Forex pressure may ease by Dec but inflation to stay

The record fuel price hike last week has thrown a spanner in the works to the finance division's projection of bringing the twin problems of inflation and delicate foreign currency reserves under control by December.

As things stand, foreign currency reserves might shore up by the end of the year thanks to inflows from multilateral lenders and the steps taken by the government to curb imports, finance ministry officials told The Daily Star on the condition of anonymity.

But the fuel price hike would be escalating inflation, which in July stood well above the budgetary target of 5.6 percent for the fiscal year.

"When the fuel price increases, the prices of goods increase, affecting the poor. Naturally, inflation also increases," said Finance Minister AHM Mustafa Kamal to a group of journalists yesterday at his office.

Typically, the impact of a fuel price hike is neutralised in nine months, as per the finance division's earlier studies.

"Given the enormity of the hike, it would take longer for the neutralising effect to kick in," said a finance ministry official on the condition of anonymity.

The prices of petrol were hiked by 51.1 percent, octane by 51.7 percent, and diesel and kerosene by 42.5 percent -- all of which are the biggest increases yet.

The government though is working on a programme to cushion the poor and the low-income people from the impacts of the spiralling prices of goods, according to Kamal.

"Of course, there will be help for the poor," he said, adding that the mechanisms for the programme are in the works.

The aid package for the poor and the low-income people would come from the Tk 5,000 crore block allocation in this fiscal year's budget as well as the loans currently being negotiated with development partners.

For instance, the government is currently negotiating a $1 billion loan with the Asian Development Bank to aid with safety net offerings, economic recovery and mitigate the impacts of climate change.

The programme for the poor would be delivered through the existing channels based on the database prepared during the pandemic, the finance ministry official said.

It would most likely be in the form of cash support.

For the low-income demographic, the government would be running open-marker sales of essential commodities such that those could be purchased at low prices.

"These steps would, hopefully, provide some relief amid the high inflation," the finance ministry official added.

At the same time, the government is working to boost the reserves.

The government would be getting $1.7 billion this year from development partners as part of the financial assistance they had offered at the start of the pandemic to aid in economic recovery and for vaccine purchase.

The development partners such as the World Bank, ADB, Asian Infrastructure Investment Bank, Japan International Cooperation Agency, the European Union, the European Investment Bank and the French Development Agency had committed a total of $7.7 billion to Bangladesh.

Of the sum, about $6 billion were disbursed in the last three fiscal years; $1.7 billion from the WB, ADB, AIIB AND EIB remains to be released and that is expected by the end of the year.

Of the $1.7 billion, $1.17 billion is meant for vaccine purchase. The government would be using $550 million as reimbursement for vaccines it has already purchased and the remaining sum would be using as budget support for this fiscal year.

The government had prior discussions with the WB for a $700 million loan and it is expected this year.

Besides, the government has sought fresh loans of $4.5 billion from the International Monetary Fund, $1 billion each from the ADB and the WB, and $500 million from JICA.

"All in all, these would send reserves to a comfortable level," the finance ministry official said.

As of August 3, foreign currency reserves stood at $39.7 billion, according to data from the Bangladesh Bank.

The reserves take a hit every time payments are made to the Asian Clearing Union to settle bills for goods imported from Bhutan, Iran, India, Maldives, Nepal, Pakistan, Sri Lanka, and Myanmar.

The next ACU payment is due in the first week of September and it would be about $1.5-1.6 billion, which is lower than in recent months' bills, said a BB official.