In context of Sri Lanka, inflation in Bangladesh

During the COVID-19 pandemic, the Sri Lankan government was compelled to declare a state of emergency in the face of a severe economic crisis. At one point, the then president Gotabaya Rajapaksa fled the country in the face of protests. Later, his younger brother, Ranil Wickremesinghe, assumed power. He appointed P. Nandalal Weerasinghe as the Governor of the Central Bank of Sri Lanka. As a result, the new president and the governor began to revive Sri Lanka's ailing economy.

Recently, Sri Lanka has paid the loan installments received from Bangladesh, foreigners are coming forward with investments in Sri Lanka, energy supply is normalizing, food prices are on the decline, reserves are on the rise, inflation rate is 1.3 percent, tourism sector is strong, remittances sent by expatriates have increased, industry and agriculture. As production increases, exports increase. According to economists, the key figure behind Sri Lanka's economic revival is Central Bank Governor P. Nandalal Weerasinghe. He is seen as playing the most significant role in steering Sri Lanka's economic recovery. Economists urge implementation of the techniques and policies followed in Sri Lanka's economic revival in our country. They are also giving various suggestions by meeting with the governor.

Sri Lanka's economy had been facing significant challenges for an extended period, first due to a prolonged civil conflict, which came to an end, and then the economic impact of the COVID-19 pandemic. Sri Lanka's foreign exchange reserves have dwindled to near zero as earnings from exports, remittances and tourism fell significantly during the coronavirus pandemic. Due to the challenges, the government declares itself bankrupt and refrains from paying installments of foreign debt. At that time school level examinations had to be canceled due to lack of paper, army had to be deployed at petrol pumps due to severe oil crisis, street lights did not light due to lack of fuel oil, cooking did not run due to lack of cooking oil, factories were closed due to lack of electricity, rice production was suspended due to ban on fertilizer and pesticides. Production fell by 20%, with reduced VAT and tax rates reducing revenue significantly. In this situation, the prices of commodities in Sri Lanka are rapidly increasing, with an inflation rate of 69.8% in September 2022. This situation gives us hope of a turnaround for Sri Lanka.

Bangladesh's economy has never been like Sri Lanka's. In comparison to various countries around the world, during the COVID-19 pandemic, Bangladesh has experienced substantial economic growth. Despite the excessive rise in commodity prices in the global market, Bangladesh's foreign currency reserves have decreased, but they still remain stable. In August this year, India had reserves of $601.45 billion, Sri Lanka had $3.56 billion, Pakistan had $12.6 billion, and Bangladesh had $29.26 billion. However, according to the IMF's guidelines, the reserve should be $21.70 billion. The IMF is unhappy about counting around $8 billion in loans provided for various projects in Bangladesh from our reserves as it affects the reserve status. However, the loan installments are being paid regularly. Reserves are not just decreasing in Bangladesh, but also in India, Sri Lanka, and Pakistan.

While reading various newspapers these days, it seems that a decrease in reserves is leading to economic troubles in the country. After gaining independence, our country did not have any foreign currency reserves; does that mean the nation wasn't thriving? Just a few days ago, both Sri Lanka and Pakistan had no foreign currency reserves either. Sri Lanka is now turning around with zero reserves. At one point, Pakistan's reserves had reached $197 billion. Their reserves are still twice the size of our reserves. By replenishing these reserves, Pakistan's economy is regaining strength. In 2008, our reserves were only $7.47 billion, and by 2011, they had reached $10 billion, a milestone celebrated by Governor Dr. Atiur Rahman. I was also a part of that celebration. If we don't spend the reserves, development will slow down, and commodity prices will rise even further.

Agricultural and industrial production in Bangladesh has increased, exports have increased, electricity generation has increased, and communication infrastructure has improved tremendously. Amidst all this growth, remittances have decreased, import costs have increased, we have to buy the same goods from abroad at twice the price. As the price of fuel increases, it adversely affects every sector of production, leading to inflation. Prices of domestically produced agricultural products also increased; Even though there is no direct relation of fuel oil with taro and green chilies, their transportation cost has increased and if they are not sold at higher prices, how will the producers of these products buy other products at higher prices? So it is not unusual to increase the price of taro.

Despite the increase in commodity prices in Bangladesh, inflation has not reached the levels seen in countries like Pakistan, Turkey, and Sri Lanka, where inflation rates have been between 70% to 80%.Inflation in Bangladesh was and still is close to the maximum of 10 percent. In some countries of the world, post-corona inflation has decreased, but it has not decreased in Bangladesh. It is worth noting that while some countries have managed to lower commodity prices, their inflation rates were not as high as ours, which reached 10%. Even now, in many parts of the world, including Canada, Australia, and Europe, commodity prices remain significantly higher. Sri Lanka's progress and success story have been widely publicized in the media, but their challenges have not yet been overcome. However, the situation is not as dire as it was last year.

Sri Lanka's economy contracted by 7.8% last year. The upcoming year is also expected to see economic contractions. However, there is some potential for growth in the coming year. In the field of revenue and monetary policy, the new government and the central bank have implemented new and effective policies. After the ouster of President Gotabaya, the new government has imposed higher taxes and increased the prices of cooking gas cylinders. Additionally, they have reduced spending from the public budget, cut subsidies, raised tax rates, and expanded the tax net. In agriculture, there has been a reintroduction of chemical fertilizers and pesticides.

The Sri Lankan government has been able to send 311,000 educated and skilled workers abroad to support its economy, while also contributing to a successful agricultural output. However, there is no direct collaboration between the government and the Central Bank in this regard. Therefore, there is no apparent reason to directly credit or commend the Governor of the Central Bank for Sri Lanka's economic recovery efforts. In April and March this year, Sri Lanka's central bank raised interest rates by 1,500 basis points or 10.5 percent. Another important work done by the central bank in reducing inflation is the introduction of a single currency exchange rate and the coordination of the currency exchange rate with the market, which encourages expatriates to send remittances. The successful implementation of these two policies by the Central Bank has the potential to curb inflationary pressures. However, Sri Lanka's lower inflation rate also has the effect of changing the base year; The base year of inflation has been changed from 2013 to 2021. Apart from this, reserves increased due to increase in income in tourism, remittance and export sectors. Sri Lankan currency appreciated due to increase in reserves, import cost decreased due to appreciation of rupee, inflation decreased due to decrease in import cost. In comparison to the previous year, there has been growth in various economic sectors in the coming year: tourism by 25%, remittances by 76%, and production by 7%. This growth is attributed to the encouragement of expatriates' economic contributions. A significant contributing factor to this visible economic progress is the conclusion of the COVID-19 pandemic, along with a departure from erroneous policies in various areas advocated by the Gotabaya government. Successful implementation of reform programs by the government and the central bank prompted the IMF to lend. Creditors and trading partner countries have increased confidence in Sri Lanka after receiving loans from the IMF, resulting in increased exports. In some sectors like tourism there has been an automatic recovery. In this case, the government or the central bank did not have to do anything.

This country's stable economy was primarily based on tourism, with 100% educated people. Central banks in almost all countries around the world are making efforts to increase policy interest rates and control inflation by withdrawing currency from the market. The Bangladesh Bank has also increased its policy interest rate and implemented exchange rate policies. Due to increase in interest rate, the price of money is supposed to increase and the demand for dollar will decrease but this formula has not worked in our country. The main reason for this is likely the reluctance to return loans, making it unattractive for businesses to borrow money and invest. On the other hand, due to the facility of rescheduling loans on easy terms, the businessmen do not have to face any hindrance in taking new loans and conducting uninterrupted business. In this situation, the businessmen feel more comfortable to pay the rescheduling down payment without paying the loan installments.

Another reason for not being able to reduce inflation is that our imports are nearly double our exports. The higher import expenditure is depleting our foreign currency reserves. To alleviate pressure on reserves, we are trying to control imports, but this import control is leading to shortages in the market. Due to the supply-demand mismatch in the market, prices are increasing. The market control is being manipulated by cartels engaged in collusion to artificially inflate prices, which is a criminal offense. Market management and control are not the same thing. The absence of a mechanism to ensure an adequate supply of goods in a timely manner is a key reason why the market now favors the seller. Therefore, following the model of countries like Sri Lanka, increasing interest rates to draw money from the market and reduce the purchasing power of buyers is the only path to inflation control.

Perhaps the central bank's increased interest rates and government austerity are not being implemented properly. The government is somewhat indifferent to austerity. Even with various thrusts, the consciousness of the government is not awakened. Since the revenue cannot be increased as expected, the government must reduce the expenditure to prevent inflation. If the government does not reduce its excessive spending, the successful implementation of the Bangladesh Bank's expanded policies becomes doubtful. Even if the number of projects does not decrease, trimming project expenditures can maintain a consistent pace of development.

There are allegations that similar or identical projects are incurring significantly higher costs in Bangladesh compared to other countries. Capacity charges are being imposed at a higher rate even when electricity is not being generated. f there is no need to use electricity, is it necessary to build a new power plant? There is no simple answer to all these complaints, silent. At present, employees from various ministries and organizations are still traveling abroad on seemingly unnecessary trips. The cabinet committee on government procurement has approved the proposal to buy 261 jeeps for the offices of the district commissioner and upazila executive officer at a cost of Tk 380 crore 65 lakh. No significant steps have been taken to raise revenue.

We have to remember that the IMF withheld their second tranche of loans because Sri Lanka could not raise their revenue significantly. The price of the dollar is not stabilizing due to the very negative publicity of the media, the price of goods is not decreasing in the market, and syndicates are being created. In the run-up to elections, reducing inflation is more important than expanding economic activity. The massive development success of the government is sinking into the abyss of oblivion under the pressure of inflation. Hence, taking a step to apply the Central Bank's highest policy interest rate to enhance revenue acquisition could be a strategic move. If inflation remains at a manageable level, reducing the policy interest rate after a few months may prove to be beneficial in curbing the proliferation of economic scandals.

Author: Former Executive Director, Bangladesh Bank and Former Managing Director, Takshal