Inflation In Bangladesh To Subside In Later Part Of FY24

While higher consumer prices have persisted during the initial months of the current fiscal year, the Asian Development Bank (ADB) predicts that inflation in Bangladesh will moderate in the latter part of 2023-24 due to a combination of external and domestic factors. According to the ADB's "Asian Development Outlook (ADO) September 2023," inflation is expected to decrease from 9 percent in 2022-23 to 6.6 percent in FY2024.

The ADB anticipates that although elevated inflation may continue in the early months of the fiscal year, it will gradually subside due to a decline in global non-fuel commodity prices, an expected increase in agricultural production, and the initial implementation of a more stringent monetary policy under a new framework. This new monetary policy is set to shift from a focus on monetary aggregates to interest rate targeting.

The Bangladesh Bank has already raised the policy interest rate from 6 percent to 6.5 percent, along with implementing a symmetric corridor of 200 basis points for standing loan and deposit facilities. Additionally, they have replaced the lending rate cap with a market-driven lending rate based on a reference lending rate called SMART (6-month moving average rate of treasury bills).

The ADB's projection comes as inflation saw a 23 basis point increase in August, reaching 9.92 percent, primarily driven by food inflation, which reached a 12-year high at 12.54 percent. The Consumer Price Index in FY23 rose to 9.02 percent, surpassing the government's revised target of 7.5 percent and marking the highest level in 12 years.

In FY24, the government aims to keep the average annual inflation rate at 6 percent. The ADB's report suggests that moderate inflation and an increase in remittances will contribute to the revival of private consumption, while the completion of major infrastructure projects will boost investment. However, the initial higher interest rates resulting from the enhanced monetary policy framework may dampen private investment.

ADB Country Director Edimon Ginting praised the government for effectively managing external economic uncertainties while advancing infrastructure development and critical reforms to improve the investment climate. These reforms include strengthening public financial management, enhancing domestic resource mobilization, improving logistics, and deepening the financial sector to support private sector development, export diversification, and job creation.

Ginting also emphasized the importance of responding to high oil prices by accelerating reforms to expand domestic renewable energy supply and achieve climate change goals.

Khondaker Golam Moazzem, research director at the Centre for Policy Dialogue, expressed concerns about inflation's relation to imports and the challenges posed by non-fuel commodity prices. He noted the pressure from fuel-related inflation due to the exchange rate and the depletion of reserves, with the formation of a new global fuel alliance indicating that fuel prices may not decrease soon.

Moazzem suggested that the government's initiatives to ease inflation are limited, and there is a reliance on imports, further straining the reserve. Reserves recently fell below $22 billion.

According to the ADB's publication, GDP is expected to grow by 6.5 percent in FY2024, up from an estimated growth of 6 percent in the previous fiscal year. This slightly higher growth forecast reflects increased domestic demand and improved export growth, driven by economic recovery in the eurozone area.

However, the ADB report highlighted the main risk to this growth projection as being a potential deterioration in export growth if global demand falls below expectations. The ADB also described the government's budget for FY24 as ambitious, aiming for a 10 percent revenue-to-GDP ratio and a 15.2 percent expenditure-to-GDP ratio, resulting in a fiscal deficit of 5.2 percent. Export growth is anticipated to accelerate to 9 percent.