Bangladesh’s long, consistent battle against inflation over the past few years has resulted in a considerable amount of discourse. Bangladesh Bank’s tight monetary stance-via policy rate increases, credit restraint, and efforts to mop up excess liquidity-aims to curb persistent price rises. Its objective is clear: reduce overall demand and thus reduce inflation and restore macroeconomic equilibrium. The question that hangs over Bangladesh's economy, however, is whether the current tight stance addresses the actual drivers of inflation or simply erodes people’s ability to purchase goods and services?
The situation presents a mixed picture, leaning towards mixed success and substantial limitation.
In terms of traditional monetary economics, Bangladesh Bank's approach is textbook. Persistent, high inflation poses a threat to individual savings, investment plans, and overall confidence. By making borrowing costlier, policymakers attempt to rein in overspending and speculative investments. Slower credit growth will reduce aggregate demand, thereby supposedly easing pressure on prices. This is a measure widely employed across the globe; the US, the Eurozone, and other regions too have been undertaking similar tightenings over the past couple of years.
For those supporting the stringent monetary policy, it serves to contain inflationary expectations. If the populace and businesses begin to believe that prices will just keep rising indefinitely, then inflation tends to become self-fulfilling. Workers will demand ever-higher wages, businesses will increase prices proactively, and people will try to consume and buy as much as they can before prices go up further. In such an environment, monetary discipline is not only preferred but essential.
There is also a sense that the high liquidity in the banking sector resulting from previous periods of easy money policy created the conditions for high inflation. Cheap loans, significant government borrowing, and weaknesses within the banking sector provided ample liquidity in the economy for excess demand pressures to grow. As such, advocates for tightening believe monetary stimulus is necessary despite its pains. The problem, however, is that the above point is only one side of the coin. The critical problem is that inflation in Bangladesh is no longer a demand-driven problem only. A significant portion of the current inflationary pressure stems from a plethora of structural and supply-side issues that only tight monetary policy alone cannot sufficiently address.
The country imports vast quantities of fuel, industrial inputs, edible oil, wheat, fertilizers, machinery and many consumer items. The devaluation of currency, therefore, directly translates to increased domestic prices. The jump in import prices seen over the past few years is a direct contributor to inflation, irrespective of what people are trying to consume locally.
If the inflation problem is demand-driven, then a tightening of monetary
policy can be extremely useful. If the problem is structural, however,
aggressive monetary tightening is addressing symptoms and not the actual
causes of price rises. The implications for society are readily
visible. Middle and lower-income households now have to allocate
increasingly larger percentages of their income on basic items like
food, rent, transport, medicine and education.
If the inflation problem is demand-driven, then a tightening of monetary policy can be extremely useful. If the problem is structural, however, aggressive monetary tightening is addressing symptoms and not the actual causes of price rises. The implications for society are readily visible. Middle and lower-income households now have to allocate increasingly larger percentages of their income on basic items like food, rent, transport, medicine and education. Meanwhile, the higher cost of loans and housing finance, thanks to tighter policy, adds to their spending burdens. Due to stagnant or slow wage increases compared to inflation, purchasing power is steadily eroding.
Basically, it becomes a form of a hidden tax on the poor, and tight monetary policy adds insult to injury. Small and medium-sized businesses too are taking a hit. Expensive credit means they can't invest and produce as much as they wish at a time when investment is key for growth and employment. Entrepreneurs find borrowing difficult and will have to postpone expansions, postpone hiring, or scale down their operations. This leads to slower economic growth, not necessarily lower inflation.
There is a valid fear that while the economy may successfully supress demand through the central bank's tight stance, the underlying structural inflationary pressures are stubbornly resisting any policy cure. However, it is also too simplistic to dismiss monetary tightening entirely. A credible central bank cannot afford to allow inflation to run out of control. Maintaining a tight monetary stance is necessary to maintain confidence in the currency, anchor inflation expectations and ensure macroeconomic stability to prevent deeper crisis.
The actual truth is that the responsibility of curbing inflation can no longer solely rest on the shoulders of monetary policy. What Bangladesh desperately needs is a comprehensive policy framework that complements monetary restraint with structural reforms. This includes stabilized currency value, increased food and energy security, enhanced agricultural production, reduced dependence on imports, reduced influence of intermediaries in price setting, efficient supply chains, a stronger industrial base, good governance and more prudent use of the exchange rate. Fiscal policy also needs to contribute. Social safety net programs are critical to support vulnerable segments of the population during times of high inflation, and public spending should not focus solely on increasing overall demand but on strengthening productivity and supply capacity. Regulatory bodies need to step up and prevent market manipulation and undue price increases.
Ultimately, Bangladesh's inflationary problem is less of a monetary one and more of a structural economic one.
The present tight monetary policy stance might work to bring down aggregate demand and put the inflation problem at bay. However, if the fundamental drivers of price pressures remain unaddressed, it would just be addressing symptoms and not actual diseases. Ultimately, the true test of economic policy is not in what inflation figures come out on paper but whether people can actually afford the items they need. If prices continue to stay high while purchasing power continues to fall, then fight against inflation is merely an exercise of wishful thinking.
Bangladesh's policymakers have a huge job to do. It is critical they ensure monetary tightening works within a wider program of reforms rather than acting as the solitary solution. Only then can the country truly achieve long-term price stability and economic resilience.
The writer is a banking and economy analyst
