Ambitious 6.5% inflation target, but no special measure outlined

In his budget proposal, Finance Minister Abul Hassan Mahmood Ali has set an ambitious target of reining in stubbornly high inflation to 6.5% in the upcoming fiscal year, without outlining any special measures to achieve this goal.

Instead, he opted to rely on stabilising the taka through austerity measures, bolstering international reserves with the support of the newly introduced crawling peg exchange rate mechanism, and benefiting from a drop in international market prices.

The move aligns closely with the direction set for the current fiscal year, when the inflation target was set at 6.5%. However, the country experienced inflation at nearly 10% for more than a year.

To ease prices, the commerce ministry had proposed reducing the customs duty on oil and sugar imports, but the finance ministry did not accept it. The customs duty of more than Tk40 per kg on sugar will remain in place for the next financial year, and no reduction has been made in customs duties on other food products, including edible oil.

However, the source tax at the supply level for 28 essential commodities has been halved from the existing 2%, although experts say its benefit is unlikely to directly reach consumers.

Meanwhile, the government has reduced the allocation for OMS, which aims to control food price spirals and address the food needs of the poor, from the current Tk5,491 crore to Tk2,004 crore.

Like the last financial year, the government has implemented austerity policies to control inflation in the current budget. The Bangladesh Bank has also taken various initiatives to maintain the stability of the taka.

However, these measures have not succeeded in curbing rising inflation. By the end of May, overall inflation in the country was 9.89%, and the food inflation rate was 10.76%.

Before the Ukraine-Russia war, the inflation rate averaged 5%-5.5%, which economists considered tolerable for the country.

To increase revenue collection, the budget proposes increasing duties and VAT on various daily necessities, including sugary foods, telecommunications, refrigerators, soft drinks, LED bulbs, and water filters.

Meanwhile, gas and electricity prices have been raised multiple times in the current fiscal year to reduce subsidy pressure. The government plans to further increase gas and electricity prices in the next fiscal year, which could raise production costs for industries and potentially fuel inflation.

Besides, the Bangladesh Bank plans to transition the dollar rate to a completely market-based system. The loan interest rates have also been market-based, which will increase the import costs of food products and necessitate higher customs duties at the import level, affecting product prices.

In the budget speech, the finance minister blamed supply-side errors and currency devaluation for high inflation. The central bank also attributed the high inflation to non-economic factors. However, the finance minister did not provide clear details about the measures the government will take to control inflation through market management.

Economists believe that high interest rates and exchange rate flexibility will yield positive long-term results.

Ahsan H Mansur, executive director of the Policy Research Institute, told The Business Standard, "The challenge of inflation extends beyond the budget; however, the budget plays a supporting role. The government's monetary policy is pivotal, and it has been significantly tightened. We need to be patient, and we are hopeful that inflation will decrease by December."

Former finance secretary Mahbub Ahmed said that people are suffering greatly due to the level of commodity prices. According to projections, if the new fiscal year sees a 6.5% increase over current prices, the hardship will worsen.

"In reality, inflation is unlikely to decrease substantially," he added. "While the inflation rate may see a slight decline next year, the current burden of high commodity prices on the public is unlikely to ease."