At present, Bangladesh is facing a number of challenges in maintaining macroeconomic stability, with the taka depreciating against the US dollar due to rising import bills coupled with declining export revenue. export and remittances. This is compounded by the fact that the global economy as a whole is going through a period of recession (or stagflation), with declining economic growth and soaring prices in many major economies.
Global and local macro challenges can have a number of serious consequences for the citizens of Bangladesh.
For all the latest news, follow the Daily Star’s Google News channel.
First, the economic contraction of our trading partners may have negative repercussions on export earnings, which may affect the process of industrialization and job creation. The energy crisis only adds to this and negatively impacts industrial production. Austerity measures taken by the government to contain inflation (and reduce import payments) could also affect employability prospects. In the short to medium term, all of these factors could reduce household income and spending.
Second, the decline in the value of the taka not only puts pressure on our foreign exchange reserves, but also increases our import bills. With our import basket containing many food essentials, the appreciation in dollar value triggers further inflation. And it goes without saying that the significant increase in the price of fuel by the government (to compensate for the losses previously incurred due to high subsidies) has affected the livelihoods of the average Bangladeshi.
While there could be a drop in global energy prices due to the global recession, the ongoing war in Europe has added a lot of uncertainty into the mix. Furthermore, if our export and remittance earnings continue to decline, this will put further pressure on the value of the taka, making fuel even more expensive to purchase.
In general, the increase in energy prices affects our daily lives in at least two ways: by an increase in the direct costs of transport and communication, and by an increase in the price of basic necessities due to the costs higher transportation.
Continued subsidies and cuts in indirect taxes to contain the prices of fuel and basic necessities could shrink our already tight fiscal space, leading the government to cut spending on health, education and social protection programs . Any cuts in safety net spending in particular can hit low-income groups hard, especially in a context of rising prices for basic necessities.
Without an appropriate support system, higher inflation can, on the one hand, push already vulnerable members of the population below the poverty line and, on the other hand, affect the quantity and quality of the food intake of people. In the latter case, lower food consumption can have crucial implications for the nutrition and health of children and adolescents. In addition, rising prices of basic necessities could force fixed-income households to reduce spending on their children’s education and/or postpone crucial health expenditures. Rising spending on basic necessities may even force some families to put their children’s education on hold. In this case, while any child could end up joining the labor force, girls could be forced into marriage. The social costs of inflation can therefore be considerable.
The government must now decide whether to move towards a market-based exchange rate system to restore macroeconomic stability. If we fail to stabilize the exchange rate, we may face a more depreciated value of the taka, which may trigger more inflation.
The government may also need to adjust import duties and value added taxes, at least in the short term. It is now essential to reduce unnecessary expenses, in particular operating expenses, and to carefully think through and select the development projects to work on while strictly controlling their performance.
On the other hand, an in-depth reform of the structure of direct taxation to widen the fiscal space is crucial. Any reform of subsidy policy must be phased, with careful planning. For example, agricultural subsidies should be given the highest priority.
In order to contain inflation, the competent authorities are already taking austerity measures, which may limit job creation and affect household incomes. It is therefore crucial to provide support mechanisms to workers through wage adjustment, subsidized food, etc. It is also crucial to expand government safety net programs to protect economically vulnerable members of the country’s population. In addition to expanding coverage, increasing per capita benefits is a current necessity.
In order to eliminate the “unexplained” aspect of inflation – which is often caused by manipulation, inefficiency and supply chain disruption – more emphasis needs to be placed on effective market surveillance.
Dr Sayema Haque Bidisha is a Professor in the Department of Economics at the University of Dhaka and Research Director at the South Asian Economic Modeling Network (Sanem).