Economists Recommend Cutting Budget Deficit to Control Inflation

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.

Unnayan Shamannay has highlighted the significant challenges in reducing Bangladesh's inflation rate to the targeted 6.5 percent in the next fiscal year, given the current rate of nearly 10 percent. The organization emphasized that achieving this target is crucial to alleviating the financial pressure on the population.

The Centre for Policy Dialogue (CPD) has deemed the government's goal to reduce inflation to 6.5 percent in the fiscal year 2024-25 as overly ambitious. In its analysis of the proposed budget, CPD highlighted the lack of concrete measures to address persistent economic issues.