For years, successive governments have cited global market volatility, geopolitical conflicts, and import restrictions as the primary culprits behind inflation in Bangladesh.
However, following the recent political shift, alternative explanations have surfaced, placing the domestic market at the heart of the issue.
A recent review by the Chief Adviser’s Office corroborates this, aligning with findings from Bangladesh Bank that attribute 84% of inflationary pressures to local goods, while only 16% stem from imported commodities.
Economists suggest that the recent dip in inflation is largely driven by falling vegetable prices.
This has led to renewed debates over the efficacy of raising interest rates to curb inflation by reducing money supply.
The Bangladesh Bureau of Statistics (BBS) reported that the country’s overall inflation rate stood at 9.32% in February, with food inflation declining to 9.24% due to lower vegetable prices.
This marks the first single-digit food inflation rate since March of the previous year.
Experts argue that interest rate hikes alone are insufficient to control inflation, as consumer demand is not the primary driver.
Rather, inefficiencies in domestic production and supply chains are exacerbating price hikes.
Agricultural economist Jahangir Alam, speaking to Bonik Barta, noted that the current production season naturally keeps prices lower.
However, as vegetable supplies diminish in the coming months, prices are expected to rise, along with staple commodities such as rice, posing an imminent inflationary threat.
He emphasised the urgency of ramping up agricultural output to mitigate future price hikes, suggesting that any shortfall should be addressed through imports.
Bangladesh Bank’s Inflation Dynamics Report further highlights the dominance of local market forces in inflationary trends.
In December last year, domestic goods accounted for 84% of inflation, while imported goods contributed merely 16%. In September of the same year, local goods accounted for 74% of inflationary pressure, with imports comprising 26%.
This underscores the fact that Bangladesh’s inflation is primarily homegrown, contradicting previous narratives that placed excessive emphasis on import dependency.
Economists stress that merely adjusting policy interest rates will not suffice to control inflation in Bangladesh.
Mustafa K. Mujeri, former chief economist of Bangladesh Bank and Executive Director of the Institute for Inclusive Finance and Development (INM), remarked that while Bangladesh remains an import-dependent economy, inflation cannot be tackled solely through interest rate hikes.
He pointed to supply chain disruptions, such as edible oils being unavailable in markets despite being imported in large quantities, and rice prices remaining high despite bumper harvests and imports.
These issues, he noted, highlight systemic inefficiencies that require immediate government intervention.
The aftermath of last year’s floods saw a bumper harvest of vegetables, leading to significant price reductions.
Farmers are struggling to recover production costs, with locally grown onions selling for as little as Tk40 per kg, and tomatoes and potatoes priced below Tk20 per kg.
In contrast, during the same period last year, onions were priced at Tk120 per kg, while all vegetable prices were significantly higher.
The government lifted the long-standing 9% cap on loan interest rates in July 2023, triggering a gradual increase.
Following the appointment of the new central bank governor in August, policy interest rates were raised several times, pushing lending rates to as high as 16% in certain sectors.
This sharp rise has substantially increased business costs, prompting companies to pass the burden onto consumers.
As a result, what was intended as an inflation-control measure has instead exacerbated unemployment and poverty, according to business leaders.
Former President of the Dhaka Chamber of Commerce and Industry (DCCI), Ashraf Ahmed, voiced concerns, stating that higher interest rates inevitably lead to reduced investment and employment.
He warned that curbing demand through interest rate hikes may inadvertently push more people below the poverty line.
Instead, he advocated for boosting production and exports as a more effective means of controlling inflation.
With investment costs surging and industrial growth slowing, employment opportunities have dwindled.
However, economists argue that the current economic scenario does not warrant demand-control measures.
Fahmida Khatun, executive director of the Centre for Policy Dialogue (CPD), asserted that the root cause of inflation lies in domestic market inefficiencies rather than excessive consumer demand.
She highlighted that most citizens are relying on savings to sustain daily expenses, and demand surges are not evident. Instead, she recommended prioritising supply chain improvements, production expansion, and ensuring fair pricing for farmers.
Additionally, she urged the government to increase the number of importers, curb unnecessary expenditure, and minimise waste.
While seasonal factors have temporarily eased inflation, concerns persist over whether this downward trend will be sustained in the coming months.
The efficacy of monetary policies in addressing inflation remains in question, with analysts increasingly calling for structural reforms to address Bangladesh’s economic challenges at their core.
