Representative photo: Reuters
Representative photo: Reuters
The current inflationary pressures are largely attributable to the rise in international prices of raw materials and the depreciation of the exchange rate, although to a relatively lesser extent. The latest data from the Bangladesh Bureau of Statistics shows that there was also an increase in demand for domestic consumption.
The international price of raw materials may not rise any further unless a new shock occurs, but it may not return to “normal” levels anytime soon. Therefore, forex market pressures are likely to continue for the foreseeable future. Addressing this is a challenge.
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All deficit measures (trade, current and general) in the balance of payments are increasing. The overall balance of payments deficit increased by $1 billion to more than $3 billion in the July-March period of the current fiscal year relative to the same period a year earlier.
The current account deficit hit $14 billion and the trade deficit is now $24 billion in March. The biggest driver was the increase in import payments.
The government faces the double challenge of controlling inflation and protecting foreign exchange reserves. At the same time, you must be mindful not to jeopardize the ongoing economic recovery. New risks or threats in the state of geopolitics at the global level cannot be ruled out.
The recession is in the forecasts for the European market. The question is not whether the recession is coming in Europe. The question is when it will come, how deep it will go and how long it will last.
A recession in the US economy is also likely, but less so than in Europe. Even if it does occur, it may not last long. But tail risks are high.
Any recession in Europe is a serious downside risk for us.
To deal with the threats, an adequate policy response is needed on all fronts: monetary, fiscal and structural.
Monetary policy should protect reserves by increasing exchange rate flexibility. This is now almost a fait accompli.
Better to do it from a position of strength than from a position of weakness. This means allowing the interbank to adjust to market conditions.
The role of the Bangladesh Bank is to make it orderly in a path determined by the market. Fiscal measures to reduce import demand can help. Attention should be paid to the Finance Minister’s call for austerity in imports and internally financed public travel.
Greater exchange rate flexibility will mean further depreciation of the taka, increasing cost pressure on inflation.
The economy is recovering from the coronavirus pandemic, but the increase in poverty that has occurred is likely not yet to be reversed despite the recovery in exports, domestic sales and production. Dozens of families who slipped back or sank deeper into poverty have yet to return to their pre-pandemic state. Inflation for them is a blow to their recovery.
The government must avoid monetizing the fiscal deficit in the future. If the liquidity of the financial system deteriorates, the government should reconsider how much money it will borrow from the market.
The space for expansionary fiscal policy is quite limited. Offset financing of the deficit can be alleviated by mobilizing budget support from donors. These require a package of reforms to sustain growth and improve resilience to future shocks. There are ongoing discussions with some donors. The government needs to accelerate the reforms that are contemplated.