[🇧🇩] Monitoring Bangladesh's Economy

[Saif]

BB signals further monetary tightening as inflation rages

The central bank has signalled that it would go for more tightening of the monetary policy since inflationary pressure shows no signs of cooling.

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BB signals further monetary tightening as inflation rages

The central bank has signalled that it would go for more tightening of the monetary policy since inflationary pressure shows no signs of cooling.

The Bangladesh Bank gave the hints about its upcoming measures in its monetary policy review for the just-concluded fiscal year. The report was released yesterday.

"Monetary policy would need to be restrictive for sufficiently long to return inflation to around the 7.5 percent target sustainably in the medium term, and further tightening would be required if there were evidence of more persistent inflationary pressures," it said.

Annual inflation rose to 9.73 percent in 2023-24, the highest since 2011-12 when it was 10.62 percent, overshooting the government's target of containing it to 7.5 percent, according to the Bangladesh Bureau of Statistics (BBS).

This is the second year in a row that the Consumer Price Index (CPI), a measure of the increase in the prices of a basket of products and services, crossed 9 percent. This means the monetary policy of the central bank could do little to bring it down although it initiated several measures, albeit belatedly.

With global components of inflation turning down, most countries have experienced a significant fall in inflation relative to its peak, said Lisa DeNell Cook, a member of the Federal Reserve Board of Governors of the US, at the Australian Conference of Economists in Adelaide of Australia, on Wednesday.

Even cash-strapped Sri Lanka succeeded in controlling inflation. On the other hand, consumer prices have kept rising in Bangladesh. The government aims to contain it to 6.5 percent in the fiscal year of 2024-25, which begins on July 1.

In the review, the central bank said the lag effect of marked global commodity price hikes, partly exacerbated by the weaker exchange rate of the taka against US dollars, has prolonged the persistently high inflation.

"Inflationary pressures have also broadened within the core basket, reflecting spillover and second-round effects as well as the pass-through of costs associated with electricity generation."

It said despite decreasing trend of global commodity prices, Bangladesh's economy could not benefit due to the significant domestic currency depreciation, which subsequently raised import prices, thereby contributing to inflationary pressures.

The taka has lost its value by about 35 percent against the US dollar in the past two years.

In FY24, the central bank adopted a tight monetary policy stance and raised the policy rate -- at which it lends to commercial banks -- on several occasions to lift it to 8.5 percent. The rate was hiked by 400 basis points since the middle of 2022.

The International Monetary Fund (IMF) has suggested the central bank raise the policy rate by 50 basis points by December this year since its monetary tightening is yet to rein in inflation.

However, most central banks stopped raising their policy rates over the past year. Some are considering how long to keep rates at restrictive levels or, if inflation picks up again, whether to raise rates further, according to Lisa DeNell Cook.

The BB said over the past year, fluctuations in fuel, food, and energy prices have been the predominant drivers of headline inflation, with food and fuel costs largely mirroring global commodity price trends.

It blamed higher food prices for the spike in demand ahead of Ramadan and Eid-ul-Fitr celebrations.

Among the components of non-food inflation, the highest rate was recorded in the health sector at 13.69 percent. followed by 11.34 percent in furnishings, household equipment, and routine maintenance of the house, according to the report.

In the review, BB Governor Abdur Rouf Talukder said Bangladesh economy was not immune to the impact of global issues, though it performed fairly well a couple of years after the Covid-19 recovery.

However, since 2023, the economy began feeling the pressures of persistently high inflation and the exchange rate depreciation, particularly through geopolitical tension and trade uncertainties, he added.

Despite the challenges, provisional estimates from the BBS indicate that gross domestic product (GDP) grew 5.82 percent in FY24, up from 5.78 percent in FY23, reflecting a modest improvement in the country's economic performance.

"To mitigate inflationary pressure and restore the stability of the exchange rate, BB upheld a hawkish approach to monetary policy throughout last year and continued the contractionary stance for the second half of the last fiscal year," he said.

The BB has not gained much success in curbing higher inflation because of the lack of a market-based interest rate system. In April 2020, the BB first introduced a 9 percent interest rate ceiling.

Although it was withdrawn in the first month of the last fiscal year, the banking regulator introduced a new interest rate system based on the six-month moving average rate of treasury bills known as SMART, which was still considered as another cap.

Finally, in May this year, the BB allowed banks to determine a market-driven interest rate in line with the IMF's prescription.

At a webinar recently, Birupaksha Paul, a professor of economics at the State University of New York, said the interest rate cap was largely responsible for the current inflationary pressure.

He explained when interest rates were increased all over the world to tackle inflation, the central bank walked in the opposite direction. The lending cap was withdrawn following the advice of the IMF.

In May, the BB also rolled out a more flexible exchange rate policy, moving away from its practices where banks would determine the price of the dollar in line with the verbal instructions of the central bank.

The governor hoped that the crawling peg will help to tackle the present challenges.

Amid the persisting macroeconomic challenge, the BB is going to announce the monetary policy for the first half of FY25 in the third week of July. The main objective will be to control inflation and achieve the GDP growth target set by the government.

Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, recently said the policy rate would have to be hiked to control inflation.

"If the central bank and the government maintain strict policy measures, it will help reduce inflation."

The government has also set high bank borrowing targets for FY25, but banks are facing liquidity shortages. This prompts the economist to suggest the central bank be strict about refraining from granting loans to the government.​

 

[Saif]

Why are we shy of signing FTAs?

Free trade agreements (FTA) are made between countries to lower trade barriers through little to zero government tariffs or subsidies and other means.

www.thedailystar.net

Why are we shy of signing FTAs?

Free trade agreements (FTA) are made between countries to lower trade barriers through little to zero government tariffs or subsidies and other means.

Most countries sign multilateral FTAs to increase regional trade such as the North American Free Trade Agreement (Nafta), the world's largest free trade bloc, where commerce among Canada, Mexico and the United States tripled in 2017.

Bangladesh is economically at a stage where it needs foreign direct investments (FDI) to create more jobs and set up infrastructure for sustainable development, which can be accelerated by FTAs.

So, what is stopping Bangladesh from entering into such deals? Bangladesh, along with Saarc countries, signed the South Asian Free Trade Agreement in 2006. Even though there are special provisions in the treaty to support the growth of least-developed countries (LDCs) like Bangladesh, concerns have been raised about the effectiveness of those provisions.

One apparent flaw is its incapability of addressing, and consequently tackling, the extensive negative list maintained by India. This includes Bangladesh's major exports such as RMGs and chemicals. Subsequently, the Safta failed to deliver on its promises of accessible trading and higher gains, becoming ineffective as an agreement.

After such a tainted start to multilateral FTAs, Bangladesh is no doubt shying away from future agreements, encouraged to support local entrepreneurs in market diversification. But allured by the benefits of accessing new markets, Bangladesh entered into a preferential trade agreement (PTA) with Bhutan in 2020.

For successful FTAs that bring true economic growth, we need FTAs with economic powerhouses such as India and China, but bureaucratic entanglements and geopolitics tend to get in the way.

Though our prime minister mentioned possible FTAs with 11 countries, as of today, we do not have an FTA with any country. It is being discussed that some policymakers are averse to the idea of FTAs. Tariff commission people often make the plea of revenue loss due to FTAs. Many analysts felt high tariff in Bangladesh is also a barrier to signing FTAs with partner countries.

To me, it seems that FTA is the logical way to go forward in increasing investment in a country.

Bangladesh's average nominal tariffs are higher than in low-income, middle-income and high-income countries, as well as most of its competitors. This impacts adversely the process of export diversification.

It does not make sense to create higher tariff barriers and import duties. I believe the average rate of tariffs can be brought down. The so-called revenue loss argument can be more than offset by progressively taxing the wealthy segment and people in the higher income bracket.

More people must be brought under the taxable income fold. Our tax-to-GDP ratio is still low compared to other countries. Domestic savings also need to be increased.

While negotiating FTAs, we have to protect our interests in the sectors where there is high export potential. One should follow a sector-by-sector approach. Expertise, experience and competence are needed, and recommendations should be taken from all stakeholders.

Bangladesh is set to graduate from the LDC group and become a developing country by the end of 2026. So, we must prepare accordingly as we will lose some of the benefits given to LDCs. Negotiating skills in concluding agreements are vital to deriving maximum benefits.

The author is chairman of Financial Excellence Ltd.​

 

[Saif]

Govt short of taka, USD due to financial distress

The government does not have adequate taka and US dollars to implement the budget because of financial distress and its failure to raise enough revenues, said Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, yesterday.

www.thedailystar.net

Govt short of taka, USD due to financial distress
Says economist Ahsan H Mansur

The government does not have adequate taka and US dollars to implement the budget because of financial distress and its failure to raise enough revenues, said Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, yesterday.

"Due to the crisis of the taka and US dollars, the government is now unable to pay the bills for various sectors, including the energy sector. Many foreign companies also can't repatriate funds from Bangladesh to their home countries," he said.

Mansur made the observations while addressing a discussion on the "Reason for the bad state of Bangladesh's banking sector" at the Economic Reporters' Forum (ERF) auditorium in the capital's Paltan.

Owing to liquidity shortage, Bangladesh is increasingly becoming dependent on debts day by day. The country's borrowing capacity from internal sources is gradually shrinking since banks are facing a liquidity crisis.

In the case of foreign debts, disappointment came from India and China as they did not respond to Bangladesh's requirements as expected, Mansur said.

"On the other hand, the government is not able to raise enough revenues."

Mansur, also a former economist of the International Monetary Fund, said banks are now showing profits by transferring the interest on loans to the income account without receiving it.

"We are selling the plates to buy biriyani."

The economist added banks are also distributing dividends from these profits, and the government is collecting taxes as well.

He said before the national election that took place in the first week of January, it was said that there would be mega reforms in the financial sector.

"However, six months have passed, and nothing has happened. This is very disappointing."

The economist said reforming the banking sector is crucial for the sake of the country.

"It is good that the IMF has given the loan to Bangladesh and has tagged some reforms with it. However, the reforms should be executed for our own sake."

He also talked about money laundering. "If the outflow of assets from the country continues, the current crisis will not be resolved. Political will is needed to deal with the crisis."

Mansur called for publishing a white paper on the state of the banking sector.

"There are more data anomalies in the banking sector than any other sector, including the export data mismatch."

He claimed actual non-performing loans (NPLs) are around 25 percent in the banking industry although it is hovering around 10 percent on paper.

"There is a question about whether savers will get back their bank deposits."

The economist recalled the banking sector was in bad shape in 1990 when a reform programme was initiated. The current regulations were borne out of the reform programme and the sector had received positive outcomes as well.

The second financial sector reform programme was initiated in 2001, which also yielded good results. The bad loans at both state-run banks and private banks came down.

Other indicators of the sector also showed improvements and the momentum continued till 2009 or 2010, Mansur said.

"Since then, the banking sector has been witnessing a downward trend."

"When the structure of governance changed, it has adversely affected not only the banking sector but also other sectors."

The economist urged the government not to support ailing banks by providing liquidity, and the central bank should stop supporting Islamic banks by printing money in the name of protection.

"If it continues, inflation will increase further."

Annual inflation rose to 9.73 percent in 2023-24, the highest since 2011-12. This is the second year in a row that the Consumer Price Index crossed 9 percent.

There are four components in the financial sector: banks, the stock market, the bond market, and the insurance sector.

Mansur said while the bond market has never fared well, the performance of the three other components worsened.

He criticised the unsuccessful bank merger initiative of the central bank.

Mansur said the foreign currency reserves are now being augmented by borrowing from other countries. "In this way, the reserves can't be increased for a long time."

In June, several bilateral and multilateral lenders approved $4.8 billion in loans for Bangladesh.

The economist said the reserves should be increased using sustainable methods like export incomes and remittance inflows and by tackling money laundering.

The gross reserves stood at $41.83 billion in June 2022 before falling to $26.81 billion at the end of 2024, BB data showed.

Mansur recommended discontinuing the 2.5 percent incentive given on remittance inflows. "This is because these incentives are being gobbled up by some firms in Dubai."

He said since the exchange rate is market-based, incentives are not required.

On May 8, the central bank relinquished its unwritten grip on the exchange rate and allowed banks to trade the US currency freely within a band.

ERF President Refayet Ullah Mirdha chaired the discussion, which was moderated by General Secretary Abul Kashem.

Daily Samakal's Special Correspondent Obaidullah Rony and Prothom Alo's Senior Correspondent Shanaullah Sakib presented a paper on the banking industry.​

 

[Saif]

Has Generative AI triggered a vicious cycle?

Generative artificial intelligence (Gen AI) does not create original knowledge in the form of texts, images, or videos. Instead, it compiles existing bits and pieces of knowledge from numerous websites and recasts them as revenue-generating new products. As a result, instead of visiting all those w

thefinancialexpress.com.bd

Bangladesh's economic outlook for 2024-25
MUHAMMAD MAHMOOD
Published :
Jul 13, 2024 21:33
Updated :
Jul 13, 2024 21:33

Even in the very recent past Bangladesh was hailed as a great success story for achieving rapid economic growth and raising millions of people out of poverty. A World Bank (WB) report published in last October wrote, "From being one of the poorest nations at birth in 1971, Bangladesh reached lower-middle income status in 2015. It is on track to graduate from the UN's Least Developed Countries (LDC) list in 2026."

The report then further lauding Bangladesh's economic achievements said, "Bangladesh has an inspiring story of growth and development, aspiring to be an upper -middle income country by 2031." In fact, Bangladesh aspires to become a developed, prosperous and higher-income country by 2041. The IMF has assured its continuing support to achieve this aspiration.

Recent data published by the Bangladesh Bureau of Statistics (BBS) reveal a bleak trajectory for the economy unravelling the country's hard earned economic gains. Bangladesh has gone from an economic miracle to needing help from the International Monetary Fund (IMF). The country's hard-won economic optimism is now being sorely tested.

The economy is faltering. Now there is a growing fear that the much-admired economic growth model of Bangladesh has got unstuck and falling short of expectations. But it just did not happen all on a sudden; it has been in the making for quite some time. The Economist on March 1 last year published an article titled "Bangladesh's economic miracle is in jeopardy" providing a critical analysis of what has gone wrong with the economy.

In fact, the economy is facing challenges at multiple fronts such as rising inflation, balance of payment deficit along with budget deficit, declining foreign exchange reserves, contraction in remittances, a depreciating currency, rising income inequality and the demand supply imbalance in the energy sector. Now added to these challenges is the fragile banking sector crippled by loan defaults. Above all, Bangladesh is particularly vulnerable to the effects of climate change.

The World Bank (WB) recently downsised the GDP growth forecast for Bangladesh by 0.1 percentage point to 5.7 per cent for the next fiscal year, 2024-25. The global lender also said high inflation, food and fuel shortages, import restrictions, and financial sector vulnerabilities weighed on the economic outlook.

With inflation hovering around 10 per cent with food price inflation at around 10.5 per cent annually, the country is now in the grip of a cost-of-living crisis. But many consider that the figure is an underestimate, the real figure is much higher. It is not uncommon for governments to choose the method to estimate inflation that suits them well.

While inflation has put a squeeze on private consumption, public consumption continues to expand, now accounting for 13.02 per cent of GDP. Rising inflation is also contributing to the higher cost of production which is further fuelling inflation. The inflationary surge was largely driven by rising food and fuel prices and the depreciation of the taka.

Bangladesh Bank adopted a contractionary monetary policy to stem the rising inflationary pressure. However, monetary policy transmission mechanism is impaired by regulations on lending interest rates by commercial banks. Also, private sector credit growth remains sluggish making the policy rate less effective.

The banking industry in the country is currently undergoing intense instability due the massive accumulation of non-performing loans and continues to face tight liquidity conditions.The banking industry also suffered a major setback in 2022 when 11 banks faced a collective shortfall of US$ 3.1 billion. The recent bank merger proposals further added to the speculation about the stability of the banking sector. Any further increased instability in the banking sector can lead to a crisis of confidence and that rapidly will move to the broader financial system. This will have serious consequences for the economy.

Industrial output growth has slowed down due to stagnant private investment, import restrictions on inputs and higher energy costs. Over the last decade or so, the private investment/GDP ratio remained at around 20 per cent. This was caused by tight liquidity conditions, rising interest rates, import restrictions, and increased input costs stemming from rising energy prices.

Foreign direct investment (FDI) also remains at a very low level at around 2 per cent of GDP. The industrial sector experienced a decline of 3.7 per cent in output growth in 2023-24. The picture is not very different in the services sector. Together these two sectors account for 87 per cent of GDP.

Corruption, bureaucratic delays, often a confusing foreign exchange regime and a complex regulatory regime have created a negative perception among foreign investors. A report published by the United Nations Conference on Trade and Development (UNCTAD) in 2021 said, "Despite steady economic growth in the country over the past decade, FDI has been comparatively low in Bangladesh compared to regional peers. Bangladesh suffers from a negative image: The country is seen as being extremely poor, underdeveloped, subject to devastating natural disasters and sociopolitical instability."

Furthermore, the Industrial sector is marked by the high concentration risk from an over reliance on the readymade garments (RMG) industry accounting for about 10 per cent of GDP and 85 per cent of exports. Bangladesh is the third largest exporter of RMG in the world. While the government appears to be aware of the need for diversification of the export basket, nothing much seems to have happened.

Bangladesh is not only running a deficit on the current account but in the financial account as well in its balance of payments. If the financial account becomes negative, it creates further pressures on foreign exchange reserve. The very low level of FDI inflow is further adding to the problem. It is to be noted that a financial account measures the increase or decrease in a country's ownership of international assets.

As balance of payments difficulties intensify, the scope for monetary policy actions become increasingly constrained by the need to protect foreign currency reserves. Bangladesh Bank is tightening its grip on import flows as the reserves decline. In fact, trying to address the reserve problem via import controls can lead to problems somewhere else such as growth, inflation and revenue collection.

Furthermore, Bangladesh's imminent graduation from least developed country status in 2026 will affect its preferential market access for exports, especially RMG exports. With low trade diversification, this will create further problems for the country's exports.

The current foreign exchange reserve is estimated to be about US$20 billion. Continuing balance of payments difficulties and an overreliance on remittances have exposed the economy to external shocks.

Very early this month Bangladesh Bank detected "accounting anomalies" in exports data for the first ten month of fiscal year 2023-24 which resulted in US$13.8 billion reduction in exports revenue. According to the Financial Express (July 12), about US$20 billion shortfall in export revenue has been detected by the Export Promotion Bureau for the last two fiscal years.

This further highlights the long-standing concerns of the country's leading economists about the reliability of published data by various government institutions including the Bangladesh Bureau of Statistics (BBS). Reliance on unreliable data can lead to worrying distortions in governments' policy planning.

Bangladesh also runs a budget deficit which stands at 4.6 per cent of GDP for the fiscal year 2024-25. Almost two-thirds of public revenue is derived from indirect taxes and a third from direct taxes. Reliance on indirect taxes, especially consumption taxes, are viewed as regressive. Such taxes not only negatively affect income redistribution via the taxation system but also further erode consumer purchasing power in periods of high inflation as is the case now in Bangladesh.

Many economists believe that a budget deficit leads to current account deficit. In macroeconomics it is known as the twin deficit hypothesis. The twin deficit problem will make Bangladesh a debtor to the rest of the world and will weaken the value of the taka, thereby further aggravating external imbalances.

Overall, to address these economic challenges Bangladesh needs to build enhanced state capacity and reorient its economic policy approach by embarking on a new phase of structural transformation. This structural transformation will focus on innovation by harnessing the new technological frontiers using skilled labour with an increased emphasis on stimulating investment including FDI. Such a reorientation of economic policy will help the country to accelerate recovery and strengthen its capacity to withstand future shocks, therefore, enabling the country to achieve sustainable economic growth and development in the long run.​

 

[Saif]

Rethinking ways to tackle inflation

The annual inflation rate last month was 9.72 per cent, a welcome decline from seven-month high at 9.89 per cent in the previous month of May. Despite this temporary easing in comparative terms, there is nothing reassuring for the common consumers in this small numerical fluctuation of the figures

thefinancialexpress.com.bd

Rethinking ways to tackle inflation
SYED FATTAHUL ALIM
Published :
Jul 14, 2024 21:48
Updated :
Jul 15, 2024 21:37

The annual inflation rate last month was 9.72 per cent, a welcome decline from seven-month high at 9.89 per cent in the previous month of May. Despite this temporary easing in comparative terms, there is nothing reassuring for the common consumers in this small numerical fluctuation of the figures that represent price levels of consumer goods in the market. In fact, there is hardly any substantial change in the prices of essentials in the kitchen market. Even so, those tasked with calculating the inflation rate at the Bangladesh Bureau of Statistics (BBS) may find some solace in seeing the changes, however small that might be in real terms. But the figures representing the inflation rate have remained close to 10 per cent during the past two fiscal years belying the government's effort to bring it down to 7.5 per cent.

True, last month witnessed a slight decline in the inflation rates of food and non-food items from 10.76 per cent and 9.19 per cent respectively to 9.42 to 9.15 per cent. Obviously, the changes contributed to the slight improvement in the inflation figure. One wonders, if the BB's move (as part of its contractionary monetary policy) that raised the rate of interest against the credit it extends to the commercial banks (policy rate), which increased borrowing cost of money from banks, has finally worked to lower the inflation rate! However, experts are not convinced if it has anything to do with the BB's monetary policy as the inflation rates in the past months did not demonstrate any consistency. The IMF, on the other hand, held the constantly depreciating Bangladesh Taka (BDT) against US dollar (USD) as an important driver of the rising inflation rate.

Notably, in the last two years, BDT lost its value against USD by 35 per cent. Considering that in three months ending in December last year (2023), Bangladesh's imports in goods and services on an average cost Tk888.18 billion, while the exports during the same period were worth Tk613.84 billion, it is not hard to understand why the country is constantly under pressure to foot its import bill and why USD is getting costlier against BDT by the day.

Costlier dollar means rising cost of import. So, until the volatility of the forex market is tamed, the cost of imported fossil fuels will continue to rise, leaving its knock-on effect on everything from domestically produced industrial to agricultural commodities, let alone other imported commodities. In that case, any impact that tightening of money supply may have on inflation rate is offset by further drop in BDT's purchasing power. In that event, the poor, the fixed-and-low-income people find that their real incomes have eroded further. In fact, it is a vicious circle that only tightening of money supply cannot address. On the other hand, costlier credit discourages investment leaving its dampening effect on business in general.

When business is in the doldrums, unemployment situation in the economy worsens. It is, again, the poor who are engaged mostly in the informal economy, either as employers or employees, are the worst hit. Consider that between 35 and 88 per cent of the country's workforce is employed in the informal economy, mostly in the agriculture sector, which contributes from 49 to 64 per cent to the Gross Domestic Product (GDP). The large variations in the percentages of the actual size of the informal economy and that of the workforce are due to the fact that there is a lack of appropriate data on the subject. The fact remains that the livelihood of a substantial segment of the population is linked to the informal sector. So, the policymakers need also to assess how tightened money supply is affecting this sector. Any economic shock hurts the poor more than the rich.

In this connection, the BB in its report for the just ended fiscal year (FY2023-24)'s monetary policy review has hinted at going for further tightening of money supply in the market. Interestingly, though the contractionary monetary policy has yet to demonstrate its efficacy in cooling down inflation, the banking regulator wants to extend it for another term. Understandably, its aim is to push down the inflation rate sustainably to the targeted 7.5 per cent in the medium term.

But in case inflation refuses to calm down, the central bank would see to it that the contractionary monetary policy is further intensified and remains in force far longer. If the contractionary monetary policy has failed to produce its intended result so far, what is the guarantee that it would work in the future? With increased government borrowing, what amount of liquidity would be left with banks to support business and others in need of credit?

No doubt, the contractionary policy is the best tool so far in practice to rein in inflation in the advanced economies in the northern hemisphere. Indeed, it worked successfully in that part of the world. Even Sri Lanka, according to the World Bank, has been showing signs of stabilisation and is projected to grow by 2.2 per cent this year (2024) defying the serious downturn it suffered in 2022.

But going by previous experience, Bangladesh has thus far proved to be an exception when it comes to combating inflation by using tested monetary tools.

So, it is time policymakers took stock of the situation before they embark on a more ambitious target of achieving 6.5 per cent inflation rate in this fiscal year (2024-25).

Though, in theory, Bangladesh's economy is market-driven, here, in practice, non-market forces are the dominant players in controlling the movement of goods and services. That would require the policymakers to go for a mix of measures, rather than going exactly by the book, to control the recalcitrant inflation.​