Representative photo: Reuters
Representative photo: Reuters
Current inflationary pressures are largely attributable to rising international commodity prices and exchange rate depreciation, albeit to a lesser extent. The latest data from the Bangladesh Bureau of Statistics shows that there has also been a spike in domestic consumption demand.
International commodity prices may not rise further unless another shock occurs, but they may not return to “normal” levels any time soon. Thus, the pressures on the foreign exchange market are likely to continue in the near future. Tackling this is a challenge.
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All measures of balance of payments deficits (trade, current and overall) increase. 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 compared 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 main driver was the increase in import payments.
The government faces the dual challenge of controlling inflation and protecting foreign exchange reserves. At the same time, it must be careful not to jeopardize the ongoing economic recovery. New risks or threats cannot be ruled out in the state of global geopolitics.
Recession is in the forecast for the European market. The question is not whether the recession is coming to Europe. The question is when it will come, how deep it will be and how long it will last.
A recession in the US economy is also likely, but less than in Europe. Even if it does happen, it may not last too long. But the tail risks are high.
Any recession in Europe represents a serious downside risk for us.
In order to deal with the threats, an appropriate policy response is needed on all fronts: monetary, fiscal and structural.
Monetary policy should protect reserves by increasing exchange rate flexibility. It is now almost a done deal.
Better to do it from a position of strength than from a position of weakness. This means allowing interbank to adapt to market conditions.
The role of the Bangladesh Bank is to make it orderly on a market determined path. Fiscal measures to reduce import demand can help. The Finance Minister’s call for austerity in imports and domestically financed public travel should be heard.
Greater exchange rate flexibility will result in further depreciation of the taka, which will increase the cost pressure on inflation.
The economy is recovering from the coronavirus pandemic, but the increase in poverty that has occurred has probably not yet been reversed despite the recovery of exports, domestic sales and production. Dozens of families who have fallen back or been pushed deeper into poverty have yet to return to their pre-pandemic state. Inflation for them is a blow to their recovery.
The government should avoid monetizing the budget deficit in the future. If the liquidity of the financial system deteriorates, the government should reconsider the amount of money it will borrow from the market.
The scope for an expansionary fiscal policy is rather limited. The deficit financing trade-off can be facilitated by mobilizing budget support from donors. These require a set of reforms to sustain growth and build resilience to future shocks. Discussions are ongoing with some donors. The government must speed up the planned reforms.