Vicious cycle hinders efforts to curb inflation: Kholiquzzaman

Bangladesh has fallen into the grip of a vicious cycle, and as a result, effective policies undertaken to curb inflation do not come to any use, said economist Qazi Kholiquzzaman Ahmad.

Kholiquzzaman, chairman of the governing council at the Dhaka School of Economics, explained that price inflation can be addressed through two approaches: monetary policy and fiscal policy.

He also said monetary policy uses various tools to combat inflation, and one of these tools is adjusting interest rates. Raising interest rates is expected to curb inflation by encouraging people to deposit money in banks rather than withdrawing it.

However, Kholiquzzaman cautioned that the effectiveness of this strategy depends on market dynamics, as different sectors are interconnected. If the market does not respond as expected, even with increased interest rates, inflation may not subside.

"It is not working in the case of Bangladesh because the country has fallen into a vicious cycle. Institutions are also ineffective due to this vicious cycle. Consequently, even if the right decision is made at the right time, it may not be implemented due to the prevailing circumstances relating to the vicious cycle," he believes.

Speaking at a seminar titled "Inflation: Recent Experience in Bangladesh", organised by the Dhaka School of Economics at Eskaton in the capital, he said breaking the vicious cycle due to economic considerations may sometimes be hindered by political reasons.

"Bangladesh has 26 policies or laws in place. Unfortunately, they remain unimplemented. Those responsible for enforcement either fail to execute them, or the entrenched vicious cycles prevent the effective implementation of these policies. Consequently, the anticipated benefits are not realised," he explained.

He said inflation should not have persisted at 9.5% for an extended period. Prices of various products have declined globally, including food and edible oil.

"Oil prices have returned to pre-Russia-Ukraine war levels, but the corresponding impact is not evident here. Although the government provided subsidies once, a further reduction in prices is unlikely due to social considerations. Social factors often do not receive priority in such matters," he added.

A tolerable level of inflation is contingent upon the state of the economy. The Bangladesh Bank aims to reduce inflation to 7.5% by June, considering it an acceptable level given the current economic conditions. However, immediate growth in production is hindered by the lack of concurrent investment, contributing to the persistently high inflation rates.

He noted that expecting inflation to be as low as 2%, 2.5%, or 3% may not be realistic, as such levels might deter investments. Investments are vital for economic progress, and without them, advancement is impeded.

He emphasised the importance of balancing economic progress with human comfort. While there are numerous political and economic policies aimed at bringing smiles to the faces of the poor, their effective implementation is lacking. Accountability in the area of implementation is crucial, and decisions for social reasons should be sustained without confusion.

Md Akhtaruzzaman, director general of the Bangladesh Institute of Bank Management, delivered a keynote address at the seminar, which was presided over by Jahangir Alam, director of the Dhaka School of Economics.