Poor people are extremely affected by inflation and the government of Bangladesh needs to extend further supports to cushion impacts of price hike on them, says a multilateral aid-agency representative and suggests current economic priorities.
"Inflation unfortunately disproportionately affects the poor people, so the government should stand ready to provide targeted support to the most vulnerable within the available fiscal space," says Rahul Anand, the mission chief to Bangladesh at the International Monetary Fund (IMF).
He felt the need for creation of an additional fiscal space to mitigate the impact of the ongoing crisis on the poor and vulnerable and strengthening the social-safety nets.
"Bangladesh has very low tax revenues and expediting reforms to tax policy and revenue administration are needed to boost tax revenues to support high spending needs," suggests Mr Anand in an exclusive interview with the FE.
The overall inflation in August rose to 9.52 per cent in Bangladesh--the highest in 11 years 3 months--while in September it fell slightly to 9.10 per cent. The food inflation reached 9.94 per cent in August which fell slightly to 9.08 per cent in September though people feel the much higher heat.
"As the risks are high and skewed towards downside, the authorities should stay vigilant and be prepared to further tighten the monetary stance, especially if there are indications of second-round effects taking hold," he said.
Mr Anand predicts that inflation will stay elevated throughout this year, owing also to low inflation base from the previous year, and then subside on the back of the demand-management policies.
Regarding the present economic condition of Bangladesh he noted that the government took quick and decisive policy actions to address the economic fallout from the COVID-19 pandemic, which facilitated a faster and robust recovery, but the war in Ukraine interrupted it.
"Though Bangladesh has limited links with Russia and Ukraine, rising global commodity prices, slowdown in external demand, and supply-chain disruptions have let to setbacks, not only in Bangladesh but in several countries around the globe," he said.
These developments have led to headline inflation rising and the current-account deficit widened. The Taka has come under pressure and foreign-exchange reserves have declined sharply, the IMF mission chief notes about the country's macroeconomic health.
He mentioned that in fiscal year 2022-23 real GDP growth is projected to slow to 6.0 per cent due to further slowdown in external demand and measures to contain domestic demand. Headline inflation is expected to accelerate to 9.1 per cent, driven by rising domestic food and fuel prices and the pass-through of large Taka depreciation.
On the back of high global commodity prices and further slowdown in external demand, the current-account deficit is projected to remain elevated at 3.8 per cent of GDP in FY2023. The overall fiscal deficit is expected to widen to 5.5 per cent of GDP in FY2023, due to lower tax revenues and elevated expenditures.
"High dependence on imports, economic slowdown in Bangladesh's major trading partners, tighter global financial conditions, and heightened global uncertainties would likely keep the balance of payments (BOP) under pressure for some time," says Mr Anand.
About the dwindling foreign-currency reserves which fell close to US$36 billion from $48 billion in August last year he said higher global commodity prices, slowing export growth amid a global slowdown, and declining remittance inflows have all contributed to the recent decline in reserves.
The downturn is expected to continue in the medium term, with lower contribution from remittance receipts to reserves accumulation, he said, adding that exports of Bangladesh are highly concentrated in the apparel sector.
The moderation of exports in recent months, after a strong rebound in FY22, is mainly due to the slowing global demand. "This slowdown highlights the need to diversify exports, both in terms of products as well as destinations."
Regarding the requirement of policy reforms to overcome present economic challenges in Bangladesh Mr Anand said containing inflation, softening the impact on the vulnerable, and building external resilience through continued exchange-rate flexibility are near-term priorities.
He notes that despite these challenges, Bangladesh's favourable demographics present a significant opportunity. "To harness this potential, Bangladesh must continue reforms to make its economy more resilient and resume progress towards the authorities' ambition of reaching upper-middle-income status."
"Foremost in this reform effort is the longstanding challenge of raising tax revenues, which is critical to increase social, developmental, and climate spending," Mr Anand said.
And this will require modernisation of the tax system and improvements in revenue collection.
"Financial-sector reforms to enhance banking regulation and supervision, and improved corporate governance, and legal systems remain important," he concludes.
