Economy faces 4-tire challenges

• Controlling rise of inflation
• Stabilizing value of money
• Stimulating economic activity
• Increasing revenue income

Mahfuz Emran: In the new financial year, the overall economy of the country has to face four main challenges and move forward. These are – to rein in hyperinflation, to counter the dollar crisis and to stabilize the exchange rate, to encourage entrepreneurs to increase investment and to increase revenue.
Achieving the targets in these sectors is quite challenging due to the ongoing economic recession in the country. The targets of the sectors were not achieved even in the outgoing financial year. Even after reducing the target in the middle of the financial year i.e. last January, it could not be achieved. This information was obtained by analyzing various reports of the central bank.
According to sources, in addition to these, some other challenges have to be faced. One of these is the implementation of IMF conditions and dealing with their impact.
Instilling confidence to increase credit flows to the private sector, sustain growth in remittance flows, bring export growth from negative to positive. Besides, preventing money laundering and reducing the influence of hundi remains a major challenge.
According to the report of the central bank, the inflation rate has been above 9 percent for 15 months. Excessive inflation for such a long time has caused major damage to the economy. Most of the responsibility falls on the low and middle income consumers. Although the target of reducing this rate has been set at various times, it has not been achieved.
On the contrary, it is increasing. The inflation rate crossed the 9 percent mark to 9.33 percent in March last year. Since then, this rate has fluctuated slightly and remained above 9 percent until last May.
Sometimes it went close to double digits. It increased to 9.89 percent in May.
In the current financial year, the target has been set to bring down this rate to 6.5 percent. To this end, the central bank is preparing to announce a contractionary monetary policy to reduce the flow of money in the market. At the same time, it also stopped providing loans to the government in printed money. Besides, the size of the various funds of the central bank consisting of printed money is also being reduced. At the same time steps have been taken to increase the flow of money in the production sector.
There is a dollar crisis in the country for two years. Because of this, as imports have been curtailed, so has economic activity. Besides, the value of the dollar has increased and the rupee has depreciated. The rupee has depreciated by about 32 to 53 percent against the dollar in two years. Imports fell by an average of 18 percent over the two years. In August 2022, the highest LCs of $9.5 billion were opened in a single month. Now it has reduced to an average of Tk 470 to Tk 500 crore LCs being opened per month. Thus, the pressure on the dollar is being reduced. Besides, steps have been taken to increase remittances and exports. Remittances increased by about 11 percent in the last financial year. Export earnings rose 2 percent through May. Last May, the income in this sector decreased by 16 percent. However, import of raw materials for export industries has started increasing. It may have a positive impact on export earnings in the coming days.
The World Bank said in a recently published report that Bangladesh’s remittance flow is at risk. Remittances will increase by less than 3 percent this year. It grew by more than 3 percent last year. Besides, there is pressure to repay foreign debt. The price of the dollar has been increased by Tk 8 per day by introducing the crawling peg system since last May. According to the IMF conditions, the market-based exchange rate of the dollar must be introduced by December. Then its price will increase further and reduce the value of money. According to the IMF, the Bangladeshi taka is overvalued. Its value should be further reduced.
In this context, the executive director of the Policy Research Institute and prominent economist Dr. Ahsan H. Mansoor said, the previous challenges remain. Inflation, dollar crisis, increased investment and increased revenue. Apart from these, the transition from LDC will bring some more challenges from 2026 onwards. They also have to be dealt with from now on. Money laundering, hundi, defaulted loans – these will also emerge as challenges. The government has to proceed very cautiously in this financial year as well. Investment should be increased. Care should be taken so that the interest rate does not increase too much. It is important to keep the value of money stable by increasing the flow of dollars.
The central bank will announce the monetary policy in advance at the end of this month. In terms of the IMF, it will adopt a policy of reducing the flow of money into the market. As a result, the loan interest rate will increase further. Liquidity flow to banks will also decrease. As a result, the cost of borrowing will increase.
On the one hand, the cost of doing business is increasing by leaps and bounds due to the rise in dollar price, interest on loans, gas and electricity prices. But people’s income is not increasing in economic recession. On the contrary, the rate of inflation is decreasing further due to increase in inflation rate. This reduces the consumer’s ability to consume. Considering these challenges, entrepreneurs are not interested in investing. As a result, as the demand for credit in the private sector is decreasing, the supply is also decreasing due to the liquidity crisis in the banking sector. At the same time foreign investment also decreased. As a result, production is decreasing. Employment is not happening as expected by the unemployed.
Meanwhile, several steps will be taken to increase investment in the monetary policy of the current financial year. Among these steps are being taken to provide dollar supply to the industrial sector, disbursement of low interest loans and other policy support. There are several steps in monetary policy in this regard. However, there is a question about how much it can be achieved. Because most of the monetary policy targets of the outgoing fiscal year were not achieved.
Economic slowdown, investment decline, dollar crisis and contractionary monetary policy have reduced imports, so overall economic activity in the country has slowed down. As a result, the government’s revenue collection is also decreasing. Targets are not being achieved due to low revenue for several years. As government expenditure has decreased, so has investment. Government has to borrow from banks without increasing revenue. Due to liquidity crisis in the banks, they are not able to provide loans to the government as per the demand. As inflation increases, it is not possible to borrow from the money printed by the central bank. As a result, the government’s financial crisis is becoming evident. To overcome this crisis, the government is increasing the price and fees of various services. It also increases the pressure on the consumer.
According to a report of the Central Bank published last Thursday, Bangladesh is not getting the benefit of supply interruption due to the Russia-Ukraine war, major devaluation of local currency, the recent drop in the prices of goods in the global market. Inflation rate is increasing due to upward adjustment of fuel, electricity and gas prices in the domestic market and market management errors.
According to central bank sources, among these instruments of inflation, the central bank has only the issue of keeping the value of money stable. The rest are beyond the control of the central bank. As a result, it is not possible for the central bank to single-handedly reduce the rate of inflation. For this, concerted action should be taken. According to the IMF report, the economy of Bangladesh now has to move forward by facing multi-faceted challenges. The economy will have to wait two more years to recover from the pre-pandemic situation.