Inflation Woes Remain

Inflation shows no sign to tame, Mocking the measures of austerity. Pumping money for sake of people’s name Deepens the problem's severity.

Govt in an unprecedented move increased all kinds of fertilizer prices by Taka 5. Despite falling prices in the international market,govt has little alternative to raising the prices in the wake of Tk 460 billion fertilizer subsidy. Depreciation of Taka more than 20% in the unofficial market following the Ukraine war and double-digit inflation set the ground for such rise. One minister even acknowledged the move may further drive up the price levels.

Nine months after its introduction, govt's contractionary policy failed to curb inflation. In fact, govt acknowledged that inflation reached 9.33% at the end of March this year. Back in July 2022,it was 7.48%¹. However, import registered a decline. More smaller increases in policy rate hike are anticipated at measured intervals in future. Still large part of the money lies outside the banking system. Since July last year several factors have been contribute to rise in price levels. In November last year, while an IMF team was in an official visit to Bangladesh, a little known Nabil Group swindled around Tk 90 billion from several Islamic banks².Till date,whereabouts of the money is not known.This plundering shook depositors' confidence so much that many were prompted to withdraw their money,leading to a liquidity crisis in the Islamic Banks. To address the crisis, central bank provided Tk 147.90 billion credit to the troubled Islamic banks through promissory demand note³.Govt literally printed the money and injected it into the ailing banks. Most of this Taka 237.90 billion is being circulated outside the banking system. Even if a large part may find safe sanctuary abroad through clandestine channels, hoondi partners may transfer the Taka to local counterparts ,adding the inflationary pressure at home.

In addition,govt created a new Export Assistance Fund(EAF)of Tk 100 billion to assist the local exporters. Earlier IMF suggested to downsize the Export Development Fund as it hinges heavily on forex reserve money. The newly created EAF so far doled out Tk 20 billion in local currency as export assistance to exporters. Interestingly, selective clients of the troubled Islamic banks got most of the assistance. A news report says $1 billion worth of export proceeds have not arrived. So promising export growth does not tell the whole story.Central bank’s injection to the economy now stands at Taka 257.90 billion. There is more!

This year government increased dearness allowance of public servants by 20%. A daily has revealed that since 2015, govt has been pursuing a policy of 5% increment in salary of public servants instead of indexing the salary like the Western countries⁴. This adds further Tk 40 billion into the economy. So central bank pumps a total of Taka 297.90 billion into the economy in the nine months of this fiscal year alone. Say half of the money stays outside the banking system, that is Taka 148.95 billion. This money mixing with the undocumented money in the economy causes huge upward pressure at price levels.

As this is ahead of election year,many are shy to bring their money into the banking system. Despite increase in deposit rates, many prefer not to deposit their money. Moreover, rule like obligatory tax return certificate for purchase of National Savings Certificate worth more than Taka 500,000 discourages households to bring their money into the system.

One group alone robbed $840 million from the banking system while the central bank were negotiating with IMF to grab $476.27 million as first instalment of credit package. But the austerity measures and contractionary policy have turned into a mockery when the central bank printed Taka 147.90 billion and injected into the system. This one single act rendered the whole policy of the central bank useless. Depositors' confidence at the banking system under current regime is at all time low. Pumping money to restore confidence in this case was a redundant move. So govt has to take fair share of the responsibility for the rise in inflation amid measures of austerity.

Notes And References

1. "Major Economic Indicators: Monthly Update,March 2023",Bangladesh Bank.
2. "’Nasty November' For Islamic Bank",Sanaullah Sakib,Daily Prothom Alo, November 24,2022.
3. "Receding Trust In Banks",Rezaul Hoque, https://hoquestake.blogspot.com,January 13,2023.For more read at https://hoquestake.blogspot.com/2023/01/receding-trust-in-banks.html?m=1
4. "Agami Budget e Sarkari Chakurijibidr Bhata Barchhey(Dearness Allowance of Govt Officials Likely To Increase In Next Budget)",The Business Standard,April 12,2023.For more watch https://m.youtube.com/watch?v=n3paeAzIvV4
   Also read " No New Payscale,20% Dearness Allowance Proposed For FY 24", Abul Kashem,The Business Standard, April 13,2023.
   For more https://www.tbsnews.net/economy/budget/no-new-pay-scale-20-dearness-allowance-proposed-fy24-615058