Bangladesh faces higher inflation risk

The interim government has been working hard over the last six months or so to guarantee political stability conducive to undertake economic repair work of macroeconomic crisis that it has inherited from the corrupt Hasina regime. This will be a difficult task to achieve in the foreseeable future given the extent of the crisis. The interim government also needs to move forward to undertake a series of necessary reform measures to create a conducive environment for an enduring democratic system to function in the country.

This will be a stupendous task for the interim government given the country's tumultuous history since independence in 1971. Bangladresh's political landscape since then has been marked by one-party rule, military coups, and a gradual erosion of democracy under civilian governments reaching the point where for 15 years and a half until early August last year, the country was ruled by a highly corrupt and repressive authoritarian regime with a democratic pretence.

Bangladesh's annual inflation rate slowed to 9.94 per cent in January 2025 from 10.89 per cent in December 2024. This marked the lowest inflation rate since September, as prices moderated in most of the sub-indices; yet according to a World Economic Forum (WEF) report released on January 15, inflation has been identified as the biggest risk to Bangladesh in 2025.

Inflation will likely remain above the central bank's target rate of 7-8 per cent which was jacked up from the previous target of 6.5 per cent in February. Raising the inflation target may allow the central bank to adopt a looser monetary policy, but that will not solve the problem.

Bangladesh Bank maintained its policy rate at 10 per cent due to persistent high inflation at its February monetary policy meeting. The upcoming national elections may contribute to political uncertainty, causing high inflation. As a result, Bangladesh Bank is expected to hold its policy rate until the end of FY2024-2025.

The way in which monetary policy affects inflation and the real economy -- output and employment -- is referred to as the monetary policy transmission mechanism. The transmission from the policy rate to inflation works its way through the financial system via many channels into economic activity, with some degree of uncertainty about the timing and size of the impacts. One important element of the transmission mechanism is the bank lending channel, where market rates transmit to lending rates making borrowing for firms and households more expensive and savings more attractive.

Inflation has put a squeeze on private consumption, and cost of living pressures are still the defining challenge for most people in Bangladesh. So, the fight against inflation must remain the highest priority of the government. Rising inflation is also contributing to the higher cost of production.

As inflation continues to hover around 10 per cent (which many consider an underestimate), real wages are falling to keep pace with inflation and millions are facing food insecurity.

The inflationary surge was largely driven by rising food and fuel prices and the depreciation of the taka. The rise in food inflation could have resulted from developments in global commodity markets. Generally, when inflation is rising, it generates conditions appropriate for further price rises, thus increasing inflation risk.

Inflationary pressures are likely to continue in 2025 in Bangladesh. This is because of supply disruptions, high exchange rate of the US dollar, balance of payment deficits and delayed pass through of higher food and energy (of which Bangladesh is a net importer) prices to the rising price pressures.

According to the IMF, global food crisis may persist with prices still elevated. Despite a slight decrease in the general inflation rate in the last four months, food inflation remains stubbornly high, exceeding 12 per cent in December, which is hitting the country's 170 million people hard. On a monthly basis, consumer prices rose 0.15 per cent, rebounding from a 1.02 per cent fall in December 2024. High inflationary pressure disproportionately affects low-income households.

While economic theory is unsatisfactory about the root causes of and cures of chronic inflation, it is also well understood that it is not a natural phenomenon. Also, inflation does not proceed equally throughout the economy. However, we do know that real or monetary factors push up specific prices, wages, or interest rates. As these specific changes spread across an economy; consumers, producers and the governments respond accordingly. Overtime, the net outcome of these differing responses is the inflation rate.

Also, the relationship between inflation and growth remains inconclusive both in theory and empirics. However, there is a consensus that growth rates and inflation rates have a long-run relationship.

The current spate of inflation in Bangladesh has largely been attributed to costs transmitted by disrupted supply chains enabling large importers and domestic businesses to jack up prices far more than the transmitted increased costs notwithstanding hoarding by domestic business syndicates adding to further supply disruptions.

The government led by Hasina during its corrupt rule borrowed heavily from the central bank as it failed to mobilise adequate revenue to pay for its grandiose projects. This also stoked inflationary pressures as it put more money into circulation. These grandiose projects were also used by her and her family members and cronies to amass massive wealth through commissions and kickbacks.

In Bangladesh as inflation surged, it led to losses of purchasing power negatively impacting production. This is generally called stagflation which is the core of the problem faced by the central bank. If the central bank raises policy rate to fight inflation, that will further slowdown the economy and may lead to a recession.

Bangladesh Bank is also faced with further dilemma with the banking sector which is on the precipice of crisis. There is a mounting liquidity crisis faced by the banking sector mostly arising from massive burden of non-performing loans. According to the Financial Express (February 27) the volume of non-performing loans hit a record level to Taka 3.45 trillion by the end of December 2024, accounting for 20.20 per cent of total loans issued by commercial banks in the country. This banking crisis has already shaken Bangladesh's standing in the global financial stage and left the country in a fragile position.

In late last August, the Bangladesh Bank governor declared that the central bank would avoid "printing money" as a solution to the liquidity crisis faced by the banking sector to curb inflation. But by late November, it backtracked on its decision and began injecting liquidity into the banking system. This additional liquidity flowing into the banking system will interfere with the central bank's policy to fight inflation.

To add a further twist to the banking crisis, the Anti-Corruption Commission (ACC) in Bangladesh on February 20 filed a case against a former central bank governor accusing him and 23 others of embezzlement. Between 2009 and 2016, during the tenure of this very governor at Bangladesh's central bank, US$81 million was stolen from the bank's account at the Federal Reserve Bank of New York in a significant cybre-heist.

This central bank governor is among several other governors and high-level officials of the central bank whose activities are being investigated for financial corruption and fraud. Some are already in detention and one former governor is on the run. Bangladesh Bank was possibly the most corruptly-run central bank in the world during the previous Hasina regime. As a result, the country's banking system is currently experiencing not only a serious liquidity crisis but also this can lead to a significant financial crisis.

The current governor of the central bank has accused the tyrannical government of Hasina engineering the massive laundering of money estimated at US$17 billion out of the country often with the help of a military intelligence agency to accumulate assets overseas illegally.

Corruption and politicisation both in the central bank and financial institutions have led to a severe trust deficit, undermining public confidence at a time when inflation and economic pressures are already on the rise. Therefore, policy makers must clearly express that the current level of inflation is standing in the way to stabilise the economy, notwithstanding the severe financial hardship being experienced by most people in the country. Therefore, they wish to reduce it. Hence. Bangladesh Bank must take concrete measures, including with regard to the policy rate to curb inflation. Addressing inflation also requires the government to implement various other measures, including providing cost-of-living relief, investing in economic capacity such as skills, energy efficiency, and infrastructure, enhancing productivity, and improving the Budget's condition.

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