Taming inflation: hard choices to be made

The persistent inflation crisis remains a major pressure point as far as managing the Bangladesh economy in the current context. This is evident through surge in prices observed since June 2020, following the onset of the pandemic. Despite minor fluctuations, high inflation has persisted the recent time. According to the Bangladesh Bureau of Statistics (BBS) inflation has soared to 9.24 per cent in April 2023, surpassing the government’s projected rate of 5.6 per cent for FY2023, as stated in the Budget Speech and Bangladesh Bank’s 7.5 per cent as projected in central bank’s Monetary Policy Statement for January – June 2023. As the surging inflation continues to be a significant pain-point for Bangladesh economy, identifying the sources of inflation is crucial for prudent policymaking.
High prices are not fully an external phenomenon: The policymakers are attributing high prices to exogenous factors since Bangladesh relies on imports of fuel and a number of other essential commodities. However, the increased global prices of these items, coupled with the rising costs of transportation and logistics due to global inflation, also have an impact on locally produced goods. Also, this pass-through effect is only observed during price increases, while the consumers are not able to reap the benefits when the global prices experience a decline. Importers argue that their current stocks were purchased at higher prices, preventing them from immediately lowering prices in response to a drop in global prices. They can only sell products at a lower price once their old stocks are cleared, and new stocks are imported at the new and lower prices. If this argument is logical, then the reverse should also hold – when commodities are imported at cheaper prices, these should also be sold at lower prices till old stocks are depleted, even if there is a price hike in the international market. As a general rule, this is not the case. When international prices rise, importers immediately raise prices, even for their old stock. Currently, importers are attributing the increased cost of imported goods to the expensive USD compared to the BDT. Lack of competitive environment, market syndication, absence of necessary monitoring and lax enforcement of existing laws by concerned institutions are key factors in this connection. This is related to the presence of an imperfect market mechanism, where market rules fail to operate optimally, has contributed to this inflationary trend. The government attempts to periodically reduce duties on particular commodities, but traders argue that this does not help narrow the gap caused by the sharp depreciation of the Taka in recent months.
To better understand the situation, price differences between local and international markets of a few commodities such as rice, soybean oil, sugar and beef have been mentioned below. An international comparative analysis reveals that the prices for basic food products in Bangladesh exhibit no decline, despite a decrease in international prices. Furthermore, the data indicates that certain essential food items show a persistent tendency to exceed global prices. Among these four commodities, rice and beef are primarily domestically produced, while soybean oil and sugar are predominantly imported. However, it has been observed that the cost of all these commodities in Bangladesh remains high compared to the global market prices. The price of three common types of rice have been consistently higher than price of both Thai and Vietnamese rice. The price of soyabean oil has been falling in the international market from November 2022 to March 2023, whereas there has been no decrease in the price of soyabean oil in the local market during the same period. The price of sugar in March 2023 was BDT 124 per kilogramme (kg) in Bangladesh, but only BDT 85 per kg in the US market, BDT 46 per kg in the world market, and BDT 36 per kg in EU market. Even if we consider transport costs, import tariffs, and other trade-related expenses, the differences in prices appear to be high. The international price of beef decreased from July 2022 to December 2022, whereas the price of the item in Bangladesh increased during the same time. As of March 2023, the price of beef per kg in Bangladesh was BDT 180 higher than the price of beef per kg in the world market.
Policy measures are inadequate to tame inflation as the real reason for price hike is not recognised by policymakers: The notion that global prices rather than domestic factors have raised domestic inflation has influenced the policy measures taken by the government. Hence, domestic policy interventions to rein in inflation had hardly worked till now. A few policy shortcomings are highlighted here.
First, various policy tools deployed by the policymakers have failed to attain their objectives. This is observed in many cases. The most obvious case is the issue of interest rate which has been fixed by the Bangladesh Bank. In order to curb the current inflation, various central banks worldwide have made use of interest rates as a means to regulate credit expansion and contain consumer demand. This approach has yielded positive outcomes not only in advanced countries like the USA and countries within the European Union (EU), but also in developing countries such as India, where interest rates were raised. The lending rate is fixed at 9 per cent since April 2020. This makes the borrowing rate cheaper as inflation rate is higher than lending rate. Recently, the central bank has raised the interest rate on consumer loans from 9 per cent to 12 per cent. However, it is noteworthy that the interest rate cap on other types of loans, has remained unchanged at 9 per cent. Regrettably, policymakers face persistent opposition from entrepreneurs whenever interest rates are proposed to be increased. Their resistance is further bolstered by recent surge in production costs resulting from higher energy prices, which they argue would undermine their competitiveness. However, competitiveness is contingent upon multiple factors, including the business environment, efficacy of institutions and the state of overall good governance. These elements are crucial for enhancing productivity and efficiency of the private sector, initiating level playing field, creating competitive environment and in the end facilitating cost reductions. By addressing these concerns, the remaining issues can be resolved. Unfortunately, economic decisions in Bangladesh are frequently influenced by non-economic factors. A lack of significant monetary policy shift has led to an ineffective attempt to curb inflation in Bangladesh. The Bangladesh Bank raised its key interest rate - the repurchase agreement (repo) in May 2022 from 4.75 to 5 and then gradually to 5.5, 5.75 and 6 at various points in time till March 2023 - to contain price pressures. However, this did not generate the expected impact in terms of reduced inflationary pressure.
Second, several imported items face high duties and taxes. The NBR relies on indirect taxes for meeting its target of revenue collection. There was hardly any attempt to reduce these duties and taxes albeit for a limited period.
Third, the ongoing fiscal year has presented substantial challenges for revenue collection due to diminishing business profits, leading to a decline in direct tax contributions. Furthermore, reduced imports have resulted in a decrease in customs tariffs. Another source of government funding is investments in national savings certificates which has declined drastically for several reasons including ceiling on NSD purchase by individuals, and reduction of savings by low-income groups due to increased cost of living. As a result of consistently low levels of domestic resource mobilisation through taxation, the government is increasingly relying on the central bank to obtain additional funds. The increased borrowing of high-powered money has the potential to fuel inflationary pressure. This may have serious macroeconomic implications (please see Section 2 of this report).
Fourth, though an important source of imported inflation in Bangladesh is high fuel prices, the skyrocketing inflation has been further worsened by frequent energy price hikes in the country. From early November 2021 till recent times, various fuel types have witnessed upward adjustments. Even though the global fuel prices are on a downward trend, one does not see this reflection of this low prices in Bangladesh. Given IMF loan equivalent to USD 4.7 billion f the government is under pressure to withdraw all types of subsidies. Consequently, increased costs due to subsidy withdrawal will be passed on to consumers, further burdening their cost of living. Despite profits made by Bangladesh Petroleum Corporation (BPC) during periods of low global energy prices, particularly between FY 2015 and FY 2022, the common people did not reap the benefits. This is because the government controls and determines energy prices in Bangladesh, leaving consumers vulnerable to the decisions of policymakers. In early August 2022, despite the decline in global fuel prices, the government raised prices for various l types of fuel. Ironically, when global energy prices rise, the government adjusts prices accordingly, but consumers do not enjoy the same benefits when global prices decrease because the government does not lower prices in line with global trends. In 2016, energy prices were only slightly reduced despite a significant decline in global prices. Therefore, consumers could not benefit from the profits made by BPC due to lower global prices of fuel in the past. One sees a similarity in the way private sector and the government behave, vis-à-vis the consumers.
Fifth, structural problems are also responsible for the price hike. Lack of strict enforcement of competition laws gives rise to unfair practices. In the absence of a pricing system that is based on transparency and takes strong stance to eliminate the involvement of middlemen in the supply chain, prices cannot be controlled with only monetary and fiscal tools.
Synchronised measures are needed to tackle persistent inflationary pressure: To mitigate the impact of inflation and provide support to those in need, it is of utmost importance that the government implements a range of measures. These should encompass direct cash support for individuals living in poverty including the new poor, augmenting allowances within social safety net programmes, enforcing stronger social protection measures for low-income families, and introducing tailored stimulus packages to aid small businesses during these challenging times.
It is crucial to establish an integrated policy framework that facilitates the coordination of fiscal and monetary policies, thus ensuring their efficacy. It is also necessary to address non-economic and distortionary practices in the market to bring down prices. This necessitates the implementation of bold and coordinated measures.
The Bangladesh Competition Commission should strengthen its role and take proactive measures. This includes establishing a comprehensive database, conducting regular surveillance of dominant market players’ activities, closely scrutinising market manipulation, and promptly taking necessary actions. To effectively address monopolies and promote fair competition, the Competition Act of 2012 needs to be updated with explicit anti-trust provisions and clear penalties for those who violate those. Additionally, rigorous monitoring and supervision are essential for efficient market management, ensuring that commodity prices remain under control.

Dr Fahmida Khatun, Executive Director, Centre for Policy Dialogue (CPD); Professor Mustafizur Rahman, Distinguished Fellow, CPD; Dr Khondaker Golam Moazzem, Research Director, CPD; Mr Towfiqul Islam Khan, Senior Research Fellow, CPD, ([email protected]); Mr Muntaseer Kamal, Research Fellow, CPD, ([email protected]); Mr Syed Yusuf Saadat, Research Fellow, CPD.
[The authors received research support from Mr Abu Saleh Md. Shamim Alam Shibly, Senior Research Associate; Mr Foqoruddin Al Kabir & Ms Nadia Nawrin, Research Associates; Ms Maesha Rashedin Joita, Ms Lubaba Reza, Mr Mohammad Abu Tayeb Taki and and Mr Mahrab Al Rahman, Programme Associates, CPD.]