Last Year's Extra Money

Not enough resources created in the system, Yet govt introduced more money against them.

There has been slight ease in inflationary pressure in December, general inflation declined to 10.89% from 11.38%. Food inflation is still hovering around 13%. Meanwhile, govt is going to implement 15% VAT on all goods and services. The decision however caused fresh debate over cost of living. For some bizarre reasons, govt is not interested to touch the corporate tax rate. Unlike political regime, this govt can carry out bold reforms,which we have not seen yet. Govt is desperate to get the next tranche of IMF credit package. That is why it is speeding up separation of revenue policy commission from revenue collection, one of the benchmark set by the IMF.

I see no wrong in raising the VAT. Many Occidental economists think any concession of tax this year will add up the burden of taxation in later years. So tax relaxation or tax rebate has little effect in the long run. But taxation is politically unpopular and risky. I think the govt could easily raise the corporate tax rate by 1% or 2%. Our external debt obligation has reached a record level. At one hand, our GDP contracts, on the other hand, our debt (all kinds) keeps rising. Energy payment dues are adding salt to injuries.

Govt called the cheapest shots by printing and injecting money into economy. In 2024 alone, the govt (both the present and the past one) did it in huge amount. At the start of the year, govt issued bonds worth Tk 260 billion to pay energy overdues( read "Economic Reforms: Morning Shows The Day" published in January ,2024 here). Chief advisor claimed that former governor, who is on the run, printed and gave a crony group around Tk 300 billion on the eve of the Awami downfall. Later the central bank gave Tk 220 billion worth of liquidity to 6 trouble ridden banks. On 30 December, 2024, govt again stepped in to rescue another 6 banks by injecting Tk 125 billion. So last year govt is responsible for introducing liquidity worth of Tk 895 billion in the economy. Now if we look at the gains and loss of last year, we will notice both political and natural events played a role in the economy last year. Flash flood in August and September cost the economy Tk 140 billion according to CPD( I have doubt about this figure). The regime change cost another $1.2 billion or Tk 147.60 billion(source: Wikipedia). Among the gains of last year, RMG export witnessed 7.23% growth, fetching an extra $2.59 billion or Tk 318.57 billion. Unfortunately, data on Aman harvest has not yet been published. The export earnings,however, take time to arrive. Bangladesh does not get the whole export money in exact time period. We also witnessed 22% growth in remittances, earning $4.7 billion extra money or Tk 578.10 billion last year. We have to remember, for some months ,we provided cash incentives(2.5%) to remitters. If we also take this into account, it also adds to the inflationary pressure. In 2023-24, rice production was 40 million tonnes. We consumed 35 million tonnes.Flash flood damaged 700000 tonnes of rice. The extra production of 4.3 million tonnes worth $ 1.93 billion or Tk 233.7 billion. If we add this to last year's total gains ,then net gains become Tk 842.77 billion. Now the govt injected money worth Tk 895 billion and the economy created extra resources of Tk 842.77 billion. So extra Tk 52.23 billion is circulating in the economy. If we drop the extra export earnings from last year's gains, then the extra money volume becomes Tk 370.8 billion. If we downsize the flash flood damage,then volume of printed money may grow even farther. Point is govt has to take blame for injection of this extra money ( ranging from Tk 52.23 billion to Tk 370.8 billion +) into the economy. This is simple arithmetic.Now govt has to come up with plans to address it. Remember this money adds to the lost loan or NPL, complicating the monetary policy. Today we are on January 10, yet there is no sign of the Monetary Policy Statement (MPS). Delay in publication of MPS reveals the awkward situation of the govt in dealing with the economy.

Update: This piece is updated by me at 7:27 AM Bangladesh Standard Time on January 11,2025. Update includes sources and mention of damage of crops due to flash flood.]