While narrating stories from Afghanistan, the writer Syed Mujtaba Ali once wrote, ‘Quinine will cure the fever; but who will cure the quinine?’ In trying to reduce the high rate of inflation in the country, high interest rates were indeed a necessary ‘medicine’; but now, how to alleviate the pain caused by high interest rates has become a cause for concern. Antibiotics cure disease, but excessive use of antibiotics also weakens a patient’s immune system.
The persistent coexistence of high interest rates and high inflation over the past one and a half years has trapped the country’s economy in a complex bind. Currently, high interest rates themselves are contributing to stubborn inflation. Excessive interest raises the cost of capital and production, ultimately fueling cost-push inflation.
Does this mean the science of monetary policy has failed? Not at all. Does it mean that lowering interest rates now will weaken inflation? That is also not true. Then should we accept high inflation as our fate? That is even less true. After the Chernobyl nuclear disaster, scientists said it was caused by six ‘blunders.’ Multiple blunders have also contributed to the current sharp inflation. The first mistake was the failure to administer the ‘medicine’ in time. Just as giving medicine too late to a patient burned by fire renders antibiotics ineffective, failing to raise interest rates when needed rendered them ineffective in 2022–23.
The then finance minister, a chartered accountant with no economic expertise and a businessman sympathetic to defaulters, ignored economists’ countless arguments and reasoning. It is said that he was also partly responsible for the stock market crash of 2010. The Awami League government could not find a better person than him for such a critical position as finance minister. The banking sector suffered the most at that time. Several banks were emptied under the pretext of providing loans at an interest rate of up to 9 per cent. At that time, market inflation was between 10 and 12 per cent, meaning that the predatory community withdrew money from banks at negative or zero interest rates. This created excess liquidity in the economy, adding fuel to the fire of inflation. However, using this as an excuse now would be an injustice to economic science.
In economics, GDP growth or standard of living is a long-term issue. That is, changing these factors requires about a decade. Increasing employment is more of a medium-term task—it can be addressed within two to five years through planning. But controlling inflation is a short-term matter—it can be influenced within one to two years.
Three neighboring countries—India, Pakistan, and Sri Lanka—have demonstrated this clearly. Unfortunately, the pain remains on Bangladesh’s forehead. In particular, over the past 15 months, no significant progress has been made.
The country’s average inflation still hovers around 9 to 10 per cent. The main cause is the government’s contradictory policies. It is like giving medicine to a patient with high blood pressure while simultaneously feeding them excess salt. This is exactly what Bangladesh Bank is doing. On one hand, it is controlling credit through ‘monetary tightening’ by maintaining extremely high interest rates. On the other hand, in the interest of consolidating banks, it is providing them with unlimited liquidity, which, like salt in the body, maintains high blood pressure—or in this case, persistent high inflation.
Even the knowledgeable governor knows this is contradictory, but facing multiple pressures, he has been unable to achieve the expected reduction in inflation. The target he had set—to bring inflation down to 6 per cent by June 2025—is now nothing more than a distant dream. Just as chronic dysentery can develop in a patient over time, the persistence of high inflation can become a chronic affliction for Bangladesh, similar to some countries in Central Africa or Latin America. Combined with rising unemployment, this will inevitably lead to an economic deadlock or ‘stagflation.’
Despite the formation of many ineffective commissions over the past 15 months, it is surprising that the government did not establish a dedicated commission to control inflation. Inflation has not received the attention it deserves, even though this silent pandemic is a daily agony for three-quarters of the population.
Another problem has compounded the situation: the government’s revenue incapacity, which has now reached a 25-year high. Because business conditions are poor, entrepreneurs cannot pay taxes properly, creating a shortage of funds in the treasury. Now the money has to come from the banking system. If the government receives money, due to the ‘crowding out’ effect, private entrepreneurs will either not get loans or will get less. Yet the excess liquidity in society will remain. Even without consuming extra salt directly, saline will still enter the body through the IV, so to speak.
If the government were competent and widely accepted, two things—1. increasing revenue collection and 2. reducing operational expenses—would have occurred simultaneously, helping control inflation. But the interim government is moving in the opposite direction in both areas. The responsibility thus falls on the central bank. As a result, without supplying liquidity, it is difficult to keep the government afloat. Hence, inflation remains entrenched.
Since the United States imposed new tariffs on imported goods, inflation there has started rising again. That is a political decision by an elected government. In Bangladesh, the local strongmen on the streets are not elected political representatives; yet their extortion acts as a form of political tax, keeping inflation high. A former commerce minister of the previous government admitted that syndicates could not be controlled. There is no evidence that this malpractice has decreased under the interim government. Blaming the past 15 years of governance for failing to control syndicates and extortion will not reduce inflation. The responsibility for curbing this ongoing problem rests squarely with the current government.
There is no data with the Bangladesh Bureau of Statistics (BBS) on how much extortion inflates prices; surveys could be conducted among retail traders or vegetable vendors in Mohammadpur to assess this.
The interim government has at least three factors working in its favour for reducing inflation: 1. rising unemployment, 2. slower growth, and 3. increasing poverty. According to the Phillips curve, any one of these would typically reduce real wages and inflation—even though these are not desirable outcomes. Just as a person suffering from famine spends less, which is not a desired situation, average inflation in August 2024 was 10 per cent. By October 2025, it had fallen only to 9.22 per cent—a statistically insignificant decline.
This small drop in inflation is largely due to these three undesirable factors. There is virtually no evidence of success from government revenue collection or monetary policy. The government should now reduce the high interest rate to provide some relief to potential borrowers, thereby lowering production costs and weakening cost-push inflation. Institutional measures, such as controlling syndicates and regulating the transport of extorted goods, would play a more effective role in reducing prices. Reducing inflation now requires more focus on supply-side factors than on demand-side measures.
#Dr. Birupaksha Paul is Professor of Economics, State University of New York at Cortland.
#The opinions expressed are those of the author.