Mixed signals from the economy

Television news two days ago told of rise of prices of essential goods in retail markets. Rice price has increased by Tk 10 per kg. The price of edible oil also has gone up Tk 20 per litre. Prices of all vegetables have registered upward trends. The purchasing power of common man continues to be battered as inflation stubbornly hangs around above 9 per cent for nearly a year.

On the demand side, the closures of a good number of industrial and business units in disturbances following the change of government have added to the pool of unemployed, drastically reducing their purchasing power. Think tanks like Bangladesh Institute of Development Studies (BIDS) and Centre of Policy Dialogue (CPD) have drawn attention to the rise in poverty, reversing earlier trends. According to the World Bank the ratio of extreme poor will rise to 9.30 per cent by the end of 2025, from 5 per cent in 2022, adding 3 million to the total of the poor. Commentators have pointed out the status quo maintained in the allocation for social safety net programmes in the current budget which will not offset the rising incidence of poverty.

The interim government is seized with the microeconomic problem of price rise in retail markets. The ministry of commerce has recently constituted several committees for monitoring price trends of essential items. It seems these committees are yet to make visible change in the operation in wholesale and retail markets. Though the Bangladesh Bank governor expressed hope at the time of unveiling of the budget for fiscal year 2025-26  that inflation  would come down to 7 per cent by next September, the rise in international price following attack on Iran makes achievement of that goal problematic. On the other hand, political unrest and mob violence may have made the task of taming the retail markets difficult. Therefore, the road to economic recovery and growth should start with the strict maintenance of law and order.

If news on the microeconomic front are dismal, those originating from macroeconomy gives the impression of a rebound of the economy as a whole. The country's gross foreign exchange reserves crossed $30 billion at the end of June, following the release of fourth and fifth tranches of loans from the International Monetary Fund (IMF)'s $4.7 billion lending package. Apart from the IMF loan disbursement, the country also received loan amounts from the World Bank, the Asian Development Bank (ADB) and Japan International Cooperation Agency (JICA). Despite the government's  having to make  substantial payments  in clearing accumulated  external overdue bills in recent months, the foreign exchange reserves have continued  to rise as a result of disbursements by bi- lateral and multilateral  institutions  and remittances  made by wage earners. Bangladeshi wage earners made record remittance in the 11 months or July-May period of FY25, amounting to $27.50 billion, which was $21.37 billion in FY24. The robust inflow of remittance, together with increase of export earnings by 9.40 per cent compared to import bills' increase of 4.7 per cent in July-May period of the last fiscal year, reduced the current account deficit to $430 million from $6.12 billion in FY24. 

Along with increase in export earnings, annual inflow of remittance recorded marked increase of 26.81 per cent during the past fiscal, ending in June, amounting to $30.51 billion, as against $23.91 billion in FY24. Incentives given to remitters for using official channel and the free-floating exchange rate have combined to bring in increased volume of foreign exchange through remittance. For the turnaround in balance of payments (BoP) and increase in foreign exchange reserves the present government can take some credit of formulating a pragmatic monetary policy. But the uptick in export earnings of $56.5 from goods and $8.5 from services in the last fiscal year should not be taken as part of a trend because of uncertainties in the export market. The biggest obstacle to a growing export volume and increasing export earnings is the recent imposition of tariff by America. If the tariff negotiations with American trade officials do not result in zero additional tariff  from the proposed 35 per cent, then export earnings for fiscal 2026 targeted at $65 billion will be seriously  affected as America is our biggest export destination. According to the International Trade Administration (ITA) of  the US Department of Commerce, Bangladesh exported  goods  worth $8.6  billion to the US in 2024 and  imported products worth $ 2.29 billion from there, resulting in a trade surplus of $6.06 billion during the year. Although Bangladesh is the 52nd largest trading partner of  America  and its trade deficit with Bangladesh is much lower than with competitors like India and Vietnam, the Trump  Administration has imposed a higher  35 per  cent  tariff on its products possibly  on political grounds, analysts think. Close ties with China and suspected use of its export channel as a conduit for Chinese goods may have prompted the high additional tariff. Therefore, much depends on the outcome of the ongoing negotiation between Bangladesh and America.

The failure of macro policy becomes evident is in fiscal management by the government. Though the budget for FY26 has reined in public expenditures, resource mobilisation through taxes and fees remain far below the desired 15 per cent of GDP. Unless a breakthrough is made in the stagnant area of resource mobilisation, government's reliance on bank borrowing will continue, adding to inflationary pressure. Alongside emphasis on revenue collection much needs to be done than merely adopting an 'austerity' budget to economise on public expenditures.

The challenge for the government is to transmit the good performance of the macro economy to the dysfunctional micro economy. While the traditional practice of making the monetary and fiscal policies addressing the macroeconomic variables should continue, the disconnect between the macro and micro economy has to be removed.

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