Inflation notably erodes people's savings capacity

High inflation is undermining Bangladeshis' inherent saving habit that gives economists to believe that deeper financial problems may be forthcoming as high prices of commodities dent household savings and investments.

They note that Bangladesh has long been a nation of savers. People traditionally set aside a significant portion of their earnings for future security, often at the cost of current consumption.

But that inherent prudence seems to be shifting. Recent data from Bangladesh Bureau of Statistics (BBS) show that the country's gross household savings have fallen to a four-year low.

Household domestic savings refer to the total money and investments families hold-such as bank deposits, stocks, and bonuses-minus any liabilities like loans and debts.

In the fiscal year 2024, gross domestic savings (GDS) declined to 23.96 per cent of GDP, shedding 1.8-percentage points from the previous year, the national statistical agency mentions in its latest report released last week.

Similarly, gross national savings (GNS), which include remittances, fell to 28.42 per cent of GDP, in a 1.53 -percentage-point decline from fiscal year 2022-23.

One eminent economist attributes the decline in savings to high inflation, as people are forced to spend more just to maintain their standard of living.

"As household expenses have surged significantly, savings are inevitably eroding," says Dr Zahid Hussain.

He points out two key reasons behind the downturn. One is a major correction in export data, which led to lower reported income levels for households.

"Rising prices in the market are making essential goods more expensive," he says.

"The cost of living has gone up, so people are spending more-leading to lower savings."

He also mentions that actually the standard of living of people did not improve because of the higher inflation on the economy although the consumption value has increased.

Dr M. Masrur Reaz, Chairman and CEO of Policy Exchange Bangladesh, echoes this same view. He notes that while the export data were revised, the share of exports in GDP also declined, signaling a fall in national income.

"When income falls and household expenditures rise, savings naturally decline," he told the FE.

He further says that under such circumstances, many savers are withdrawing from their savings to meet expenses.

Household spending has surged dramatically in recent years. According to the Household Income and Expenditure Survey (HIES), household expenditures had more than doubled since fiscal year 2016, reaching

Tk 31, 500 per month in 2022.

Dr Masrur also mentions that the BBS data integrity has improved since the fall of the previous Awami League government, doing away with exaggerations.

"Earlier, BBS consistently showed GNS above 25 per cent , but now they are producing quality figures that reflect a more accurate picture," he goes on.

Inflation in Bangladesh remained close to 10 per cent in January, further squeezing household budgets.

As such, some economists warn of deeper economic risks.

"The decline in savings, combined with rising household expenditure, raises concerns about household-debt repayment and financial fragility," says Musfa K. Mujeri, former chief economist at Bangladesh Bank, the central bank.

Dr Mujeri, now executive director of Institute for Finance and Development, suggests containing the inexorable inflation by adopting proper strategies.

However, the country's real GDP or gross domestic product during the past fiscal year increased at a subdued pace of 4.22 per cent in its final count, down by 1.56-percentage points from that of the previous year (2022-23).

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