ICCB says capping inflation crucial for growth
Dhaka, Bangladesh (BBN)– Bangladesh economy faced wide range of risks and pressures, including soaring inflation, hefty bank borrowings, rise in government subsidies and low foreign aid disbursement in 2011, which may harden the macro-economic management of the country in 2012.
Besides, the economy also witnessed a fall in the private sector credit flow, depreciation of Taka against dollar, higher import of products other than capital machineries and raw materials as well as current account balance deficit.
All these are going to be the main challenges for the current year as well, according to the Editorial of the current ICCB News bulletin (January-March 2012 issue) of International Chamber of Commerce-Bangladesh (ICCB), released on Monday.
All we know, inflation, unemployment and growth trend are the major factors of macro economies. Over the past few decades, the nexus between inflation and economic growth have drawn extensive attention of macroeconomists.
However, according to experts, inflation and growth rate have both positive and negative relationship depending on situation; but inflation and unemployment have a negative relationship.
Inflation in India and China affected long term growth rates since 1979 to 2009. Today, both the countries are fastest-growing economies in the world, having one-third of world’s population as well as facing the related problems such as unemployment, environmental degradation, poverty and non-performing loans, institutional frailties and structural problems.
Macro-economic parameters clearly confirm that both the Chinese and Indian economies are against inflationary capacity constraints. In China, inflation impacts on growth rate meanwhile in India it was inverse relationship.
Bangladesh’s inflation rate has maintained double digits since March last year. In the outgoing year, a major reason behind the galloping inflation was the depreciation of local currency against US dollar.
The value of Taka, which fell by over 15 percent during the outgoing calendar year (2011), was another threat to the economy as it had inflated the cost of imported goods having a knock-on-effect at the consumers’ level and thus increasing inflation rate.
The average inflation during FY2011 increased to 10.70 percent from that of 8.13 percent in the previous year; reaching almost the 1987 inflation rate of 10.82 percent after 25 years.
The double digit inflation which is likely to continue during remaining period of FY2012 ending in June, 2012 will hurt the poor and erode their purchasing power.
In addition to higher inflation, there are some other concerns for the country’s economy like high bank borrowings by the government that already exceeded the target of the current fiscal; dwindling remittance inflow, higher fuel import and lower disbursement of fund by development agencies that are not only causing depreciation of Taka but also reducing foreign exchange reserve. All these are also creating pressure on the balance of payment.
Against all of these backdrops, Bangladesh economy performed reasonably well in Q2 (October-December) of FY12, when most of the developed world has been in the midst of a recession. On the other hand, after a superb performance of 41 percent growth of export in the last fiscal year, even though the export growth in first six months of FY12 dropped to 14.7 percent is still considered to be a respectable figure by any measure.
However, the outlook for exports during the remaining period of FY12 is subdued by adverse developments in the Eurozone and a rather anemic recovery in the US economy.
The central bank’s monetary policy for the second half of the current FY12 (January-June 2012) is designed to support the government’s revenue policies in pursuit of “inclusive economic growth” and binding the inflation rate at 7.5 percent, but according to experts it is very unlikely to be achieved.
Bangladesh could follow monetary policy strategy of some of the Asian economies, in particular of the China and India, which revised interest rates 12 times in the last 18 months; Bank of China revised two types of loan interests nine times.
The country needs to pursue drastic measures in controlling the inflation rate in order to achieve its budgetary goals and economic growth rate of 7.0 percent above, the ICCB noted.
BBN/SSR/AD-16Apr12-3:10 pm (BST)