Recipe for facing economic challenges

Inflation in many countries has been simmering for some time due to production disruptions and supply chain issues related to the Covid-19 pandemic.

The supply of many commodities and goods has failed to meet increased demand reflected in, among other factors, bottlenecks, rising shipping costs, delivery delays and shortages of inputs key production products such as computer chips.

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Productions have fallen, with many companies struggling to cope financially, putting pressure on the prices of basic necessities. In addition, the transport sector and movement of goods within and between countries has disrupted supply chains.

World oil prices had already increased by 77% in January 2022 compared to December 2021.

With the economy recovering and strong pent-up demand for foreign goods and machinery, Bangladesh has seen an increase in imports of around 46% this fiscal year.

With 75% of our import basket comprising raw materials, intermediate goods and capital goods for the productive sector, high world prices are expected to put more pressure on consumers, who generally bear the burden of rising costs.

Capital is flowing into the United States in search of higher returns as the Federal Reserve tightens monetary policy by raising key interest rates to fight inflation.

Most currencies in developing countries, including the Bangladeshi taka, have lost substantial value in recent weeks against a stronger dollar, potentially fueling additional imported inflation, raising debt payment costs and increasing instability. financial.

The ongoing conflict in Ukraine has further reinforced the surge in inflation. Shocks in world oil markets due to sanctions imposed on Russia have led to price increases on the world market.

According to the World Bank, energy prices were more than four times higher in March 2022 compared to their April 2020 lows. Fertilizer prices rose 220% over the same period.

IMPLICATIONS ON THE ECONOMY AND BUSINESSES OF BANGLADESH

Global inflation has had a negative impact on food and energy prices globally, and Bangladesh is not immune to this. Bangladesh being an oil importing country, the rise in oil prices in the world market has had a direct impact on Bangladesh.

Food and transport were affected. Since average food consumption accounts for more than 60% of total consumption expenditure of marginal households, rising food inflation in Bangladesh has devastated their livelihoods.

With 75% of our import basket comprising raw materials, intermediate goods and capital goods for the productive sector, high world prices are expected to put more pressure on consumers, who generally bear the burden of rising costs.

According to World Bank estimates, energy costs could rise by more than 50% in 2022 before falling in 2023 and 2024.

Oil prices could reach $150 per barrel, and non-energy prices such as agriculture and metals are expected to increase by more than 20% in 2022. In such situations, Bangladesh’s export competitiveness will suffer if inflation is not well managed, as a rise in raw material costs will increase the overall cost of exportable products.

Finally, inflation would be an additional blow for small businesses, which have yet to fully recover from the Covid-induced shock, as rising input prices, rising loan costs and falling demand will bring even more misery.

WHAT OTHER COUNTRIES ARE DOING TO MANAGE UNCERTAINTIES

Central banks around the world are concerned about the suffering of low-income people and are acting quickly to prevent the situation from getting worse. Tough measures such as raising interest rates to the highest level in years and raising the repo rate have been taken.

The Federal Reserve raised interest rates by three-quarters of a percentage point.

India has prioritized inflation over growth and recently proposed a reduction in petrol and diesel taxes to fight inflation while raising the pension rate by 40 basis points more early. This reduction in excise duties and import taxes may result in a revenue loss of Rs 1 lakh crore per year, but it is expected to reduce inflation by 35 to 40 basis points.

In response to rising inflation, the Bank of England raised interest rates by 0.25 percentage points to 1% on May 5, bringing them to their highest level since March 2009.

PROPOSED BUDGET AND ITS OFFERS TO MEET THE CHALLENGES

The government has acknowledged that inflation is a major challenge for the financial year and has considered the possibility of a further increase in world prices of major commodities in the budget for the financial year 2022-2023.

Reducing tariffs on wheat gluten and animal feed, plans to purchase 47,000 tons of food grains through government procurement in the event of shortages, and actions against hoarders through the courts mobiles are expected to help increase the supply of basic necessities.

The increase in sales of basic necessities at lower prices through the Trading Corporation of Bangladesh (TCB), the overall 21% increase in subsidies on items such as food, fuel and d other agricultural products, and the 5% increase in the social protection budget and the planned increase in the number of beneficiaries should, to a certain extent, help those in need and limit the inflationary effects.

Strategies to contain inflation and support those most affected, however, could have been more comprehensive. The tax-free personal income threshold remains unchanged despite the additional burden of rising prices, while for low-income people receiving social protection benefits, the small benefit amount has remained the same as years. previous ones.

The increase in the social protection budget has also been minimal. Support for low-income earners has been minimal as the broad spending plan and ambitious Annual Development Program (ADP) targets are expected to have high import components to put pressure on currencies and lead to further depreciation taka and more inflation. .

Allowing lower tariffs for some of the essential food items, including rice, lentils and palm oil, could have ensured a better supply in the market, discouraged hoarding practices and kept prices low.

At a time when tight management of exchange rates is essential to ensure an optimal supply of foreign exchange, the support foreseen in the budget to boost exports and foreign direct investment (FDI), the two main drivers of foreign exchange, has a significant room for improvement.

Proposed provisions regarding transfer to special reserve, increase in effective tax rate on contribution to Workers’ Profit Sharing Fund, mandatory submission of tax returns for global digital service providers such as Facebook, Google and Amazon, and the increase in the tax source for exporters will slow down FDI and the recovery of exports.

MEASURES BANGLADESH MUST CONSIDER

Monetary policy measures:

Raising Interest Rates Effectively: There are marked discrepancies between the policy rate, the deposit rate, and the lending rate. Currently, depositors are getting an interest return below the rate of inflation, which erodes their ability to buy.

Maintain an appropriate level of exchange rate: Bangladesh’s real effective exchange rate (REER) has been above the nominal rate since the pandemic, indicating that exports are more expensive and imports cheaper compared to trading partners.

The official exchange rate set by the central bank also discourages senders from bringing in foreign currency through banking channels due to the marked difference in rates between official and other channels. It is therefore important to further devalue the currency after carefully assessing the transmission rate of the exchange rate to inflation and the market difference.

Tax policy measures:

Social protection support for low-income groups: The safety net must be scaled up effectively with minimal exclusion error and benefits must reach those in need with effective monitoring and accountability in place. hard times. Energy price increases should be delayed in order to contain inflation and inflation expectations despite this increase in the short-term budget deficit.

Reduction of customs duties and taxes on basic necessities: if certain consumer goods such as palm and soybean oil are all imported, it is important to temporarily eliminate customs duties or reduce them considerably, both for crude and refined, as an emergency measure, as in India, and take other necessary measures to increase supplies from imports to keep the price level low.

The market should be signaled that the central bank is determined to ease inflationary pressures as much as possible, even at the expense of GDP growth, to reduce future inflation expectations.

Keep energy prices affordable for businesses and citizens: It is essential that the Bangladesh Energy Regulatory Commission reconsiders its plan to increase energy prices for businesses and businesses. Such an increase will compound the negative effect of soaring commodity prices and the dollar on businesses and citizens, decreasing competitiveness and increasing the cost of living.

The authors are respectively president of the Policy Exchange of Bangladesh and an economist.