BB measures may not work in reining in inflation

The economy is going through a crisis as evidenced by the deterioration in all economic indicators. Prof Rashed Al Mahmud Titumir, chairman of the development studies department at the University of Dhaka, talks about the steps that were missing as inflation surged and what needs to be done now to bring the situation under control, in an interview

DS: How deep is the impact of inflation?

Prof Titumir: The country is plagued by protracted inflation. Not only the families stricken by poverty, but also the low and fixed-income people have been hit hard by the stubbornly high consumer prices.

Although the price level, particularly that of commodities, has fallen in the international market, its reflection could not be seen in the market of Bangladesh.

Businesses, especially small enterprises, are also bearing the brunt. The general mass, including the middle class, has seen a reduction in consumption, including food intake, and an escalation of malnutrition, amongst others.

The continued high inflationary pressure increased poverty in many places as the national statistical agency's Household Income and Expenditure Survey reveals.

DS: What could Bangladesh Bank do to tame higher inflation?

Prof Titumir: The main mandate of the central bank is to maintain price stability. But instead of squeezing the money supply, it provided a large sum to the cash-strapped government by printing money. It had paused for a while upon criticism.

The central bank, without bringing those to book for the mismanagement, started the second episode of printing money to rescue several banks controlled by a business conglomerate. The regulator has not said yet when it will stop the fund injection.

Now, for the third time in a row, the BB is printing money against the special bonds to foot the government's fertilizer and electricity bills. If this continues, how will the public be saved from the scourge of chronic inflation?

The swollen costs of raw materials, utilities and transport have pushed up inflation. High depreciation of the local currency against foreign currencies is also causing inflation. Therefore, raising interest rates alone would not tame inflation. The inflation target announced in the monetary policy statement (MPS) is, thus, illusory. In the past, the targets were not achieved.

DS: What do you think about the idea of the crawling peg to stabilise the exchange rate?

Prof Titumir: Several countries, including Argentina, Ecuador, Botswana, Costa Rica, Nicaragua, Uruguay and Vietnam, followed this path. The experience was not pleasant and the method had to be abandoned.

The exchange rate will not stabilise if the kerb market is active. Expatriates will not send remittances through banks when their funds fetch a higher amount from the informal market. Most importantly, when the informal market holds sway, the reversal is not easy. Nothing has been said in the MPS about the informal market. This begs the question: Which segment is not allowing to halt this unrecorded economy?

Capital flight, stagnant exports, lower-than-usual inflow of remittances through formal channels, reduced foreign direct investment and higher external debts are the reasons for the dwindling foreign exchange reserves. The dependence on food and fuel imports also put additional pressure on the reserves.

For the first time, the country has seen its financial account fall into the negative territory due to mounting loan repayments and this is a cause of concern. Foreign loans surged by 322 percent since 2009 owing to government borrowing.

On the other hand, the forceful reduction of imports, particularly raw materials and intermediate goods as a means to reduce the overall balance of payments deficit is not a prudent strategy. This will have a negative impact on production and export.

Tax avoidance, exemption and evasion are on the rise, contributing to a tax-to-gross domestic product (GDP) ratio in Bangladesh that is one of the lowest in the world, just above war-torn Afghanistan in South Asia, intensifying acute dependence on borrowing.

DS: Why can't prices and markets be regulated?

Prof Titumir: Institutions regulate goods, services, labour, assets and financial markets. Here, on the contrary, markets are prone to collusion between money makers and rule makers.

In Bangladesh, rentiers have emerged as oligarchic clientele, thriving on patronage. The state is remunerating oligarchs by imposing additional prices on consumers.

For example, the electricity tariff was increased many a time while Tk 90,000 crore was dished out as a capacity charge to plant owners in the last 14 years whether or not their electricity was used. All were rewarded in the US dollars. Three companies amassed 35 percent. Very few places in the world have such largesse for oligarchic clientele!

The middle class, unfortunately, is in a rat race to secure rents, and the political and cultural glory of the class is, thus, eroding. As a result, the politics and movements for accountability are not taking root in the divisive atmosphere.

In the absence of public society as a countervailing force, efforts to transform the state into an accountable and egalitarian democratic state have also weakened, leading to an absolutist form.

DS: What should be done to fix the economy?

Prof Titumir: Without transparency in statistics, appropriate strategies and policies cannot be formulated. Narratives of fabricated facts deepen the crisis. That's what happened here.

Structural change is the only way out of the current precarity.

First, immediate forensic audits to prevent money laundering will bring confidence and provide a signal of order and security of investment.

In the medium term, there is a need to move away from the current model of consumption-centred GDP growth to the desired path of sustainable green growth pathway, based on domestic and foreign investment for industrialisation, diversification of exports, increased productivity and competitiveness.

Second, food prices are going out of reach, signalling food insecurity. There is a need to diversify the sourcing of imports for food security in the short term while public investment is required to diversify agricultural production and raise productivity.

Third, exploration in the Bay of Bengal is the most important route to reduce import dependence on energy. If import dependence is cut, geopolitical events like the Red Sea chaos will not affect energy security. Immediate cancellation of the electricity purchase contracts of rental and quick rental power plants is the call of the hour.

Fourth, the elimination of security risks associated with the smuggling of goods from, and drugs to, Bangladesh because of the fragile economy of Myanmar due to the internal political crisis must be stopped.

Fifth, a demographic-dividend strategy, investment in, and employment for, youth is an utmost priority to avert future vulnerability in the backdrop of brain drains and high employment amongst the youth, particularly the educated youth stratum. Two generations have already been deprived of universal and quality education and healthcare.

Bangladesh, finally, needs to find homegrown solutions to smoothen its debilitating political settlement to move towards a republic of the people in accordance with the spirit of the Liberation War.