Financing Crisis Becomes Acute

Inflation shows no sign to tame Depreciation gets the blame.

A week ago Bangladesh Bureau of Statistics (BBS) revealed that January inflation is hovering around 9.86%,indicating increase in price levels. Gradual contractionary policy has yet to come into effect. The rise in inflation necessitates another round of increase in policy rates. Despite assurance from the Indian govt, rice and onion markets remain volatile. Prices of other kitchen commodities are troubling the Middle class and the poor alike.

Financing the budget has become so worrisome that PM even advised to not hold any iftar (fast-breaking event) party during the fasting month of Ramjan. Earlier NBR chairman in a series of talks with the businessmen made it clear that govt may discontinue providing subsidies to big groups indefinitely.

In this backdrop, govt has decided to increase the electricity price once more,which is anticipated amid the acute budget deficit. This time electricity price is likely to go up by 70 paisa/unit,an 8.50% increase at the retail level(Source: “Khuchra Porjae Bidyuter Dam Barchhey 8.50%”,Bonik Barta,February 29,2024) . Earlier, gas price was also raised by 75 paisa/unit. Govt provides Taka 390 billion and Taka 60 billion subsidy to electricity and gas. In addition, govt provides Taka 260 billion capacity charge to independent power providers. This move is strongly criticized at home since it swallows a good deal of public money. Meanwhile, reason put forward for the electricity price hike is the pass-through effect of depreciation that raised the cost of electricity generation. This year central bank plans to depreciate further the currency, a move likely to shrink the GDP in dollar estimates.

Earlier Bangladesh Bank introduced Dollar-Taka swap policy for the banks. In this policy, commercial banks can swap their excess dollar holdings with market rate equivalent amount of Taka. When they need dollar,they can deposit required taka amount at the central bank and get the dollars. The measure was taken to inflate the central bank's forex reserve in a bid to meet IMF target for March.

In brief, so far inflation situation worsened at the start of the 2024. Government concentrates on cutting subsidies ,which resulted in raising the utility prices. Businessmen fear further rise in cost of doing business. Austerity appears as the more feasible option for the govt. I think it is the policy delay that should be blamed instead of the pass-through effect. If we were not stuck with the 9% and 6% lending rate and deposit rate respectively for far too long, things might look different and pass-through effect might not reign in. Point is to make Taka stronger policy rate is the ultimate tool and we did not use it in the past.