Due to why printing money cause inflation

In a speech to the nation, Interim Government Chief Adviser Dr. Muhammad Yunus stated that the people of the country are suffering from inflation due to the 'fascist' government's decision to print and release an additional Tk 600 billion for looting. Controlling this inflation is one of the interim government's main objectives. The Governor of Bangladesh Bank has also blamed this Tk 600 billion for the inflation and rising prices. The liquidity crisis in the banking sector has become so severe that several banks are now forced to collect deposits at interest rates above 12%. Due to the instability in the country and the banking sector, investment has stagnated, with some banks opting to invest in government treasury bills and bonds. Not only banks, but private individuals are also making significant investments in these government bills and bonds at high interest rates. The uncertainty in the industrial sector and high-interest rates have caused a crash in the stock market.

Experts had strongly advised against printing money during the Awami League era. Those who have spoken about the Tk 600 billion are all knowledgeable economists, but Bangladesh Bank gave the government the money by printing new notes, not to any individual. It is essential for the central bank to provide funds to the government when necessary. The government does not take this money in secret but uses it to cover expenses approved by the budget in parliament. Each ministry pays contractors through checks, and whether the government has funds in its accounts or not, Bangladesh Bank honors these checks. The government has more than a hundred accounts in Bangladesh Bank, and these accounts are not only used to disburse payments but also to deposit tax revenues from the public. If disbursements exceed deposits for a day, it becomes government debt, and if deposits exceed disbursements, the debt is automatically repaid. If this borrowing system were to be dismissed, the country would come to a standstill. The only solution is to avoid budget deficits. If the government's budget is not balanced, the current Governor will not be able to stop the government from borrowing using monetary policy alone.

From the Chief Adviser's statements, it is clear that the more the previous government spent, the more corruption occurred. All governments have borrowed from Bangladesh Bank and spent it on various projects. It is not a crime for the government to borrow when necessary; the crime is the reckless use of that borrowing. Corruption was so rampant that it created individuals like Benazir Ahmed and Matiur Rahman, allowed Bangladeshis to build second homes in Malaysia and Dubai, established "Begumpara" in Canada, proposed building two swimming pools in bureaucrats' homes, and even considered going to Rhodesia to learn farming or traveling abroad to learn how to cook khichuri. Despite widespread corruption, Awami League’s Obaidul Quader would often preach "zero tolerance" for corruption, which would draw laughter from the public.

Corruption and money laundering did not happen only under Awami League; it has occurred under every government. Corrupt bureaucrats have no political ideology or loyalty; they always support the government in power. Money laundering happens not just in Bangladesh but in every South Asian country. Indian Prime Minister Narendra Modi and Pakistan's Imran Khan both campaigned on promises to bring back laundered money but later faced corruption charges themselves. In 2022, Sri Lankan President Gotabaya Rajapaksa was forced to flee the country, and his elder brother, Prime Minister Mahinda Rajapaksa, had to resign amid public protests against corruption and economic mismanagement. Despite being accused of corruption, the Rajapaksa family is now again poised to return to power. In the Third World’s democracies, there is blind loyalty to political parties, and no supporter of any party believes their leaders are corrupt. This blind loyalty is why Ferdinand Marcos Jr., son of the corrupt and dictatorial Ferdinand Marcos, is now the President of the Philippines, even though his parents had to flee the country due to public outrage.

In his speech, the Chief Adviser also mentioned that the policy interest rate has been raised to 9% to control inflation. Central Bank Governor Dr. Ahsan H. Mansur has already raised it to 9.5% and plans to gradually increase it to 10% or higher in the coming months to bring inflation down to 3-4%. Hearing the Governor’s plan, one might think that interest rates need to be raised so high that no one will approach the bank for loans anymore. While Europe and the U.S. have adopted the policy of making loans more expensive by raising interest rates, they have not attempted to reduce people's purchasing power.

According to the Governor, even though Bangladesh Bank lost billions of dollars in the past, it has now recovered somewhat under his tenure by buying some dollars to boost reserves. However, there is nothing new about this; Bangladesh Bank’s declared policy is to sell dollars to commercial banks as needed and to buy surplus dollars from them. An excessively conservative reserve policy could hinder imports. When commercial banks become hesitant to open Letters of Credit (LCs) due to conservative policies, influential businessmen will rush to Bangladesh Bank for dollars, creating a new avenue for corruption. Even though reserves may increase, inflation will also rise; the more foreign loans or remittances are accumulated in the reserves, the more inflation will occur.

The Chief Adviser mentioned in his speech that programs like OMS, the food-friendly program, and the provision of essential goods to marginalized people at affordable prices continue to protect the common people from inflation. These programs were initiated during the so-called ‘fascist’ Awami League government. Even though everything from the ‘dictatorial’ Awami League government is being discarded, the interim government has retained this program to curb inflation. The Awami League government provided a subsidy of Tk 100 billion for this program. No matter what Dr. Yunus says, the interim government will also have to continue the subsidy; if they don’t, their popularity will suffer.

The primary goal of raising interest rates is to reduce loan availability. However, the economy doesn’t run on a straightforward, linear path; every policy has both positive and negative consequences. If interest rates are excessively increased, reducing investment and purchasing power, economic activity and employment will also shrink. If economic stagnation occurs, unemployment will rise, industrial growth will slow, production will decline, and development projects will fail. When interest rates rise, the cost of capital for businesses will increase, which will, in turn, raise the prices of goods. The assurances of stability in the banking sector are being undermined by Bangladesh Bank’s careless announcements. When news of bank insolvencies spreads, it becomes difficult to maintain depositors’ trust in the banking system.

The first mention of budget cuts came from the Finance Adviser, and the Chief Adviser repeated the same point. Despite plans to cut the budget, the interim government is still taking loans from the IMF, the World Bank, and JICA. Much noise had been made earlier that the Awami League government had drowned the country in debt, but now everyone seems proud of Dr. Yunus's ability to secure loans. No economist has made any critical comments against the current government's borrowing. It must be acknowledged that soft loans with favorable terms are necessary, and foreign debt is still within manageable limits compared to GDP, as noted by current Finance Adviser Salehuddin Ahmed.

The primary causes of inflation and rising prices are the government's excessive budget deficits and limited revenue collection. The government's revenue collection is only 8% of GDP, and unless this is increased, the government's reliance on borrowing and inflation will not be forcibly reduced. Prices are rising day by day, but the public is not complaining as much as before because they still expect this government to succeed. In an effort to keep prices low, the current government has removed import duties on some essential goods. While temporary relief can be achieved by lowering import duties and regulatory tariffs, long-term benefits will only come if corruption within the National Board of Revenue (NBR) is reduced. Most of the corruption in Bangladesh occurs within the NBR. Only when the NBR is made corruption-free can the country and its people be saved from inflation.

Ziauddin Ahmed: Former Executive Director of Bangladesh Bank