Tackling inflation should be key priority for budget FY24 – Fahmida Khatun

Originally posted in The Business Standard on 20 May 2023

Dr Fahmida Khatun, executive director of the Centre for Policy Dialogue (CPD), stressed the importance of addressing four crucial aspects in the upcoming budget.

First and foremost, she emphasised the need for tackling inflation, ensuring support for the poor segments of society.

Secondly, she highlighted the importance of coordinating monetary and fiscal policies and utilising interest and exchange rates as tools to control inflation effectively.

Also, she called for the use of fiscal policy measures to strengthen the social safety net, providing increased support to the most vulnerable.

Fourthly, she specifically said on the significance of a robust market monitoring system so that unscrupulous businesses cannot manipulate the prices of essentials.

Dr Fahmida on Saturday shared her expert opinions on the present economic situation in Bangladesh and the challenges that lie ahead of the finance minister tasked with presenting the budget for the fiscal year 2023-24 next month.

In an interview with The Business Standard, she outlined key areas that require attention and addressed the pressing issues affecting the economy, which had a stability for the last two decades.

The CPD boss also underscored the importance of expediting reforms and rationalise expenditures to bolster macroeconomic stability. She identified the lack of reforms and inefficiency in administration as persistent challenges that must be addressed to take the country to the next level — post-LDC graduation.

Inflation

In terms of inflation, Dr Fahmida identified it as the most pressing challenge currently and anticipated for the following year. Stating that policymakers blame external reasons — war and Covid — for inflationary pressure, she questioned the rising prices of rice and vegetables, which are primarily produced locally, despite there is no supply shortage in the market.

“If a product’s price rises 10% in the international market, it increases 30% in the local market. We have shown it item by item in CPD’s analysis,” said Dr Fahmida.

She said while global price fluctuations may have an impact, it is a necessity to identify other reasons and address those for inflation within Bangladesh itself.

To tackle this challenge, she recommends utilising monetary tools such as interest rates, and warns against government borrowing from the central bank, as it further fuels inflation. She feels sorry for the savers who are facing negative returns due to the current high inflation rate of 9.24%.

NBR reforms and automation

Dr Fahmida laments for poor revenue collection and tax-GDP ratio at 7.5 despite the country’s consistent economic growth and rising purchasing power of consumers.

She stressed the urgency of reforming the National Board of Revenue (NBR) and implementing automation to enhance domestic resource mobilisation, which is a must to face the post-LDC challenges. She asked the authorities concerned to align bank accounts with tax identification numbers or TIN so that NBR officials can assess a person’s taxable income and take measures accordingly.

“Automation can streamline processes, reduce corruption, and improve the overall effectiveness of resource mobilisation efforts,” she commented.

Bank reforms

Dr Fahmida is concerned about the rising nonperforming loans (NPL) and the way wilful defaulters are taking out money in the name of bank loans. “This is unethical and a crime, yet they are not punished,” she said.

Highlighting the need for a time-bound commission in the banking sector, she underscored the importance of addressing problems and ensuring stability in this crucial industry. “A commission dedicated to banking reforms can identify systemic issues, and make recommendations to improve governance within the sector,” she said.

The CPD boss also said this step would contribute to strengthening the overall financial system and maintaining macroeconomic stability, otherwise conditions would deteriorate further.

Fiscal and monetary policy coordination

Dr Fahmida said they see a significant lack in coordination between policies to address economic challenges.

She emphasised the significance of coordinating fiscal and monetary policies to effectively control inflation. She called for better alignment and communication between these two policy areas to ensure a harmonised approach towards achieving macroeconomic stability.

“By utilising interest and exchange rates as tools, policymakers can work towards taming inflation and maintaining a balanced economic environment,” she said.

Political will for carrying out reforms

Last but not the least, Dr Fahmida emphasised that political will is essential for implementing necessary reforms in Bangladesh. She stressed the importance of strong leadership that is committed to driving change and willing to take decisive action.

“Those who resist reforms, the government should get rid of them,” she said.

With political will, the country can overcome inefficiencies in administration, financial sector, address identified challenges, and create an enabling environment for sustainable growth, she noted.

Other key observations

In addition to the above areas, Dr Fahmida makes several other important observations. She stresses the need to identify and address unidentified problems that persist in the economy.

Engaging in discussions with experts will enable policymakers to gain insights into these challenges and formulate appropriate solutions, she said.

She advocated for a market-based exchange rate system and suggests adjusting fuel prices on a monthly basis.

Dr Fahmida also emphasised that the upcoming budget should prioritise support for the poor and address inflation concerns, rather than being overly focused on the forthcoming elections. Streamlining administrative and operating costs is crucial for improving efficiency and reducing wastage.