Govt has mechanism to reduce inflation: Zahid Hussain

Bangladesh was on the way to macroeconomic recovery after coronavirus pandemic. Meanwhile, Ukraine war hit. What is the challenge at this moment?

In the case of macro economy, the main challenge is to sustain the recovery that has been taking place for one and half years. According to the estimation of Bangladesh Bureau of Statistics (BBS) of 2017, some 22 per cent to 24 per cent people were under the poverty line. That has increased due to coronavirus pandemic. Some people are saying 42 per cent while some are saying 45 per cent. This means around 20 million to 30 million people have become poor. Those who were under the poverty line before the coronavirus their condition has deteriorated further during the coronavirus. We have no statistics of those poor people who returned to their previous state. The big challenge for Bangladesh economy to pull out huge number of people from the poverty line. Ahead of the Ukraine war we have noticed that the prices of different commodities were increasing. That trend was prevailing in our country too. After beginning of the war the pressure has mounted. The pressure of inflation is now another big challenge. Whether rich, middleclass or poor- inflation is a big challenge for all. Inflation may be an irritation for high income and mid income groups. But inflation is a crisis of livelihood for low income and poor people.

Russia-Ukraine war is being blamed for current crisis of global economy. What would be the situation if the war prolongs?

Supply chain of gas, oil, wheat, edible oil, fertilizer and raw materials for industries has been disrupted. Again it is not clear what impact has fallen on others due to imposing economic sanctions on Russia and its allies, for example Belarus. A big uncertainty is being created in the global trade due to war and sanctions. That uncertainty will not disappear if the war prolongs. The economy that was on the path of recovery has already been hampered due to the war. The global growth for 2022-23 the World Bank and IMF estimated in January, that has decreased in April. In the case of commodities and labour market, we have a big connection with the international market. European Union and UK, which are our the biggest market, are in serious risks due to the Ukraine war. One thing is being said about the European market that the inflation will continue there and there will be a recession too. Now the question is whether the recession will appear in the next quarter or the last quarter of this year and how much would it be intense and long. The USA has not that much risk like Europe. But inflation is much higher now in US than Europe. There is a fear of outbreaking a mild recession in US in the beginning of next year. Bangladesh was in the path of turning around in the export. Moreover, there was an increasing demand of our labour in the international labour market. Over 600,000 people have gone abroad for work last year while over 400,000 people have migrated for jobs in four months this year. Export of commodities and new opportunity of labour market would be hampered. Ahead of the war, it was perceived that the high prices of commodities including fuel would be temporary. Prices would decrease in the last six months of 2022. The prices of fuel reached 100 US dollars, that is not normal price hike. The estimation has now changed due to the war. The commodity market outlook of World Bank that has been published this month states that the high prices of commodities are now in the international market, there is a little chance to come down. The price that existed before the abnormal situation, it may need up to 2024 to return to that level. But the situation may be different if there is a dramatic change in war situation.

Inflation has taken place in food items and other commodities in Bangladesh like other countries. BBS is saying that inflation is 6.22 per cent. Is this estimation is pragmatic?

The assessment BBS gives that is of national level. This is done on the basis of two consumption basket of village and city. There are 470 items in the basket of city while there are 322 items in the basket of village. On the basis of prices of rice, dal or other commodities BBS is assessing the inflation, that is not much difference from the market price. So this cannot be said that the assessment of BBS is not accurate. The question is that the prices of commodities in the international market have increased for all countries. But why is the inflation in Bangladesh less than the other countries of similar economies? There is an economic reason here. The contribution of fuel oil is the highest for increasing inflation. The prices of fuel in the internal market of India or east Asian countries comparable to us is related to the prices of fuel in the international market. The price in our country is fixed administratively. As a result, the price hike of fuel in the international market has not spread to the Bangladesh market. Prices of diesel and gas were adjusted once in November last. The thing the government is doing is keeping subsidy in the budget and putting the financial burden on the suppliers.

During the global recession in 2008, Bangladesh experienced high prices of food items. The number of poor people increased. What should Bangladesh do this time taking that situation into consideration?

There is a big difference of food crisis in 2008 and the food crisis of current time in perspective of Bangladesh. At the time, the the biggest impact was on the rice market. That year, there was a deficit of rice production due to the natural calamities in the exporting countries. The product cost of rice went up due to price hike of oil and fertilizer. The food crisis of this time is not rice centric. This comparatively depends on luck and a matter of relief for us. But steps have to be taken to ensure production of rice in a bid to ensure food security. Now boro is harvesting, aus is being cultivated. The season of aman is in the offing. There is a big risk of natural calamity in the days to come. The agricultural production will be affected in case of natural calamity. Advanced preparations have to be taken so that that loss can be covered. Although we have less dependence on wheat, we have to find out alternative source of wheat import.

Many people think that the main challenge of the government is to keep the inflation at a tolerable level and rein in the prices of foods and consumer items. What are the ways to tackle this?

Analysing the statistics of BBS, we found that the prices of all types of commodities have increased. The inflation is widespread. Inflation is being noted in all types of commodities including imported items, items produced in the country and the items which do not enter the international market. So how we can say, only international price hike causes our internal inflation. Another big cause of inflation is internal demand has risen to a great. BBS estimation says the consumer expenditure has increased by 13 per cent. Now the consumer expenditure is 78 per cent, which was 69 per cent earlier. Not poor families, consumer expenditure of the higher income and middle class people has increased. Internal demand has to be lessened a bit to decrease the inflation. That arms is in the hand of government. One is budget and another is monetary policy. The strong trend regarding internal demand is in this year's budget, no new thing should be added to this. This means there is little chance going for expanded budget this year. The deficit normally remains in the budget, the deficit budget has to be less than that. The thing is not like that the internal demand has increased due to supply of currency. The rate of currency supply is still in one digit. If we look at the world economy, all central banks is now increasing policy interest rate. Policy interest rate psychologically has an impact on the market. This works as a signal. The central bank is telling the market that we are worried over the inflation. We are observing and we will go for tough steps if necessary. The internal demand has to be brought under control if an impact is to make on the real inflation. For that lending rate has to be increased. Cash assistance has to be given to the poor people of villages and cities until the inflation does not come down to normal level or 5 per cent.

Value of taka against dollar is being depreciated. Dollar is being sold in the open market at much higher price than the fixed by the central bank. What is the reason?

If the market value is artificially fixed, the market finds out its own alternatives, which does not yield good. Inflation and increasing price of dollars are closely connected. The demand of dollar is worldwide. There are two reasons behind the increasing demand. First one, an uncertain situation has been created in the world economy, investors are not interested in long term and big investment. During the crisis period, they are investing in gold and US dollars. As the supply of gold is limited, they are going for US dollars. The second one, Trade deficit of commodity importing countries has increased, where financing is needed there. Demand of dollars has increased there too. The dollar is now at the most powerful stage in the international market in the last 19 years. The import cost has increased in our country too due to increasing the prices of dollars and commodities in the international market. As a result, the demand of dollar has increased much in the foreign currency market. The supply has decreased as the price of dollar has increased in the international market. The wage earners' income has decreased although our export has turned around. So an imbalance has been created in the currency market. The main cause has to be addressed to tackle this situation. We have to find out how we can decrease the demand of dollars and increase the supply. This is like rules. This situation cannot be tackled by fixing the price of dollars artificially or intervening the market visibly or invisibly. In the same type of transaction and the same day, dollars are being sold at varied prices. Dollar is not toothpaste that it will be sold at varied price as per quality. This is an instance of big problem of market management. We permanently call our share market as a young one, but our foreign currency market is a matured one. This sort of mismanagement is not expected there. The price of dollar is being controlled, that has become irrelevant in the case of import and wage earners' income. Only this is being applicable for the exporters. The government price of dollar has gone far away from the real price. The controlled price of dollar will be effective when the central bank will supply dollars from its reserve to fulfill the deficit of demand and supply. But the big question, how many days that can be done? If the crisis was temporary, it could be effective. The reserve has now come to a low level. So in my view, there is no alternative but to allow increasing the value of dollar. But that will increase the pressure of inflation.

The reserve the Bangladesh Bank has, import of five months can be met with that. How much is it fearful in the context of Bangladesh economy?

One of the big means of combating risk is to have adequate amount of foreign exchange reserve. The reserve India has can be met import expenditure of 13 months. IMF analysis says reserve of three to five months is safe during the normal period. That is eight to 12 months during the abnormal period. Now the government can think about some additional measures to protect reserve. There is scope to get cash assistance for the financial sector. ADB, World Bank and IMF provides budget assistance. Some infrastructural reforms have to carry out to get that assistance.

Unplanned mega project is being cited as the reason behind the cause of economic crisis in Sri Lanka. A number of mega project is also being implemented in Bangladesh. How are the mega projects concern for Bangladesh economy?

The big lesson from Sri Lanka for us is that the crisis which may emerge in future should be given recognition now. Since 2008-2009, World Bank, IMF and ADB warned Sri Lanka that the country is going to face crisis. At the time, Sri Lankan government said these agencies are always conservative. They show fear of juju. They pretend not to see the problem. That can be the big lesson from Sri Lanka. The mega projects were not problems for Sri Lanka. The investment management is responsible for this. They needed big projects including deep sea port, moderninsation of airport and wide roads. Designs of the projects have been carried out considering the political benefit instead of economic benefit. Another matter has been noticed in case of Sri Lanka that the repayment of loan appears before getting the benefit of the projects. Investment has been made, before returning loan is being paid, that will certainly make a burden.

We need to make necessary preparations for tackling the financial pressure for the repayment of mega project loans. There is no reason of falling into crisis if we can make a plan and advance through a scientific management. There is no reason to be worried if the mega projects can contribute to the economic growth.

Budget is set to be unveiled. What is your expectation from the budget?

The revenue GDP that is supposed to be, we get three to four per cent less than that. There is little scope to increase GDP revenue in this budget. In the pre-budget discussion, all stakeholders say that the tax cannot be raised in the budget. There is scope of reforms in the subsidy budget. Power division, WASA, Petrobangla-all are pressing for increasing prices. Prices of electricity, water and gas have to be raised a bit. According to the finance division, some additional Tk 600 billion to Tk 700 billion will be required for subsidy if prices are not adjusted. The budget has to be increased if subsidy has to be increased. Inflation will go up if subsidy is reduced. Subsidy must be given a bit. Money has to be saved from other areas in the budget. Savings can be made from the subsidy being given on the wage earners' income, that should be diverted. Expatriates are being benefited due to hike of dollar price. Again, the statistics says two digits growth has happened in each sub sector of the industrial sector for two consecutive years. Then what is the logic of providing subsidy on the incentive of industrial sector?

*This interview, originally published in Prothom Alo print and online editions, has been rewritten in English by Rabiul Islam.