Domestic production should be boosted to meet aggregate demand

There are many challenges that the economy has been facing in the post-Covid recovery. How well the economy will recover in the future would be determined by how well the challenges, such as inflation, exchange rate pressure and forex reserves are being dealt with. 

In order to contain inflation, it is necessary to take both supply and demand side measures, including the reduction of the money flow. Tight monetary policy is desirable that warrants an upward revision of the interest rates. Steps are also needed to protect the value of taka from too much depreciation. 

For countries like Bangladesh, a freely floating exchange rate determined by the demand and supply of dollars in the market is not desirable. 

I do not think that the market rate would solve the current depreciating trend. Rather, for the time being, the Bangladesh Bank may opt for introducing a crawling band exchange rate system. Further, bilateral currency arrangement with big trading partners, such as India, China, Russia etc. is desirable for taking respite from any future conundrum in the dollar market. 

The Russia-Ukraine war is setting a tone for new economic order with various currency blocks. 

Therefore, pragmatic exchange rate policy is necessary to pursue to address upcoming global challenges.  However, such initiatives might put pressure on investment, which would likely slow down GDP growth. As a result, we may have to compromise on the resurgence of growth that has begun in post-Covid-19 times. Imports have also risen exponentially recently, which should be controlled to save forex reserves to manage any currency crisis. 

Reduction of imports will however lower the growth as capital machinery and raw materials have a lion's share of imports. So, economic growth may fall below our target and expectation. This is a global phenomenon arising out of the Ukraine-Russia war and various measures and adverse consequences taken during the pandemic. 

The world may face a food deficit as some countries have imposed restrictions on food exports. India banned wheat exports and Indonesia banned palm oil exports though it has now been lifted. 

We may see such types of restrictions on other commodities, such as onion and rice. Ukraine and Russia are the major suppliers of food items. They export edible oil, fuel and gas as well. 

We have to take careful initiatives to manage the pressure on inflation. Productivity needs to be increased to boost domestic production to meet demand. New products and markets should be explored to diversify the export basket. If exports do not increase, it will be difficult to pay import bills. 

At this moment, it would not be wise to prepare an expansionary budget for the next fiscal year. The government rightly is preparing a balanced budget, which might provide a safeguard against macroeconomic instability. However, it would cause a reduction in growth ‍and employment and income.

No doubt, the world is going through a transition period. It will be difficult to sustain growth at this time for other countries too. I prefer proper macroeconomic management over higher growth, to check the risks of any instability. 

As the lower growth restrained income and employment, the government should create some additional employment under social protection activities to protect the livelihood of the poor.

Dr Monzur Hossain is the research director at BIDS