High Inflation: Depreciation Gets The Blame

Data hiding, wrong policies are to blame While depreciation only gets a bad name.

Central bank in its monetary policy review put the blame of high inflation on depreciation, high commodity prices, and fuel price adjustment. In particular, depreciation of taka gets most of the blame. But how much weight does such claim carry? Taka has witnessed a 40% depreciation in recent years. Depreciation to some extent swelled the price levels. But identifying it as the single most reason behind inflation is not right. This year we have experienced a 6.36% depreciation of taka against US dollar. Meanwhile , crude oil price during the same month was decreased by 7%. I highlighted the matter in "BB's Twin Actions". So inflationary pressure resulting from depreciation offset by fall in crude oil prices .More clearly, this year's taka 7 depreciation has miniscule impact on inflation. Moreover, major commodity prices across the globe registered a downward decline. Wheat prices declined by 12.81% in one year. Price of rice decreased by 16.44% in the six months of this year. Soybean prices in the US hit all time low in three years,being sold at $11.30 per bushel. It is worthwhile to mention that US soybean faces ban in China, resulting in low prices of soybean in the international market. Natural gas price also decreased by 2.43%(sources: Statista,Trading Economics, Macro Trend). The commodities that matter to us almost witness decline in prices in recent months. So pass-through effect of depreciation this year is more or less offset by decline in prices of major commodities. In addition, central bank's contractionary monetary policy also chokes demand for major goods. Point is domestic and international contexts are pretty much in line with setting a downward pressure in price levels.

What contributing to the rising price levels are weak regulatory grip, wrong policies and information hiding. Along with pursuing the contractionary policy the central bank injected cash by printing money into trouble-ridden specialized banks, it provided cash incentives to the remitters, it relaxed the conditions for loan defaulters and allowed them to take fresh loans, it provided bonds as a mean to pay off the energy dues. Now it is claiming a $10 billion mismatch in export data. Meanwhile, LCs were opened with subsidized dollar ,incentives were paid on export and remittances , but value addition to the economy is not known. At one hand, money is being injected, on the other hand we have no clue on the true value addition to the economy. Data hiding and weak regulatory grip plus unwanted intervention worsened the matter. We still do not know what really happened to the missing $10 billion. Is it laundered abroad? Or is it a clerical mistake? Only time will reveal the truth. But damage it has done is enormous. No one will believe the official data now for sure. Borrowing from abroad may become tough.

I think it is a bit unwise to blame squarely depreciation as the major cause of inflation. Dissemination of this piece of information without furnishing ample data will give some pretext to raise further the price level at consumer level where regulatory grip is very weak. For this year, we have just seen that depreciation of taka is not a reason for inflation. To tame the inflation, I think strictly pursuing the contractionary policy will give some positive result.