The collapse of the Hasina government came when the economy was already experiencing great difficulty. The past three years have revealed the uncertainty of the future; slowing GDP growth; labour unrest; increased external pressure; reduced production from some of the facilities owned by persons who have been arrested or fled; problems with providing electricity and gas; and the continuing deterioration of many banks.
Moody’s downgrade of the economy and several of the banks reflect the situation, although all of these factors were recognized before August 5, but did not seem to carry the same weight. It is mysterious why Moody’s assessment of the economy changed when the real factors noted had long been present.
For the economy, long-run policy changes miss the point. Immediate actions are needed. The focus is on action that can be implemented rapidly and will have a major positive impact. We begin with the most important and perplexing.
Inflation is the number one issue in the mind of the public. In my opinion it is a very important force that contributed to the revolt against Hasina. Some 80% of Bangladeshis found their real income declining due to the combination of rising prices and declining availability. Inflation was the major factor that led to Trump winning. Also, the recent defeats of the party in power in the UK, France, and Japan are probably due to the voters’ anger with inflation.
The key point is that in many of these countries, inflation was under control, but prices remained high. The high prices are what caused so much anger. In Bangladesh the situation is worse, as inflation has not been brought under control and the citizens are faced with high prices that continue to rise. The inflation began in FY23 rising above 9% from 6% in FY22. It has stayed above 9%, rising above 10% in the last four quarters. It should rise further in the next few months until Eid in CY 25. After that one hopes it will fall below 10%.
Even if inflation slows down, prices will end up 30-35% higher than in 2022. Wages have increased more slowly, at 8%, than inflation so net incomes have fallen for much of the population. One can say that incomes have declined in real terms by 5-6%. Until inflation is controlled and real incomes can begin to increase, this anger will remain.
The rising prices come partially from excess demand and partially from a reduction in supply. World inflation started from the heavy expenditures made by the major economies to stave off recessions from Covid-19. The inflation was exacerbated by the Russian invasion of Ukraine. The higher import prices and the disruption of the RMG market triggered a large increase of the current account deficit. The consequent depreciation of the Taka contributed to the inflation.
The economy slowed due to the downward pressure on imports and weakening exports. But inflation continued from depreciation and the continuation of negative interest rates. The textbook answer that the central bank employed is to raise interest rates and to reduce government deficit. These actions will certainly reduce demand. The interest rates have been increased. The ability to reduce the deficit is more difficult. This is the first point of the three discussed below. The effort to raise supply is largely limited to reducing tariffs in the expectation that there will be an increased supply of imports.
There is little attention to increasing domestic supply. The response time to increase imports of key commodities can be quite long. The companies that were the principal importers have also largely lost their chiefs who have fled or are in detention. The second of the three points deals with how to increase supply. Finally, we suggest some adjustments in the price index; obviously it is important to have an accurate measurement of the price levels as households actually see them. The ultimate solution to the economic problem is more rapid growth of exports.
Food storage
Inflation has been particularly painful for food. In a way this is surprising as the production data suggests that there is plenty of food. The floods had an adverse impact. This experience suggests that a much greater system of warehouses is needed to hold key foods such as paddy, potatoes, wheat, maize, etc.
This is an important problem for the future. Privately-owned warehouses to hold commodities, with warrants issued to the owner of the foodstuff being stored, provide a flexibility as such warrants can be traded. With increasing uncertainty in weather and consequent danger to crop production, the country must be much better prepared for potential food shortages.
In this system the government can purchase or sell warrants according to the particular conditions. But the ownership of warehouses should be left to the private sector. Such a warehousing system requires careful regulation but it is essential to work towards assurance that there will be enough food. We emphasize that this is a program for the future after the current inflation is brought under control.
Cutting government expenditures
The Hasina government and the Yunus government both claimed they were doing this. The latest data indicates that for FY24, government expenditures, excluding interest payments, were Tk491 thousand crore; in FY23 it was Tk486 thousand crore. Thus, the former government slowed down the growth to 1.4%, commendable, but not a reduction in demand.
Data on the Annual Development Program indicates in the first four months of FY25 there was a sharp drop of expenditures reaching only 6% of the same period in FY24. The reduction arises from the interim government reviewing the projects scheduled for implementation by the former Hasina government. Reduction of the current operating expenditures only works if you have strict rules for government expenditures.
The interim government can control the expenditures of the government in any way it chooses. In addition to implementing the above rules the government can make decisions to eliminate or reduce the responsibility of departments and hence to reduce the number of required government workers. It is too early to obtain data on what has happened since July FY25. There are some indications that the budget expenditures will be slightly higher in FY26.
Small and medium size manufacturing
This action is to increase supply. Reduce the interest rates to 10% for small and medium sized enterprises; limit the distribution of loans by a rule that for every Taka lent to a large enterprise, two must be lent to SMEs. The central bank must cover the 5% difference between 15% and 10%. There should be a condition that the loan is repaid before the central bank pays the increment for the lower interest rate.
This action will attack the inflation from the supply side encouraging production by enterprises that are largely serving low income households. Of course, there must be a serious effort to keep enterprises from relending these low-cost funds, ensuring that they are used for SME manufacturing clients. This increase in loans to the SME manufacturing industries will be largely for intermediate goods that must be purchased for production.
The funds should not be used for capital expansions. SMEs are usually able to increase output substantially without additional equipment. Overtime for workers can be increased or a second shift can be organized so long as the working capital is available. There is some hoarding but it is on a small scale. As more supplies appear on the market, hoarding will be reversed.
In addition to lower interest rates for operating capital, a recent survey revealed that government regulatory procedures were a serious impediment to SMEs. The bureaucratic mindset is the same all over the world, demanding excess information and completion of complex forms.
Improve the CPI
There are a number of actions that Bangladesh Bureau of Statistics can take to make the CPI (consumer price index) more realistic.
Forrest Cookson is the Research Advisor to the Centre for Research and Development. In Bangladesh, he led the central bank component of the Financial Sector Reforms; was the Team Leader of the study of Northwest Area Development of Bangladesh; and served as the Statistical Advisor of the Legal and Judicial Capacity Building Project.
