Indexation,Food Stamp & Extended Credit

Indexation, food stamp and extended credit, Growth should reach all before memory fades it.

Govt's decision to implement the 9th pay scale amid high inflation leaves difficult choices for the private sector. Several news reports indicate that govt allotted [Tk] 1.4 trillion for paying salaries and pensions of 1.4 million public servants and pensioners in the budget of FY 2026-27. The proposed [pay scale] requires [Tk 1.05 trillion] which current budget could not accommodate. Revenue collection is projected to have a deficit of more than Tk 1 trillion. Even if the govt is managed to implement the new pay scale, the sheer addition of this fixed cost to the budget will definitely drive up the prices of essential commodities, worsening the inflation.

There is no doubt that implementation of the new pay scale will increase the wages of private sector, increasing the urban minimum wage. But whether that increase in private wages will be adequate to offset the price increase remains a genuine concern for private sector employees. So the new pay scale [will] not only increase the prospect of wage hike in private sector, it will also increase the possibility of further hike in cost of living.

Public sector has national pay commission to deal with inflation. Private sector does not have such thing. They merely depend on collective bargaining power or the mercy of the owner. There are increments at the end of the year, but most of the time it is not enough to deal with the inflation.

In foreign countries, job contracts include indexation clause that allows adjustment to salary as per inflation level. So a private employee never feels the heat of inflation as his real income never falls. In Bangladesh, private companies or firms are not immune from inflation. Moreover, their financial position is not that good that they will offer such clause to employees to insulate them against inflation. Less inflation proof measures for firms plus the cost are holding back firms from offering indexation clause in job contracts.

An intermediate step between no clause and full indexation clause in the contract will be partial cover from inflation. Some job offers already include increment, which can be viewed in light of this intermediate step. This kind of mild contractual obligation one day will lead our firms to strong contractual obligation when economy fully develops and balance sheets of the companies improve. This sort of contract is badly needed for lower income group employees.

Govt can do more in helping the lower income group in the troubling times. Special deposit schemes for them in banks or group participation of lower income group individuals to treasury bill purchase at one hand augments their incomes, on the other protects them from rising inflation. Setting a certain limit on deposit or bill purchase will make govt intervention more meaningful. Say, a lower-income group individual can avail a special high interest bearing deposit scheme worth Tk 100000 in a high inflation year. Or 5 such individuals can purchase Tk 250000 worth of treasury bills by forming a group in a high inflation year. This kind of specially designed programs at one hand will make sure that benefits reach the target individuals ,it will stop govt leakages in social benefit programs on the other.

Food coupon or food stamp is another such program aimed at lower income group who cannot avail quality nutritious food in hard times. In USA, it is known as Supplemental Nutrition Assistance Program (SNAP). Interestingly such program was taken so that American farmers could sell their surplus produces to consumers who could not avail them. In the 1930s, during the Great Depression, number of the unemployed rose, many households lost their purchasing power, but there were ample of foods in the market. So the Federal govt came up with the food coupon plan that allowed the needy American households to purchase surplus farm produces. Govt set eligibility criteria like income level for the households to participate in the food stamp program. With the food coupons, households can buy dairy products,cereals, egg,milk,fresh fruits and vegetables. Later food stamps were transformed into Electronic Benefit Transfer (EBT ) card,some kind of debit card. Federal govt transfers the benefits to the card of a household belonging to a certain income group. The household uses the card to buy food from super market. EBT fraud is very rare and it is very effective in terms of fighting hunger, inflation and increasing farm sales.

I think govt should introduce this kind of food stamp program for lower income group who bears the most brunt of inflation. In the time of inflation, there is significant erosion in their purchasing power. Most of them reduce their protein consumption. A food card or special MFS account will greatly address their lost purchasing power issue. Say one individual deposits Tk 1000 into his food card or special MFS account,he / she will get Tk 2000 to buy foods. Food card/ MFS account will be used to buy meat,poultry products,milk,dairy products,wheat,rice,pulses and locally grown fruits. Sacrifice of protein consumption will be avoided due to food coupon/ cards. Meanwhile, food cards can also be viewed as sales booster for grocery items during high inflation. Usually sales of dairy products or protein items drop during high inflation. Revival of the loss of sales can be achieved through this food stamp. Moreover, many new firms, poultry farms,dairy products may pop up to cater to the need of the consumer class who gets the much needed cash transfer during the time of inflation. So food stamp is boon for both consumer activity and business expansion.

It will be particularly helpful in tackling urban poverty. Nowadays, TCB operations are stretching across the city. In addition, chain stores are scattering across the city. A lower income group household can show up at any of the TCB sale point or chain store and avail the protein products with the food card. Govt will use prevailing distribution facilities or commercial facilities without any further intervention. Use of MFS account can further extend the reach of the program.

The beauty of this program is instead of giving support both the agricultural producer and consumer at the same time,cash transfer to particular income group is helping both the farmer by increasing his sales and consumer by restoring his/her purchasing power.

Another way to cushion the adverse effects of inflation is to offer easy credit with long duration of paying back to lower income group. Since salaries are paid to the bank accounts or MFS account in the private sector , a private sector employee can be offered special credit by the govt during high inflation so that he can afford protein during this difficult time. Say the private employee of a certain income group can draw a credit of up to Tk 10000 in a high inflation year. He can pay back the money in 4/5 years at a special interest rate. It will not create extra burden on this private employee with limited income during inflation.

Growth, prosperity should be shared with people. It is highly unjust that lower income group who barely receives any govt support will only pay the cost of inflation. They never participated in the decision making process,often proved to be erroneous, that provoked the inflation. So why should they pay for something they are not responsible for? Meanwhile, they hardly receive any benefits when economy performs well. To accelerate the trickle down process, indexation clause, food stamp and extended protein credit programs should be introduced. These will not create any discrimination rather these will create fairer chances for all.

MPS Highlights Opposing Goals

Opposing tasks are being done by the central bank, Missing the targets is the assessment frank.

Bangladesh Bank(BB) has unveiled the Monetary Policy Statement (MPS) for the first half of FY 2027.Amid high inflation, BB keeps the policy rate same at 10%. Meanwhile, Standing Lending Facility (SLF) stays at 11.5% and Standing Deposit Facility (SDF) remains at 7.5%.

One of the key aspects of this MPS is outlining medium and long term ways to deal with the Non Performing Loans(NPLs). BB is planning to write-off bad debts with poor prospects of recovery and thereby improving the absolute figure of the NPLs. Another strategy is to introduce Expected Credit Loss(ECL) ,which takes into account probability of default, expected recovery rates and future macroeconomic conditions in forecasting potential loan default. MPS also says BB will fortify Risk-Based Supervision (RBS) and implement bank specific Asset Quality Reviews (AQRs) as part of long term goals to tackle the NPL.Moreover, it is speeding up Money Loan Court proceedings. BB is also preparing the Distressed Asset Management Act so that banks can easily get rid of non performing assets.

These are desperate measures to improve the NPL situation before Bangladesh enters talk with the IMF for a fresh credit package.

BB projects the headline inflation will be 8.9% by December 2026 and 8.6% by June 2027. BB's inflation expectation survey projects the inflation rate will be between 8% and 10% by June 2027. The projected inflation rate is much higher than the desired 7.5% rate.

This projected high inflation set the context for keeping the policy rate high.

MPS projects private sector credit growth of 6.8% and public sector credit growth of 21.8% by December 2026. Declining credit growth for the private sector is attributed to low demand for credit amid high interest rate. Meanwhile, higher public sector credit growth means govt borrowing will be more than before. Any shortfall in revenue collection and/or failure to secure foreign credit will push the govt to borrow more from the banks.

Moreover, govt securities are also becoming safe haven for investors. Outstanding stock of treasury bills and bonds has increased from Tk 7.44 trillion in 2025 to Tk 8.37 trillion in 2026. It is indeed a good news that bond market is expanding. Bad news is govt's interest spending is also rising. Furthermore, too much govt borrowing from banks leaves little for the private sector, which is subject to receive a stimulus package strangely managed by BB.

Despite BB's claim that the stimulus package will not lead to monetary expansion, the designed interest subsidy of Tk 30 billion per year,a total of Tk 90 billion in three years,will inject extra cash into the economy. Most of the big stimulus package came as tax break or huge public spending. This kind of central bank-led stimulus package is unheard of. As it will be highly relevant, sharing again part of my analysis on stimulus package, spelled out in the piece titled "Leave The Central Bank Alone" on May 27,2026:

Finance ministry would be the [just] authority to declare such stimulus package, where political aspiration is more pronounced. Central bank is a regulatory authority that is tasked with overseeing the regulatory discipline and [fine-tuning] its goals to ensure macroeconomic stability. It can extend its support to political govt as long as that support is viable in light of macroeconomic reality. That is why central bank's independence is so important. And central bank's resources are not meant for supporting political goals or electoral pledges.

To accomplish political objectives and to meet electoral pledges, govt has fiscal policy. It can [cut] subsidy here to augment subsidy elsewhere. It can slash tax here to increase tax elsewhere. Central bank can come to aid if existing macroeconomic reality calls for such help.

Inflation is persistently above 9% and so is the inflation expectation.

Former World Bank lead economist to Bangladesh Zahid Hussain called into question relevance of this stimulus package in his article titled "Stimulus in a supply-constrained economy". He argues," The package is framed as countercyclical intervention. That logic works best when an economy is suffering from weak demand,low inflation, and temporarily idle productive capacity. Bangladesh today faces a more difficult combination: growth is slowing while inflation remains elevated and persistent.
In such conditions, additional stimulus does not automatically translate into higher output. If supply cannot respond, it may raise prices faster than production."(see "Stimulus in a supply-constrained economy", Zahid Hussain, The Daily Star, May 23,2026,https://www.thedailystar.net/business/news/stimulus-supply-constrained-economy-4182846)

Instead of going for monetary expansion, govt can opt for fiscal policies through resource reallocation. Recently, platform of steel manufacturers in a press conference urged govt not to raise electricity price. They solicited slashing the subsidy spent on capacity charge for the power plants. This is indeed a good advice that govt must pay heed. The saved subsidy then will be used to refinance closed factories and rejuvenate the rural economy.

Even the banking industry offers alternative solution. Chairman of the Association of Bankers,Bangladesh (ABB), in an interview with the Daily Star said central bank could lower the cash reserve ratio (CRR) to increase liquidity in the market(see "Tk 60000 crore stimulus for private sector"). This is a good advice in this time of inflation. Chinese central bank did similar thing to increase money flow for the private sector amid high inflation.

Banks know their clients well. If the stimulus comes into effect, then it will force good banks with ample liquidity to channel funds to problematic clients of the troubled banks. Despite central bank's guarantee, the [package] pushes good banks to bet on clients whose initiatives may bear risk for the banks.

Central bank itself has poor record in managing its own Equity and Entrepreneurship Fund(EEF),which is full of scams. It will be indeed interesting to watch how transparently and efficiently BB [will] manage such a large pool of fund.

Charging multiple interest rates to different entities has its challenges. Cheap credit may end up [being invested into] treasury bills, which offer safe returns, [compromising] govt's intended goals of increasing production and creating jobs. Or the cheap money may be lent to others at higher rates,further compromising the true objectives.

In brief, central bank is a regulatory body to oversee monetary discipline. Govt can use fiscal tools to fulfill its electoral pledges and central bank can only help in that endeavor if the macroeconomic context is right. The stimulus package has the potential to turn the good banks into bad. Past record of central bank's fund management does not provide room for optimism.

Chance is higher that a large part of the stimulus money may end up in govt treasury bill and bond market. It will increase the broad money growth by increasing the deposit growth and jeopardizing the goal of reopening the closed factories and creating 2.5 million jobs.

The MPS sounds more to convince the multilateral donor institutions than to spell out how to contain the inflation. Accommodating opposing tasks of monetary expansion through stimulus package and bringing the inflation down ,central bank complicated its objectives. It is unclear how the central bank will manage the multiple interest rate regimes it just introduced by taking upon its shoulders these opposing tasks.

Leave The Central Bank Alone

Use of central bank to meet electoral pledges Erodes gradually the safety hedges.

Bangladesh Bank in a surprise move announced Tk 60000 crore [stimulus package] in a bid to revive closed factories,support the cottage, micro,small and medium enterprises, diversify export,rejuvenate rural economy and create 2.5 million jobs.

The package has two components: Tk 41000 crore refinancing fund,which will be sourced from banks with surplus liquidity; another Tk 19000 crore will be sourced from Bangladesh Bank's (BB) own resources (see "Tk 60000 crore stimulus for private sector", Md Mehedi Hassan, The Daily Star, May 24,2026,https://www.thedailystar.net/news/bangladesh/news/tk-60000cr-stimulus-private-sector-4183136).

Banks with excess liquidity will deposit the money at 10% interest rate. Targeted borrowers will borrow the money at 3% or 4% or 7% depending on the size of the enterprise and the rest 6% or 7% will be subsidized by the govt. It will cost the govt Tk 3000 crore annually.

Govt last week also expressed interest to move away from the ongoing IMF credit program and to ink a new deal with the Bretton Woods institution.

However, the central bank did not announce any change in the policy rate,suggesting contractionary monetary policy is still in action.

Meanwhile, central bank's decision is tantamount [to] monetary expansion,contrary to its ongoing policy!

Finance ministry would be the [just] authority to declare such stimulus package, where political aspiration is more pronounced. Central bank is a regulatory authority that is tasked with overseeing the regulatory discipline and [fine-tuning] its goals to ensure macroeconomic stability. It can extend its support to political govt as long as that support is viable in light of macroeconomic reality. That is why central bank's independence is so important. And central bank's resources are not meant for supporting political goals or electoral pledges.

To accomplish political objectives and to meet electoral pledges, govt has fiscal policy. It can [cut] subsidy here to augment subsidy elsewhere. It can slash tax here to increase tax elsewhere. Central bank can come to aid if existing macroeconomic reality calls for such help.

Inflation is persistently above 9% and so is the inflation expectation.

Former World Bank lead economist to Bangladesh Zahid Hussain called into question relevance of this stimulus package in his article titled "Stimulus in a supply-constrained economy". He argues," The package is framed as countercyclical intervention. That logic works best when an economy is suffering from weak demand,low inflation, and temporarily idle productive capacity. Bangladesh today faces a more difficult combination: growth is slowing while inflation remains elevated and persistent.
In such conditions, additional stimulus does not automatically translate into higher output. If supply cannot respond, it may raise prices faster than production."(see "Stimulus in a supply-constrained economy", Zahid Hussain, The Daily Star, May 23,2026,https://www.thedailystar.net/business/news/stimulus-supply-constrained-economy-4182846)

Instead of going for monetary expansion, govt can opt for fiscal policies through resource reallocation. Recently, platform of steel manufacturers in a press conference urged govt not to raise electricity price. They solicited slashing the subsidy spent on capacity charge for the power plants. This is indeed a good advice that govt must pay heed. The saved subsidy then will be used to refinance closed factories and rejuvenate the rural economy.

Even the banking industry offers alternative solution. Chairman of the Association of Bankers,Bangladesh (ABB), in an interview with the Daily Star said central bank could lower the cash reserve ratio (CRR) to increase liquidity in the market(see "Tk 60000 crore stimulus for private sector"). This is a good advice in this time of inflation. Chinese central bank did similar thing to increase money flow for the private sector amid high inflation.

Banks know their clients well. If the stimulus comes into effect, then it will force good banks with ample liquidity to channel funds to problematic clients of the troubled banks. Despite central bank's guarantee, the [package] pushes good banks to bet on clients whose initiatives may bear risk for the banks.

Central bank itself has poor record in managing its own Equity and Entrepreneurship Fund(EEF),which is full of scams. It will be indeed interesting to watch how transparently and efficiently BB [will] manage such a large pool of fund.

Charging multiple interest rates to different entities has its challenges. Cheap credit may end up [being invested into] treasury bills, which offer safe returns, [compromising] govt's intended goals of increasing production and creating jobs. Or the cheap money may be lent to others at higher rates,further compromising the true objectives.

In brief, central bank is a regulatory body to oversee monetary discipline. Govt can use fiscal tools to fulfill its electoral pledges and central bank can only help in that endeavor if the macroeconomic context is right. The stimulus package has the potential to turn the good banks into bad. Past record of central bank's fund management does not provide room for optimism.

Need For Quarterly MPS

Unfulfilled remain the MPS objectives, Quarterly MPS for timely directives.

The Monetary Policy Statement (MPS) for January-June 2026 is about to expire in June. Most of its goals remain unfulfilled. First take a look at its key objectives. The objectives are "to anchor inflation expectations, guide inflation toward BB's target, address the unacceptably elevated NPLs, and restore public confidence in the banking system through improved governance and close coordination with fiscal and other relevant authorities" (see Monetary Policy, Bangladesh Bank,https://www.bb.org.bd/en/index.php/monetaryactivity/monetarypolicy).

Restoring public confidence in banking system hit a dead end when govt passed mutilated Bank Resolution Act 2025,allowing wrongdoers to regain control of the bank. The Deposit Protection Ordinance 2025 further signals that govt will be obliged to pay each depositor a maximum of Tk 2 lac in case of any bank goes bankrupt,further thickening suspicion of closure of troubled banks.

The abrupt dismissal of previous governor is no sign "improved governance" and further makes hole into public confidence in the banking system.

War in the Middle East came as unforeseen shock. Amid shortfall of revenue and rising oil prices in the international market, govt raised fuel prices at home. It will have an upward pressure on kitchen commodity prices. Inflation already rose to 9.04% in April from 8.71% in March. High oil prices in international market also provoked higher inflation in major economies ,including our key export and import markets. Uncertainties stemming from war and rising inflation make a dent in consumer activity in our export destinations. In addition, imported goods will be costlier because of rising price levels in importing countries. Notwithstanding inflation easing expectations in the MPS, inflation as well as general inflation expectation is set to rise.

Contrary to MPS optimism about policy rate cuts across the globe, many central banks shelved their plans of policy rate cuts in the wake of war,fearing inflationary pressure. Delay in policy rate cut delays investment projects and business expansion ,further shrinking consumer activity. Against this backdrop, foreign financing gets costlier. So govt depends more on banks for financing the budget ,leaving little to the private sector. The MPS keeps the policy rate (10%) same but it has lowered Standing Deposit Facility (SDF) from 8% to 7.5% in a bid to generate more credit to private sector. But Bangladesh Bank's own finding reveals that private sector credit growth rate in January and in February was 6.05% ,lowest in 23 years( see "Rin e 23 Bochhorer Moddhey Sorbo Nimno Probriddhi(Lowest private sector credit growth in 23 years)", Daily Prothom Alo,May 21,2026).

The lowering of SDF did not help much. Rather banks find it safe and lucrative to lend money to govt and to buy govt securities. Let us see how the private sector credit behaves in the remaining four months.

The MPS acknowledges that the NPL reached 36% of total loans in September 2025. Given the dull economic situation and less commitment to financial reform, the NPL is likely to rise. However , govt reiterates its commitment to true auditing of businesses.

Despite pressure for lowering the policy rate, the central bank cannot slash it as inflation rate is still hovering above 9%. In the last quarter(April-June) of this fiscal year, there is little chance that inflation will reach the BB's desired 7% level. Now it is interesting to see how the govt reviews its reform commitment and addresses the pending issues in its future policies.

If the MPS were published quarterly,then it would review the policy objectives and fine tune the goals in light of emerging realities. Six months is a long time for such adjustment. Four MPSs in a given year will be more appropriate in this fast changing world.

Rating Agencies Downgrade Bangladesh

Dull economic condition & poor reform initiative Turn Fitch Ratings outlook negative.

Fitch Ratings keeps Bangladesh's rating same,B+,but downgrades outlook from stable to negative (see "Fitch revises down Bangladesh outlook to negative ",The Business Standard, May 14,2026,https://www.tbsnews.net/bangladesh/fitch-revises-bangladesh-outlook-negative-affirms-b-rating-1438136). It underscores challenges macroeconomic stability faces in the wake of rising external pressures like escalation of tensions in the Middle East,rise in fuel prices etc.

Such downgrading will make foreign credit more costly. Despite continuous swelling of forex reserve, Fitch notes that forex reserve condition may sharply deteriorate if the war in the Middle East turns worst.

This downgrading comes at a moment when BBS divulged that general inflation rose to 9.04% in April from 8.71% in March(see "Bangladesh Inflation Snapshot:2026",The Business Standard, May 11,2026,https://www.tbsnews.net/infograph/numbers/bangladesh-inflation-snapshot-april-2026-1436091). It is the non-food inflation that contributed greatly to the rise of inflation in April.

Recent fuel price hike is likely to raise non-food inflation further. Since there is an upward pressure on inflation, any slash in policy rate is highly unlikely in near future.

Inflation rate remains higher than central bank's desired 6% or 7% rate,Fitch report highlights.

Bangladesh's growing Non-Performing Loans (NPL),which is now 30% of total loan, is causing mayhem in the banking system,Fitch observes.

The IMF set a target to reduce NPL to 8%(see "IMF's Second Review on Credit Program",published here on June 27,2024,https://hoquestake.blogspot.com/2024/06/imfs-second-review-on-credit-program.html?m=0).There is no sign of NPL reduction; instead it grows day by day. The 8% target seems an uphill task right now.

We missed both the inflation and NPL reduction targets set by the IMF. In addition, abrupt dismissal of the past governor and allowing wrongdoers to regain control of the bank in the bank resolution act sent a wrong signal abroad about our commitment to genuine reforms.

Splitting NBR into policy and implementation departments is another IMF benchmark that remains unfulfilled. When there is suggestion for subsidy cut,govt plans to borrow heavily from domestic and foreign sources to finance the budget. Despite fuel price hike ,govt plans to borrow $2 billion for fuel import.

Govt also misses revenue target. To raise revenue, govt doubles source tax for key kitchen items including rice,edible oil,onion and pulses. It will fetch Tk 5 billion ,govt hopes. Not only that govt is mulling to tax motorbikes and e-rickshaws. Taxing the motorbikes will net another Tk 10 billion. Taxing the e-rickshaw is a good move to regulate their number.

There is no visible policy on how to tackle the NPL. No policy on how to fill the void created by NPL. And ordinary citizens are paying the price in the kitchen market and in the public transport.

Inflation, NPL,banking reform and revenue reform so far remain disappointing. And it is reflected in ratings made by agencies. Earlier, Moody's set the credit rating for Bangladesh at B2 with negative outlook. Standard & Poor's credit rating for Bangladesh set at B+ with stable outlook (see "Bangladesh-credit rating", Trading Economics,https://tradingeconomics.com/bangladesh/rating). I won't be surprised if Standard & Poor's outlook becomes negative following Fitch's outlook. In short, dilapidated economic conditions make foreign credit costlier.

Challenge Posed By Currency Tool

Striking the iron when it is hot, Strong local currency is what you got.

The World Bank lowered growth forecast for Bangladesh to 3.3 % for FY 2026. Moreover, it fears more than 3 million Bangladeshis may go under poverty line next year. Despite sign of reconciliation between the USA and China (President Trump hints lowering the tariffs on China and China exempts few US items from retaliation list) ,prospect of global trade remains uncertain. There is no sign that a consensus will be reached within 90 days though bilateral negotiation is in full swing with many countries. The Federal Reserve plans to lower the policy rate in May. It will weaken the USD. At the same time, it will be high time for the US to employ the currency tool if the ongoing negotiation may not yield expected result. I think the Trump administration will not wait too long to employ the tool. They want to do the unpleasant things at the start of the tenure and reap the benefits at the last leg of the tenure, when the fallout of the reciprocal tariffs will be offset and faded from people's memory.

Given the lack of response from outside world, it is highly likely that Trump administration may resort to currency tool this year. Will the Fed allow the Trump administration to print and $1 trillion and give it to procure rivals' currencies in a bid to appreciate their value against USD?Answer is still unknown ,but further weakening of US dollar will put appreciation pressure on other currencies.

To make clear my point, let us take a look at the formula of Real Effective Exchange Rate(REER):

REER at period t= (Exchange rate index of a country x Inflation rate of the country)x 100÷(Average of trading partners' exchange rate index x weight x Average of inflation rates in partner countries)

Exchange Rate Index at t= (Exchange rate of a county's currency at t)÷(Exchange rate of a county's currency at base period)

The US do trade with most of the countries. Any weakening of US dollar (look at the denominator) means REER of a currency appreciates given its exchange rate remains the same. The USA accounts 20% of our exports whereas the EU accounts more than 45% of our exports. Meanwhile, China and India are our top two importing [sources]. Moreover, except Eurozone, Bangladesh does trade with most of its trading partners in USD. So USD carries [(if not then it should)]more weight in REER calculation and thereby deeply influences REER of Taka. The point is any future depreciation [of USD] will put appreciation pressure on Taka (look at the formula). Since the tariff debate,we have seen Euro, Yuan [,] Dong, Rupee depreciated. This clearly makes possibility of REER appreciation of Taka stronger unless the central bank intervenes in the forex market.

We cannot make great leap towards productivity through technological innovation [in short span of time]. But we can retain the competitiveness through local currency depreciation. For that central bank's active role is what we needed.

Trump administration can also employ International Emergency Economic Powers Act that permits the US president to withhold interest payment on US treasury bonds or to freeze payments to other countries. When this will happen many countries will try to lower their US treasury bond holding, leading to appreciate their currencies. Either approach leads to REER appreciation of local currency.The USA will try its best to make USD less attractive as the reserve currency. So central bank should have a contingency plan on how to convert part of the reserve in gold,Euro or other IMF reserve currencies.

What The Broad Money Growth Tells

Inflation is high compared to last year, Amid trust deficit, holding cash is what people prefer.

In the latest Monetary Policy Statement (MPS) , broad money registered 7.6% growth against the projection of 8.2%. Broad money or M2 consists of currency outside banks,deposits of financial institutions at the central bank, demand deposits and time deposits. Both currency outside banks and time deposits witnessed growth in December 2024 compared to the corresponding month in 2023. Time deposit's growth surpassed all. Riding on this two, overall money supply (M2) saw 7.57% growth.

If we look at the twelve month average inflation, January 2025 inflation( 9.94%) is still higher than January 2024 inflation (9.86%).That means one year on inflation is still in double digit. We have to remember that in the last one year both the current and previous regimes injected huge money into the system ( see "Last Year's Extra Cash" published here on January 10,2025). This to a great extent dampens the contractionary monetary policy mood and prolongs the recovery.

According to the MPS ,deposit growth was 7.4% in December. Earlier years it had been much higher. During the first half of this year, more money remained outside the banking system,translating overall trust deficits in corruption-stricken banks. Latest data show,from November to December, currency outside banks registered a negative growth. But still a significant amount of money remains outside the banking system. People still prefers holding cash.

According to the MPS, redemption of National Savings Certificates (NSCs) increased and people diverted non banking savings to other sources. Time deposit growth hints that things have slowly started to change. Apart from that treasury bond sales are also becoming popular among individual investors. But the size of NPL is growing. This may discourage people again depositing their money at the banks.

Trust deficits resulting from poor governance and political uncertainty still holding back people going to the banks. Government's over reliance on the banking system diverts credit from private to public sector.

In short span of time, the interim govt cannot drastically improve the governance situation. The best it can do is to cut the spending. Fiscal tightening at this time can provide the extra credit for the private sector.

Seasonal commodities like winter vegetables and low oil prices at the international market influenced the inflation. Since curbing the inflation is the priority, govt should focus on how to bring the money outside the system into the banks and arrange credit for the private sector.

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/

Review Decision On Tariff And Vandalism

Review the decision on tariff and criminal act, For more revenue and justice perfect.

Three weeks ago government lowered the prices of sugar and edible oil. Yet the two items are still being sold at higher prices. In general, 52% taxes( 30% duty,15% VAT and 7% advanced tax) were imposed on sugar before the new directive took effect. On the other hand, 15% VAT along with other duties were imposed on edible oil. Govt halved the import duty on sugar and halved the VAT on edible oil. Along with onion, import duty on edible oil and sugar constitutes a great part of import revenue. Slashing the duties will evidently lower the revenue generated from these two kitchen commodities.

In 2023, govt's sugar import stood at Tk 12710 crore. Every year govt imports Tk 25000 crore worth of edible oil. Now with the former duty structure, sugar alone generated Tk 6609.2 crore and edible oil Tk 3750 crore as import revenue. With the new tariff structure, revenue loss from sugar and edible oil will become Tk 1906.5 crore and Tk 1250 crore respectively. The decision would cost the govt altogether Tk 3156.5 crore in this time of austerity^1&2.

As understood from desperation of tackling the inflation,the measures are pretty much in line with govt's top priority. At this time of slow business activity, revenue generation will be lower. This year govt faces an uphill task of meeting revenue target of Tk 5.41 trillion. Last year, revenue shortfall was Tk 381.57 billion against the target of Tk 4.1 trillion. The slow pace of revenue generation ( caused by political uncertainty, lack of capacity and slow business activity) is likely to hamper meeting the target. We have to wait for 1 or 2 months to see whether the tariff reduction has any impact on inflation.

My personal opinion is to review the decision immediately. Because sugar and to some extent edible oil get less priority in the list of essential kitchen items. So govt could easily retain Tk 3165.5 crore by reinstating the tariff structure. I am optimistic after the November 5 election things will improve dramatically including inflation.

Apart from fixing the revenue generation, addressing political uncertainty calls for objective stance on vandalism. Vandalism does not have different meanings for different people. It will be biased move for the govt to call one unlawful act vandalism while sparing the other one. Attacks on key public installation, foreign cultural institute, museum, police station, houses of former ruling party members should be treated as acts of vandalism and law should take its own course. Otherwise, biased justice will open another chapter of political agitation. In Sri Lanka, interim govt tried the attackers of presidential palace and the court sentenced them for their conduct. To gain the confidence of people from all walks of life, interim govt should do the same and immediately bring to book all the troublemakers, plunderers and arsonists. It is indeed a good news that United Nations Commission for Human Rights opened an office in Bangladesh. An independent forensic lab under the UN could help the probe on the atrocities committed during July and August. Reviewing the decisions taken so far could improve our revenue generation and help the govt gaining more confidence.

References:

1. "Chinir Shulko 30% Theke Kome 15% Kora Hoechhey:NBR(Tariff On Sugar Lowered To 15% From 30%:NBR)",Daily Prothom Alo,October 09,2024.
2. "Soyabin O Pam Tele Vat Chhar Diyecchey Sarker(Govt Slashed VAT On Soybean And Palm Oil)",Daily Prothom Alo,October 17,2024.

Address Political Uncertainty

Consensus to address political uncertainty May send a signal of greater clarity.

Central bank once again raised the policy rate by 50 basis points, making it 10% in a desperate measure to curb inflation. Governor earlier in an interview hinted to raise it even one more time in the coming weeks. Meanwhile, IMF downgrades Bangladesh's growth projection to 4% and anticipates that inflation will be around 10% next year. Earlier, the World Bank had downgraded the growth rate. Since inflation shows no sign of coming down, contractionary monetary policy will be prolonged.

The political protest,sit-in continue unabated. If the political crisis prolongs, it will create new problem as well as cast shadow over the economy. Unlike Sri Lanka where political parties formed the interim govt (which had support of even the outgoing regime) in a consensus, here the former ruling regime is nearly decimated,its student wing is facing ban and other parties are in no mood to have a dialogue with the former ruling regime before its trial. Some key groups associated with former regime signal to wind up their businesses. In addition, govt freezes bank accounts of many groups and owners who have been accused of corruption and money laundering activities. In the absence of greater political reconciliation, budget deficit may continue in the future. Many are demanding an election date. A specific date of the next election will clear away half of the uncertainty. Investors, businessmen and in general the economy will get a signal when the stalemate will be over. Maybe by mid November or by the end of November the draft reform policies and the white paper on corruption will be made public. This will further dispel the ambiguities on the objective of this govt. If this political uncertainty persists or lack of confidence on govt exists ,it will create new problems along with the ongoing economic woes.

Incumbent govt has a new responsibility in addition to fix the economy and start some reform programs. It is to clear political uncertainty arising from this regime change.

If it announces a date,even if it is 5/7 years later, or go for people's mandate for duration of the govt,which I propagated earlier in one of my pieces, it will give tremendous confidence to the economy and people. Because both will know where the country is heading and when it will be over.

When we are in the middle of an economic crisis, all the stakeholders (people,administration,parties) of this country have to think again whether our troubled economy and innocent people can bear the cost of frequent political misadventures.

Lack of reconciliation, rule of law and people's participation almost jeopardize bipartisan political structure, which somehow gives a kind of stability in many countries,in our country. Former ruling regime tried to do the "unnayan" (development) for people without taking their consent. By the same token, we see that "songsker" (reform) is being pursued for people bypassing their mandate. Trapping into the narrative of "biplobi sarker"(revolutionary govt) may cost the incumbent govt. Boasting such argument may invite another unsettling event that we should all try to avoid. People's mandate may throw cold water into all kinds of debate surrounding this govt. And it will be good for the economy. At the end of the day both " unnayan" and " songsker" will be done for the people. So they should be at the center stage of everything. Otherwise, I apprehend, vested quarters may exploit the situation as they did during the tenure of previous regime and during the caretaker govt. Our economy and taxpayers may not bear the cost of wrong policy decisions.

China recently lowers its policy rate. Earlier it had appreciated its currency. Low Chinese policy rate paves the path for cheap Chinese credit for the private sector. While foreign currency keeps coming, a large trade deficit in the bilateral trade calls for taking Chinese credit for the private sector to pay the bills for doing business with China. Previous regime did manage to get 1 billion yuan. If it necessitates, govt may go for another package when we need more credit to give our private sector to rejuvenate the economy.

Govt took some right steps to address inflation woes. Now it needs to unveil reform plans and address political uncertainty before it gets worse.

Tackling Inflation: Slash Price , Launch New Scope

Amid inflation, slashing prices is a must, To save tiny savings, launch investment scope just.

Egg prices remain an issue in dealing with rising price levels. Despite increasing surveillance, prices are not lowered. For two days, big distributors stopped selling eggs as govt fixed prices for eggs at various stages. News reports say unusual precipitation hampered poultry farming across the country, causing shortfall of 5/8 million eggs daily. This is one of the reasons for unusual hike in egg prices. However, I disagree with the view that corporate groups bag huge profit from the unusual hike in poultry item prices. Swollen retained earnings presented as proof of foul play,but the profit before tax clearly shows size of profit corporate group usually generates¹.It is not true that retained earnings show earnings after dividends. Rather it is reserved for paying dividends or reinvestment in the future at the will of corporation.

There is an increasing tendency to blame cartel/syndicate for the price hike in kitchen market. Back in March and August in 2023 in two pieces titled "Poultry Meat Gets Costlier" and "Poultry Market Becomes Volatile Again", I highlighted that there are too many farms and punishment is immediate in case of forming cartel in the poultry market². Bangladesh Competition Commission fined two big farms and govt allowed import of Indian eggs. Then what is the point of forming cartel?

But there are signs of unholy alliance in the input market. Govt should probe on that. Like telecom business, govt may intervene in hatchery and feed production business to supply feed and chick to marginalized poultry farmers who find the feed prices too high.

Govt also needs to do a lot of things for hedging tiny savings against inflation. In our country, people do not have enough things to hedge their tiny savings against inflation except depositing money into bank accounts where interest rate is still lower than the true inflation rate. Govt is planning to allow ordinary people's investment into treasury bills which offer interest rate up to 12%. Problem is such investment requires minimum investment of Taka 100000 and it does not allow investment into treasury bills with 91-day or 180-day maturity. If small investors with Taka 500/1000/5000 are allowed to invest into such treasury bills, it would do a great help to them against inflation during the time of high price levels.

Similarly, ordinary people and micro savers' participation can be allowed into commodity exchange market where they can buy/sell futures ,options of commodities through banks/MFS. At the same time, foreign currency regulations act needs to be updated so that individuals can increase their foreign currency holdings in case of free fall of Taka or high inflation. Currently, the act forbids holding of foreign currency by individuals without valid documentation.

Lowering the price levels is a must step to give comfort from scorching heat of inflation. At the same time, it is no less important to protect peoples' savings.

References:

1. "Dim ,Murgi Beche Fule Fepe Utchhey Boro Utpadak Protishthangulo(Big Producers Get Bigger By Selling Eggs,Poultry) ",Mehedi Hasan ,Bonikbarta, October 16,2024. Link: https://bonikbarta.com/bangladesh/dLzn4ol50hNoEqfH
2. "Poultry Market Becomes Volatile Again",Rezaul Hoque, August 17,2023,https://hoquestake.blogspot.com.Link : https://hoquestake.blogspot.com/2023/08/poultry-market-becomes-volatile-again.html?m=1

Regulatory Grip Is Still Weak

No reflection of official data in market, Allow others to make the data perfect.

September inflation data published by BBS shows marked decline in inflation. Average inflation declined to 9.92% and food inflation declined to 10.36%. It means for the two consecutive months average inflation declined. If the trend continues significant improvement in price levels may be observed by the end of this year. However, except rice, key kitchen commodities have yet to reflect the inflation data. At home rice registered decline in prices by Taka 4/5 per kilo. This is largely due to decline in prices at international market. India also lifted restrictions on export of non-Basmati rice. Coarse rice registered the marked decline.

Weak regulatory grip is more conspicuous. Despite Army and police presence, people are still being beaten to death. Law & order has yet to return to normalcy. A lack of accountability is still prevailing in the ground. Last week I noticed that mobile data pack prices were raised by all the operators in unison. This time volume of the data pack for shorter duration was also lowered. Moreover, the speed of the internet has yet to reach the pre-election level. Too many unrest, mob beating may be one of the reasons for slow speed. But the operators have not furnished any explanation yet. Unlike the previous regime, there is no whimsical imposition of tariff or duties. Then why is this price hike?

Reactivating BTRC's hearing on mobile phone services to a great extent address the issues. Similarly, resuming the operation of Bangladesh Competition Commission could make marked improvement in consumption behavior of the consumers and competition.

Since this regime does not have political loyalists/storm troopers on the ground or inside the administration ,there is a tendency not to respect their orders / instructions. Hopefully ,in the coming months their regulatory grip will be strengthened.

I think govt should also allow others to calculate and publish the consumer price index.Consumer's body,Bangladesh Bank, association of banks, market research firms or individuals should be allowed to do the CPI survey and publish the inflation data. Since inflation is affecting interest rate, vernacular activities, investment, it will be prudent to bring multiple parties to calculate the inflation and then have a discussion on them. Then govt can officially announce the true inflation data, emerging from so many studies. Economic data should reflect the market. Govt's own think tank's recent study reveals people's lack of confidence in govt data. Info on true situation in the ground and successful implementation of instructions are keys to have a firm regulatory grip.

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.