Political shifts occur, but market syndicates persist

It has been less than two and a half months since the interim government took charge, making it premature to conduct an in-depth analysis of its successes or failures. This government assumed responsibility amid complex challenges in both the political and economic realms. Its primary duty is to enact effective reforms in political and economic sectors to facilitate broad-based, participatory national elections that are considered credible both nationally and internationally. With this objective, the government has embarked on various reform initiatives, forming several committees to propose recommendations, which are expected within the next three months.

For the past two and a half years, high inflation has been a pressing issue in Bangladesh's economy. Although Bangladesh Bank has taken various measures to curb inflation, there has yet to be any visible progress. The global inflationary trend escalated after the Russia-Ukraine war, which disrupted transportation due to fuel shortages despite steady production levels. Consequently, global inflation soared to unprecedented levels, with the United States recording a 9.1% inflation rate—the highest in 40 years. To combat this, the Federal Reserve raised the policy rate multiple times, followed by central banks in 77 other countries. Bangladesh Bank also raised its policy rate, moving from 5% to 9.5%. Yet, with a cap on bank loan interest rates at 9%, monetary tightening proved ineffective.

Since the interim government took office, it has increased the policy rate several times and removed the cap on loan interest rates, allowing a market-driven approach. Consequently, interest rates on bank loans have risen significantly, with some borrowers facing rates as high as 17%. However, inflation remains persistently high, making it crucial for the government to prioritize inflation control. Alongside policy rate hikes, fiscal measures and other necessary steps must be adopted. High inflation has placed considerable strain on the middle and lower-middle classes, who had hoped for price relief under the interim government but are increasingly disappointed.

Bangladesh imports around 25% of its consumption goods, with the remaining 75% produced locally. While international price increases impact local markets, global price reductions seldom lead to immediate local price adjustments. When local goods see sharp price hikes without justifiable reasons, it points to underlying causes.

An undeniable factor is the constant presence of a powerful market syndicate in the country. These syndicates operate under the protection of the ruling political party, shifting their affiliations as governments change. Although governments avoid acknowledging these syndicates, they persist through political transitions, adapting to new administrations. With the recent change in power on August 5, some syndicate members went underground, while others filled the void left by their predecessors.

To restore trust in commerce, the government should ensure full-scale local production in every sector and minimize unnecessary imports, especially of luxury goods. Initiatives to boost the production and use of import substitutes locally are necessary. However, any reduction in imports should not affect raw materials, capital machinery, or intermediate goods essential for industry, as restricting these imports could have long-term adverse economic effects. For aspiring entrepreneurs, particularly small-scale ones, gaining access to formal financing is a significant challenge.

Reports indicate there are approximately 45,000 NGOs in the country, primarily tasked with providing credit to small entrepreneurs. Yet, financing challenges persist among these entrepreneurs. Bangladesh Bank has 11 refinancing programs for SMEs, but entrepreneurs often encounter issues accessing funds. The SME sector, a vital source of employment, faces the most difficulty in securing financing. Both government agencies and NGOs need to work collaboratively to create a supportive environment for small businesses.

Bangladesh Bank's “Agricultural and Rural Credit” program is designed to support small, rural, agriculture-based industries. Unlike regular agricultural loans, this program offers an interest rate 1% lower than conventional loans. However, procedural complexities hinder its effectiveness, benefiting NGOs more than the intended farmers. Commercial banks lending directly to entrepreneurs offer loans at this lower interest rate, but when the loans are channeled through NGOs, the interest rate set by the Microcredit Regulatory Authority (MRA) applies, with a minimum rate of 24%. This means loans meant to be provided at a lower rate are instead granted at a substantial premium due to NGO involvement.

NGOs should be excluded from the agricultural and rural credit program. If implemented correctly, this program could foster numerous small enterprises in rural areas, supporting both employment growth and domestic production. During recent student protests, small and medium enterprises suffered the most damage. Large businesses endured, but many small entrepreneurs nearly lost their capital, jeopardizing their survival.

Bangladesh’s economy relies heavily on the informal sector, contributing about 85% to the GDP. This sector bears the brunt of inflation, as do those in the formal manufacturing sector who face higher interest rates on bank loans and endure the impacts of inflation. Simply increasing the policy rate is insufficient to control inflation in the context of Bangladesh’s economy. Comprehensive measures are necessary, with a primary focus on dismantling market syndicates. Transport-related extortion must cease, and efforts should be made to maximize internal production.

There is no shortage of goods in the market, nor has demand spiked unexpectedly. So, why do prices continue to rise? Syndicates dominate each market with an unrestrained influence, while limited steps have been taken to curb their activities. Although business syndicates exist globally, few are as influential as those in Bangladesh. The Competition Commission and the Directorate of National Consumer Rights Protection occasionally inspect markets, but these efforts yield minimal improvement. Authorities must engage in dialogue with the known syndicate leaders and, if necessary, enforce exemplary penalties should they refuse to cease such activities.

The argument that local price hikes are justified by global price increases is often inaccurate. When prices are raised domestically due to global fluctuations, they rarely decrease in tandem with subsequent international declines. Controlling inflation is the most complex challenge for the current interim government, and success in this area is essential. Failing to bring inflation down to a manageable level risks undermining many other achievements.

Ferdous Ara Begum: Economist and CEO, Business Initiative Leading Development (BUILD)