Impact of high inflation on bank savings

There has been much discussion regarding the government's actions, highlighting both positive aspects and criticisms. The current government faces numerous economic challenges, and while efforts are being made to address these, immediate solutions are not possible. However, efforts must continue. Among the achievements are the stability of the exchange rate, an increase in reserves, efforts to bring discipline to financial institutions, and changes in administration. Gradual progress can be expected in these areas.

At present, the most complex challenge facing the economy is the rising inflation. High inflation has not emerged suddenly; it began in 2022. The inflationary trend started during the pandemic, and when the Ukraine war began, inflation escalated globally. Even the United States, the world's largest economy, saw inflation rise to 9.1%. To combat this, the U.S. Federal Reserve raised interest rates multiple times and took other measures, which gradually brought inflation under control. However, inflation in Bangladesh has not shown any signs of decreasing. A visit to local markets reveals how severe inflation is. Under the previous government, there was a tendency to downplay negative economic indicators, including inflation, and despite economists pointing out these discrepancies, no steps were taken to resolve the statistical confusion.

The current interim government is making an effort to inform the public of the actual economic situation. The current inflation statistics are realistic and can be trusted. According to October's data from the Bangladesh Bureau of Statistics, inflation in the domestic market continues to rise. Food inflation was 12.66%, and non-food inflation stood at 10.87%. In other words, food inflation is close to 13%, and non-food inflation is nearing 11%. At present, controlling high inflation is the most significant challenge for the economy.

It cannot be denied that since the interim government took office, inflation has not decreased but has instead increased. The new governor of Bangladesh Bank has particularly focused on bringing inflation down to a manageable level. Several measures have been implemented, but it seems that a considerable amount of time will be needed for inflation to reach an acceptable level. The governor has stated that it will take time to bring inflation under control, and this is a reasonable assertion. It is unlikely that inflation, which has been high for an extended period, can be reduced to manageable levels overnight. He also cited examples where some countries were able to bring inflation under control within six months, but in other cases, it took longer. We may see inflation decrease slightly by the end of this year.

For the past three months, inflation in Bangladesh has been consistently above 9%. High inflation has affected all sectors of society, but the most impacted have been those with fixed incomes, low-income groups, and the lower middle class. Small-scale entrepreneurs have also suffered the most due to high inflation. Small entrepreneurs typically require less capital to run their businesses, but they often face high interest rates because they have difficulty securing loans from the banking sector. As a result, they often turn to NGOs for loans, which charge significantly higher interest rates. Due to high inflation, their financial capacity has been affected. The cost of producing goods has risen, but they cannot sell their products at appropriate prices. Many have been unable to repay loans and are becoming defaulters. Some have been forced to close their businesses, even if they wanted to continue.

Previously, there were doubts about the accuracy of economic data published by the Bangladesh Bureau of Statistics. However, the current interim government has worked to ensure statistical transparency, making the data released by the Bureau more reliable. When accurate information is available, decision-making becomes easier.

There are also other issues that need urgent resolution, such as how to integrate the informal economy into the formal one, as the informal sector continues to grow. The country has not been able to use many of its economic tools effectively. In 2022, the amount of currency outside the banking system was 12.9%, but by 2023, this figure had risen to 23.5%. Inflation has been a key factor in this rise, as people are struggling to manage their household expenses and cannot save money in banks.

There is a growing lack of trust in the banking sector, partly due to the negative news surrounding banks. If we examine the statistics for 2024, we may be able to determine whether the amount of currency outside the banking system is increasing or decreasing. The decreasing trend in savings in banks is not good for the economy. Economists believe that the money moving outside the banks is not being saved at home, but instead is being spent more due to inflation. As a result, people are unable to save in banks despite their intentions.

The most affected groups by high inflation are the working-class and those on fixed, low incomes, as their wage increases have been insufficient to keep up with inflation. As a result, their purchasing power and financial capacity are decreasing. If this situation continues, the poverty rate will rise, which would not be beneficial for the economy.

Several banks have fallen into serious trouble and are unable to return depositors' money. Small savers, who are hit hard by inflation, are losing their ability to save. The measures taken by Bangladesh Bank to control inflation have not been effective, and inflation continues to rise. It is necessary to examine whether the market mechanisms are functioning properly and how the informal economy is operating.

In terms of broad money growth, Bangladesh Bank's figures were 9.4% in 2022, rising to 10.5% in 2023. It is essential to examine whether people's time deposits or demand deposits are increasing. These deposits might rise because banks, facing deposit shortages, are offering higher interest rates to attract savings. Liquidity coverage ratio (LCR) has increased from 100 basis points in 2017 to 211 in 2020 and 213 in 2021. In Sri Lanka, it is 145.

During the COVID-19 pandemic, liquidity rose, largely due to a stimulus package worth one trillion taka, but this did not work effectively. The intention was for banks to lend the money in the first year and recover it for redistribution to other struggling sectors, but this plan failed in many cases, with initial loans not being repaid correctly. Bangladesh Bank has been continuously raising policy rates, which has adversely affected borrowers, particularly small and medium enterprises (SMEs).

Simply raising the policy rate by Bangladesh Bank will not reduce inflation to acceptable levels. Other tools must also be used to control inflation. Measures to control import costs have been taken, but the question is whether blanket cuts in imports are beneficial for the economy. While reducing the import of unnecessary and luxury items is not harmful, reducing imports of raw materials, capital machinery, and intermediate goods could hurt the production sector in the long term. According to the latest data, import costs have decreased by around 19%, with capital machinery imports falling by nearly 44%.

We need to analyze how countries like Turkey and Sri Lanka controlled high inflation, and Bangladesh Bank could take inspiration from these examples to make faster and more accurate decisions. Ultimately, controlling high inflation as quickly as possible is crucial for our economy.

Both the government and the private sector must work together to address this issue. Market monitoring through accurate information is essential. The Bangladesh Competition Commission had been working in this area but has not been as effective recently. Providing high-interest rates to entrepreneurs will not help them survive in the long run. Increased investment is critical for job creation, and frequent consultations between the public and private sectors are necessary.

Farida Ara Begum: Economist and Chief Executive, Business Initiative Leading Development (BUILD).
Transcription: MA Khalek