Need Prudent Decision

Prudent macroeconomic management Helps to weather the bad event.

Bangladesh Bureau of Statistics (BBS) is about to publish the inflation rate for October. September inflation rate declined to 9.92%. Despite the ongoing contractionary monetary policy, market has yet to reflect the official inflation data. Govt lifted all duties and taxes on rice import following the heavy loss of Aman paddy cultivation due to unusual precipitation in August-September. This is happening at a time when the govt embarked on bringing the corrupts to the book. During this anti-corruption drive many groups are reluctant to open L/C. On the other hand,high interest rate and lack of instructions from the central bank bar new entrants to go for rice import. Govt has to play crucial role to encourage grain import in this troubling time.

Yesterday(November 06), I read a Reuters report that depicts pessimism about economy following Trump's victory. The report says a fresh round of trade war would accelerate inflation as consumers will pay higher prices for consumer goods¹.

I do not think so. Previous round of trade war under Trump presidency shrank global growth by 0.30%,according to the IMF. This time too, both the IMF and the World Bank projections hint slow down of major economies except the USA for next year. When growth shrinks,demand for output falls and it brings down the price levels. Trump's plan to impose 10% tariff on all foreign goods and 50% tariff on Chinese goods are likely to protect the car industry, particularly the electric vehicle industry. Apart from that it will bring pace to import substitution industry in the US along with the new tax rebate policies for the US businesses. This is heading towards more jobs,more income and more consumption. Trump is likely to recuperate loss from tax rebate by cutting govt spending abroad ( less military spending abroad, less foreign assistance, less fund for climate change etc). This Trumpian resource mobilization will boost consumer activity, a good news for Bangladeshi apparel export. I also disagree with Reuter's fear that it will delay Fed's plan for lowering the policy rate. Fed has already lowered the policy rate. Fall of demand for goods will bring down the price levels. Moreover, Saudis are planning to cut the prices for oil for Asia in December². Prices of fuel, which influence the price levels, registers a decline. So lowering trend of inflation along with boost of American export due to increasing military spending across the globe will force the Fed to lower the policy rate. Back in June 15 this year, I highlighted in my piece titled "Macroeconomy Amid Trade War V", how fall in prices of soya and soya meals may help Bangladesh in the fight against inflation³.

Most importantly, high tariffs on Chinese goods will help relocating manufacturing units to other countries. More FDIs are expected under Trump presidency. In general for Bangladesh, non-food inflation will come down in the first two quarters of next year if any disaster does not disrupt the global supply chain.

Many social media channel claimed China refused to provide fresh credit to Bangladesh. They equated the decision with the regime change. I think it is economic reason rather than political one. Prior to former Prime Minister's visit to China,a Politburo member of Chinese communist party came to Bangladesh in an official visit along with EXIM bank of China and other ministry officials. They held talks with the central bank about the macroeconomy. JICA officials also held talks with the central bank about economy at this time to know first the real economic situation here. According to a report by Reuters⁴, Chinese public debt tripled its GDP due to the crisis in its housing market. So it slows down the economy and the party directing fresh credit to the manufacturing sector at home while the Belt and Road project gets less priority. I think for this reason China is not committing new loan to Bangladesh.

Last week, another decision, it appears, may hurt govt's revenue collection target for the next year. Government decided to revise 30% tax on capital gain from the stock market. The new rate is 15%. It will evidently hamper govt's revenue collection target of Tk 4.8/5.1 trillion next year. No ordinary or common people come to invest in share market, where opaque capital enjoys safe sanctuary. Earlier govt slashed tariff on edible oil and sugar. There are too many fiscal relaxations when the fiscal policy is supposed to align with the monetary policy. I think except the handful few kitchen items , which are consumed by all income groups, there should be no relaxation on taxes.

Government has to reconsider its decision on soft tax policy when normalcy in daily life and kitchen market has yet to return [and it has to meet a colossal revenue target]. Economic activities are not in full swing. Though external situation is in favor of a quick recovery, weathering the bad spell requires prudent economic management.

P.S.: BBS published the inflation for September when I am preparing the piece. General inflation increased to 10.87% and food inflation increased to 12.66%.

References:

1. "Trump Victory To Reverberate Through Global Economy ",Balazs Koranyi,Reuters,November 06,2024. Link: https://www.reuters.com/markets/us/trump-victory-reverberate-through-global-economy-2024-11-06/
2. "Aramco Cuts Oil Prices To Asia",Yahoo Finance,November ,06,2024. Link:https://finance.yahoo.com/news/aramco-cuts-oil-prices-asia-185011180.html
3. "Macroeconomy Amid Trade War V",Rezaul Hoque,June 15,2024.https://hoquestake.blogspot.com. Link:https://hoquestake.blogspot.com/2024/06/macroeconomy-amid-trade-war-v.html?m=1
4. " Why Trump Tariffs Pose A Bigger Threat To China's Economy This Time",Marius Zaharia,November 06,2024. Link: https://www.reuters.com/world/china/why-chinas-economy-is-more-vulnerable-trump-tariffs-this-time-2024-11-06/