Trend of reduced high inflation must be maintained

In recent years, the issue that has raised the most concern in Bangladesh’s economy is the trend of high inflation. There seemed to be no way to curb this trend of high inflation. Just as the post-COVID global economy was recovering, the Russia-Ukraine war broke out. This unexpected war caused major disruptions to the global economy. The global supply chain nearly collapsed. As a result, due to transportation crises, the prices of various products around the world rose abnormally. In the year the Russia-Ukraine war began, food and other product production worldwide were normal. Therefore, there was no opportunity to identify the trend of high inflation as a problem caused by a shortage in production.

During the first year of the war, food production in Russia and Ukraine remained normal. Notably, Russia and Ukraine together supply 30 percent of the world’s total grain. Russia alone supplies one-tenth of the world’s fuel oil. During the war, the United States and its allied countries imposed extensive economic sanctions on Russia. In response, Russia halted its fuel oil supply. And for the limited fuel oil that was exported, payment in Russian currency was made mandatory. The Ukraine war and the resulting political conflict between Russia and the United States severely disrupted the global economy. In every country’s domestic market, product prices rose significantly, creating high inflation. At one point, inflation in the U.S. economy broke a 40-year record, rising to 9.1 percent.

To overcome this situation, the Federal Reserve Bank of America (the Fed), even at the risk of shrinking investment, significantly increased the policy rate (the rate at which the central bank lends to scheduled banks for the short term). As the policy rate increased, scheduled banks proportionally raised their loan interest rates (the interest charged when banks lend to their customers). This made borrowing from banks costly. Potential borrowers were discouraged from taking loans. The money supply in the market decreased. Thus, over time, the high inflation in the US began to decline. Following the US, central banks in at least 77 countries raised their policy rates. Controlling inflation through increased policy rates is a basic economic principle.

At that time, Bangladesh Bank also raised its policy rate multiple times. Previously, the policy rate of Bangladesh Bank was 5 percent; it has now been raised to 10 percent. However, the planned mistake Bangladesh Bank made was that although it increased the policy rate, it did not allow for any increase in loan interest rates. Bangladesh Bank directed scheduled banks to charge a maximum of 9 percent interest on loans. This limited the banks' lending activities. However, a class of entrepreneurs supported by the government began to take large loans from banks in the name of setting up factories. Instead of using these loans for their intended projects, the money was diverted elsewhere. Eventually, this loan money entered the market. As a result, the effort to reduce high inflation became even more complicated. Very few countries in the world have experienced such prolonged high inflation in their economies.

Fixing both the bank loan interest rate and the exchange rate of the US dollar halted the normal flow of the economy. This erroneous decision by Bangladesh Bank, taken in the interest of a certain business group, led to dire consequences for the country’s economy. When the maximum bank loan interest rate was set at 9 percent, the monetary policy targeted a 14.1 percent growth in private investment. In reality, it achieved 14.7 percent. At the same time, the import of capital machinery for industry dropped by 76 percent. Raw material and intermediate goods imports each declined by 14 percent. This indicates that the loans taken under the guise of project establishment were definitely diverted to other sectors.

Under these circumstances, when the Sheikh Hasina government was ousted last year following student and public protests, changes were made in the management of Bangladesh Bank. Renowned economist Dr Ahsan H Mansur was appointed as Governor of Bangladesh Bank. Before assuming the role, Dr Ahsan H Mansur stated in an interview that bank loans had become cheap, as loans could be obtained at interest rates lower than the prevailing inflation. He also said that to overcome this situation, bank loan interest rates should be made market-based. Similarly, the exchange rate of the US dollar should also be market-based. After becoming governor, Dr Ahsan H Mansur took several steps considered highly pragmatic.

Many feared that making the exchange rate of the US dollar market-based would create instability in the currency market. They believed the local currency would depreciate significantly, increasing import costs and further fuelling inflation. But none of these fears proved true. Initially, the exchange rate of the US dollar was determined using the crawling peg method. Later, following the advice of the International Monetary Fund, it was made fully market-based. Since then, the exchange rate of the US dollar has remained stable. No instability has occurred in the currency market. Those whose advice led Bangladesh Bank to fix the maximum loan interest rate and exchange rate of the US dollar should be identified and held accountable. Because while trying to serve their vested interests, they have caused significant damage to the country’s economy.

The argument that rising US dollar exchange rates increase import costs and fuel inflation is not entirely accurate. Bangladesh meets only 25 percent of its consumption needs through imports. The remaining 75 percent is produced domestically. The price of imported goods, only 25 percent, does not significantly affect inflation. If the market is managed transparently and accountably, and if the politically backed business syndicates dominating the market are curbed, inflation will naturally decline. During the previous government’s tenure, the economy was used as a tool to serve specific group interests rather than national interests.

For over three years, the country’s economy has been experiencing high inflation. Currently, a downward trend is visible. This is mainly due to some pragmatic measures taken by Bangladesh Bank. If the current declining trend in inflation continues, the inflation target set in this fiscal year’s budget may be achieved. In fact, the inflation rate may drop below the target. This fiscal year aims to bring the overall inflation rate down to 6.5 percent. The trend of declining inflation has continued for four consecutive months. In June, the inflation rate was 8.48 percent—the lowest in 35 months. Previously, in July 2022, the inflation rate was 7.48 percent.

According to data from the Bangladesh Bureau of Statistics, food inflation in June was 7.39 percent, while non-food inflation was 9.37 percent. The decrease in food inflation has provided some relief to the general public. In our country, inflation is calculated based on 740 items—422 urban and 318 rural. Among them are items that are not particularly significant. Many economists believe that less important items could be excluded from inflation calculations. Instead, inflation could be measured based on essential items for daily life—that would be the most logical approach. The upward trend in inflation harms ordinary people the most. They cannot purchase desired goods. Food inflation, in particular, has the most negative impact on everyday life. In the last fiscal year (2024–25), food inflation’s abnormal rise created the most uncomfortable situation. At that time, food inflation was 10.03 percent—the highest in the past 15 years.

Despite the overall upward trend in inflation, ordinary people’s incomes are not increasing at the same pace. As a result, their purchasing power is declining. The national wage growth rate was 8.18 percent. That means wage growth is not keeping pace with rising inflation. In the past, the government tried to take credit by downplaying inflation figures. Now, efforts to move away from that tendency are visible. Not all price hikes have the same impact. For example, if the price of lemons rises, it’s not a big problem because we can choose not to consume lemons. But if rice prices rise, there will be problems, because everyone, rich or poor, consumes rice. Even if inflation rises, there’s no problem if people’s incomes increase proportionally. Purchasing power is a crucial issue. If purchasing power grows faster than inflation, there is no problem. Therefore, in addition to controlling inflation, we must focus on increasing people’s purchasing power.

Currently, the activity of politically backed business syndicates in the market has somewhat decreased; but extortion has increased significantly. Under the guise of political party affiliation, a group is engaging in widespread extortion across the country. If they can do this even before coming to power, one wonders what they will do after gaining it!

The hope and public aspiration sparked by the August uprising must be realised. Under no circumstances should the country’s politics be allowed to return to its previous course.

MA Khaleque: Retired General Manager, Bangladesh Development Bank and economic affairs writer