Will a sizeable section of the population be facing food insecurity due to high inflationary pressures? And will the sharp depletion of foreign exchange reserves lead to macroeconomic instability? These are two major concerns that the country must now deal with as it struggles to come out of the current economic crisis.

Inflation has been hovering at between 6 and 9.5 percent since February 2021, and there are concerns that the actual inflation rate might be higher. Official rates of inflation may be underestimated since the Bangladesh Bureau of Statistics (BBS) still uses the 2004-2005 data to calculate the consumer price index.

There are four reasons for the soaring inflation of recent months – escalated prices of food, fuel, and other commodities in the global market; domestic production shortage; imperfections and anomalies in the local markets and supply-side disruptions; and currency depreciation. As always, low income groups are the worst sufferers. They are being forced to switch to cheaper food options, and cut down on costs of education, healthcare and entertainment, leading to deteriorating living standards that will result in negative intergenerational impacts.

Read more

A rising tide can sink all boats too

Repeated surveys by Sanem among 1,300 garment workers in five cities in the last several months found that the food security indices of the workers and their families continued to decline. A delayed intervention will not work with the risk of food insecurity persisting for long. Though there is little scope for famine in Bangladesh, the risk of food shortage for marginalised communities and groups living in remote areas remains. The next two to three months are crucial for taking steps to deal with this.

In addition to boosting agricultural production, facilitating imports, and addressing market imperfections and manipulation through monitoring, the government should expand social protection programmes immediately to support the people reeling from escalated food prices.

However, institutional and corruption-related challenges need to be addressed, too. There are always targeting errors in these programmes – those who are not supposed to receive assistance are getting it whereas those who need it the most are left out. The amount of support is small, and the coverage is low as well.

Regarding food security, we can use scientific methods to estimate food availability and actual demand, in order to find out production and import requirements, since incorrect supply and demand assessments lead to wrong policy choices. This can then create panic and allow vested quarters to spread misinformation about food shortage, and use the situation to make abnormally high profits from food prices.

In the last 11 months, on average, the foreign exchange reserve dropped by more than USD 1 billion each month. This sharp depletion of reserves has put macroeconomic stability in danger. Though Bangladesh is not in a precarious situation yet, there is a danger if the rate of depletion does not slow down. Policies and strategies need to be put in place to boost reserves in order to meet import liabilities for 8-10 months.

The taka has also lost its value sharply against the US dollar amid a shortage of the latter and a surge in import bills. Although the taka depreciated by more than 50 percent between 2010 and 2022, the sharpest depreciation happened only over the past few months since, before that, the taka was kept artificially appreciated. In contrast, India, Vietnam, and Indonesia allowed a gradual depreciation of their currencies to avoid sudden shocks.

Read more

Financial sector reforms necessary to get rid of default loans

The exchange rate regime in Bangladesh still remains highly distorted, as there are separate exchange rates for importers, exporters, remitters, and in curb markets. There must be a proper convergence of these multiple rates if we are to avoid further macroeconomic instability.

The trends in exports and remittances over the past few months haven't been encouraging, either. In a bid to contain imports, the opening of letters of credit (LCs) to import capital machinery declined drastically during July to September. Similarly, the opening of LCs for importing intermediate goods and industrial raw materials fell by more than 14.5 percent during the same period, which could cause economic growth and employment generation to decelerate in the current financial year. Micro, small and medium enterprises (MSMEs), which are most likely to be affected by this, will need special policy interventions to cope.

The looming global recession is not good news for our exports and remittances. We must prioritise diversification of our export basket and address supply-side constraints, including the high cost of doing business. The hundi business, an illegal cross-border money transfer system, needs to be restricted to augment the flow of remittances through legal channels. It should be kept in mind that the hundi business is not only used by expatriates to send money home through informal channels, but also by people inside the country to illicitly transfer their wealth abroad. Unless these transfer routes from Bangladesh are restricted, there will always be demand for hundi.

Dr Selim Raihan is a professor at the Department of Economics of the University of Dhaka, and executive director at the South Asian Network on Economic Modeling (Sanem).