In Bangladesh, inflation control needs an iconoclastic approach

Inflation is often conceptualised as the rise in aggregate price levels. These prices are consolidated across temporal intervals—usually between years—on an assemblage of commodities usually consumed daily. We often construe inflation through the narrow prism of price fluctuations. However, inflation indicates an intricate interplay of logistical, political, financial, and ethical practices that should be analysed to decipher changes in prices.

The Bangladesh Bank records consistently elevated inflation trends, rising from around 5.86 percent in January 2022 to about 11.38 percent in November 2024. In general, food inflation outpaces non-food inflation. Policy consensus suggests that exogenous shocks, such as the Covid pandemic, Russia-Ukraine conflict, and concomitant global economic slowdown, impacted Bangladesh’s efforts to control price levels, leading to rising target inflation rate.

The quickest endpoint of a higher inflation rate is the reduction of purchasing power. Lower purchasing power translates into weaker local currency, which tosses a temporary lifeline to an export-orientated economy. For an import-hungry economy like Bangladesh, the sagging currency leaks more money, turbocharges the trade imbalance, and leaves a lower currency reserve.

Bangladesh’s economy manifests unique idiosyncratic economic and trade characteristics, including its large population, high growth rate, and a heavy reliance on a circumscribed cohort of tradable commodities. One anomaly pertains to the entwinement of the country’s principal export and import being connected to the same industry: ready-made garments. A significant portion of the country’s industrial imports undergoes value-added processing before being exported to powerful foreign buyers, having a complex influence on prices, employment, government policy, currency rate, and GDP. 

The most traditional method of controlling inflation is to balance a monetary instrument, notably the borrowing rates (first two panels in Figure 2). Often, these abrupt changes are moderated by an upward adjustment of direct and indirect taxes to restrain consumption.

The restrictive monetary and fiscal measures result in a deceleration in production, consumption, employment, and economic growth, which may lead to stagflation. The temporal horizon for an economy to transition out of stagflation is three to four years for a developed economy. While these traditional restrictive mechanisms work well for economies with robust financial markets, they can jeopardise overall stability in emerging nations already suffering from a systemic fragility in financial markets. 

Some unconventional control mechanisms 

Figure 1 delineates the metamorphosis of price transformation as goods transition from producers to consumers. Various determinants in the price formation continuum contribute to the accretion of additional costs in production pricing. Notably, many price components are superfluous and can be eliminated to attenuate the overall economic cost.

Farmer’s market

Arguably, one of the most effective methods to mitigate the repetitive price-cycle cost is to “close the gap” between producers and consumers. One such mechanism, increasingly marginalised in our society, is the traditional weekly marketplace where producers sell products directly to the consumers. Similar models are available in Malaysia and other Southeast Asian nations, exemplified by the Pasar Malam or the night markets. In England, the councils curate borough markets, facilitating direct transactions between farmers and consumers. Under these models, the government can emphasise their targeted support for the producers in the form of subsidising the cost of irrigation, seeds, labour, finance, and agricultural technologies. Effective distribution channels can be employed to distribute goods aimed at vulnerable groups at a low cost (i.e. rice and commodities at a subsidised price). 

It is worth noting that sellers from the informal sector vendors (hawkers) are different from the farmer’s market. Of note, with the growth of the multinational resellers, these direct exchange frameworks are declining, thereby consolidating the power of the so-called market syndicates, putting upward pressure on prices. While there are several logistical problems inherent to a farmer’s market, Bangladesh can utilise its massive infrastructural growth of recent years to revitalise such models. 

Use of alternative low-cost social funds 

Islamic countries like Bangladesh can instrumentalise the use of social funds. Numerous examples of such instrumentation can be drawn from Indonesia and Malaysia. While the cost is low, there are obvious disadvantages of these social funds. The most prominent drawback is the trust of the general mass in the efficiency of the government managing these social funds. Nonetheless, while relying on the traditional financial sector slows down economic activities, the social fund sector can offer a viable second tier of funds (Figure 2). 

Wealth management and financial literacy

Bangladesh amassed around $23.9 billion in remittances in FY2023-24. Massive infusion of remittance-driven consumption expenditure in rural areas exerts pronounced inflationary pressure, distorting price formation at the production stage.

Bangladesh could draw examples from Malaysia, Indonesia, the Philippines, and even India, which instituted numerous foreign currency investment schemes for remittance earners. By provisioning these schemes, the government can strategically divert a portion of the funds to productive investment, thereby augmenting the capital available to the financial markets. Integrating financial technology (fintech) with judicious policy reforms could empower wealth management firms to facilitate personalised wealth management solutions. This would help build a tertiary financial sector to help diffuse instability currently concentrated within the conventional financial and banking sectors.

Finally, disproportionate escalation of inflation can have profound financial, sentimental, and political impacts. While several instruments can modulate inflationary pressure within brackets, promoting financial literacy is necessary for wider social engagement. Also, highly diversified economies exhibit greater resilience than insular economies. Therefore, strategic trade and economic partnerships may prove instrumental for Bangladesh at attenuating high inflation.

Dr Mamunur Rashid is a reader in finance at Canterbury Christ Church University, UK. He can be reached at [email protected]. 

Views expressed in this article are the author’s own and do not reflect the views of the institutions he serves. 

Follow The Daily Star Opinion on Facebook for the latest opinions, commentaries and analyses by experts and professionals. To contribute your article or letter to The Daily Star Opinion, see our guidelines for submission.