Economists Recommend Cutting Budget Deficit to Control Inflation

The Ministry of Finance has pointed to excessive borrowing by the outgoing Awami League government as a key cause of rising inflation, which reached a 13-year high of 11.66% in July, with food inflation exceeding 14%. The government borrowed Tk 94,282 crore from the banking sector last year, increasing the overdraft limit from Tk 6,000 crore to Tk 12,000 crore, leading to increased money supply and higher prices.

Bangladesh, along with 14 other countries, is classified in the red category for food inflation by the World Bank. This designation reflects a food inflation rate between 5% and 30%. Bangladesh's food inflation has exceeded 10%, marking a record 10-year high of over 12% in November of the previous year, with overall inflation above 9% this year. Despite global reductions in inflation due to factors like the Russia-Ukraine war, Bangladesh has struggled to lower its rates.

Wage growth for low-paid and unskilled workers in Bangladesh rose by 7.95% in June, but fell short of the 9.72% inflation rate, marking a 29-month trend. This disparity has forced cuts in consumption as real incomes decline. Despite slight dips, food inflation remains high, hitting 10.42% in June after a peak of 12.56% in October 2023. Analysts warn of rising poverty rates and call for adjustments to wages to match inflation. The impact on employment and demand underscores the need for enhanced social safety nets and support for vulnerable urban populations.

Low-income earners in Bangladesh are facing significant wage erosion due to high inflation, despite seeing some monthly income growth over the past year. Real wages declined by 1.99 percentage points in FY24, as inflation outpaced wage growth. The average annual inflation rate stood at 9.73%, surpassing the wage growth rate of 7.74%.

Bangladesh's annual average inflation rate soared to 9.73% in the 2023-24 fiscal year, the highest since 2011-12, despite a slight easing in June. The government's measures to curb inflation, including increasing the policy rate and adopting a flexible exchange rate, have proven ineffective.

Economists suggest that reducing the budget deficit would decrease government borrowing from the domestic sector, helping to control inflation. In discussions post-budget, concerns were raised about the feasibility of targets such as reducing inflation to 6.5% while aiming for a 6.75% GDP growth. Limited success in curbing inflation was attributed to coordination issues in decision implementation. Stabilizing the economy was deemed crucial, with emphasis on exchange rate stabilization.