Take fiscal measures to address inflation: South Asian Network on Economic Modeling

The South Asian Network on Economic Modeling has suggested Bangladesh's finance ministry to lower taxes on imported goods as it would directly impact prices in the domestic market, and reduce ongoing inflationary pressure.


File photo of South Asian Network on Economic Modeling logo. PHOTO: THE DAILY STAR

October 24, 2023

DHAKA – Although Bangladesh Bank is taking several initiatives to reduce inflation, only implementing monetary policies is not enough as fiscal policies also play a big role in this regard, according to the South Asian Network on Economic Modeling (Sanem).

In a bid to step up its fight against ongoing inflationary pressure, the central bank hiked the policy rate by 75 basis points to 7.25 percent earlier this month.

But to expedite the process, Sanem suggested to officials of the finance ministry that taxes on imported goods should be lowered as it would directly impact prices in the domestic market.

Central bank officials yesterday met with Selim Raihan, executive director of Sanem, and Sayema Haque Bidisha, research director, as a part of their move to take opinions from local economists on how to address current economic challenges.

Taxes on imported goods should be lowered as it would directly impact prices in the domestic market, Sanem said.

Abdur Rouf Talukder, governor of Bangladesh Bank, and Khairuzzaman Mozumder, finance secretary, were present at the meeting, where Md Habibur Rahman, chief economist, presented a paper on the country’s economic condition.

“We suggested the finance secretary to reduce the tax on importing goods where there is scope to do so,” Raihan told The Daily Star after the meeting.

Inflation fell by 0.29 percentage points in September from the previous month, but it is still as high as 9.63 percent.

Inflation stood at 9.92 percent in August, according to data of the Bangladesh Bureau of Statistics.

Raihan said the ongoing inflation is a concern and it is hampering the food security of many people.

Echoing the same, Bidisha said that inflation will have to be controlled through both monetary and fiscal policies.

The meeting discussed various issues, including the high inflation, falling trend of forex reserve, exchange rate, governance in the banking sector, non-performing loans and so on.

Raihan informed that central bank officials highlighted some external and internal factors behind the ongoing inflationary pressure.

“But we said the failure to make the right decisions at the right time is another reason for the ongoing pressure,” he said, adding that they suggested the regulator adjust the exchange rate as needed.

The two officials of Sanem also said the inflow of remittance has fallen due to the growing hundi system and increased money laundering activities.

They said that strict monitoring for over-invoicing and underinvesting is needed as well.

Besides, the new incentive on remittance will not help in the long run as there is a gap in exchange rates between the formal and informal markets, they added.

The Association of Bankers, Bangladesh and Bangladesh Foreign Exchange Dealers Association had on October 21 decided to provide as high as 2.50 percent as an incentive from banks apart from the government’s existing cash support.

“We suggested implementing the market-based exchange rate and the central bank officials said they will introduce a new exchange rate system as per the suggestion of the International Monetary Fund,” Raihan said.

“The new exchange rate system will allow fluctuation within a band of rates,” he added.

Bangladesh Bank officials informed they will not be taking any further reforms ahead of the election, but massive reforms in the financial sector will be implemented afterwards.

“Still, we asked them what assurance there is that they will be able to ensure reforms after the election,” said Raihan, also an economics professor at the University of Dhaka.

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