for building up a national consensus on generating power from coal-based power plants to shift dependence on imported oil-based plants. In order to keep the deficit financing within the limit of 5.0 per cent as projected in the budget for the current FY, loans from the state-owned commercial banks (SCBs) should not be sanctioned on any political consideration as such loans do usually go to the non-viable sectors. The country's eminent economists called for effective steps to rein in the inflationary rate to ensure price stability and achieve the targeted GDP growth rate. Stabilisation of the situation in the capital market is also important. The government may consider steps for facilitating issuance of more new initial public offerings (IPOs) to help reduce dependence on bank borrowings. The lending rate and deposit rate should be rationalised and non-tax revenue income of the government should also be increased as the latter contributes between 20 per cent and 25 per cent to aggregate revenue collections. Indeed, Bangladesh has performed better than many countries in coping with several adversities in the past. Now the challenges are serious, and if not managed, the short-term outlook of the economy looks very bleak. Credit growth should have been much more structured and disciplined. Government borrowing from the central bank is fuelling inflation. In no way should the government fall into a debt trap that will put economy under severe strain. szkhan@dhaka.net